2024 Year In Review: Defense Tech in Israel

Part two of a series reviewing trends and activity in across various sectors within Israel's startup ecosystem

The following is a review of Israel’s defense tech sector in 2024. This is the second of a series of annual reviews for various technology sectors, and to kick off the post I wrote a small general introduction. (To view the first post about Israel’s fintech sector, click here, and to skip the introduction click here).

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It’s been a year.

There’s still a month to go, but 2024 has gone by both insultingly slow and painfully quick.

Despite the national challenges Israel has faced this year, the early stage startup ecosystem has experienced one of its most active years in recent memory. I wrote about this back in March and the blistering pace of activity persisted through the summer until the local holidays.

At TLV Partners, 2024 has already been our most active year in terms of net new investments. At the time of this post we have led 10 new rounds of financing (eight seed rounds and two A rounds). Historically we’ve invested in an average of eight deals per year dating back to 2016.

This is notable because a narrative seems to exist that Israel’s high-tech ecosystem is suffering due to the ongoing conflict. Of course there have been challenges (reserve duty has disrupted countless founders’ and employees’ routine, business travel has slowed due to lack of flights and the emotional toll of the conflict affects everyone’s ability in one way or another), but despite the challenges the overall ecosystem has been thriving.

Companies have been growing quickly, investment rounds have been competitive and both local and global investors have been aggressively deploying capital at the early stages.

So as 2024 comes to a close I thought it would be interesting to review a few of the dominant sectors in our ecosystem and share some general observations, trends and opportunities relating to those sectors.

The sectors I plan to review are fintech, defense-tech, cyber security, and AI applications.

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2024 Israel Defense Tech Review

From Motivation to Momentum

A year ago I wrote a piece that laid out our thesis for why the timing was right for an explosion of new defense tech companies in Israel. A big part of the timing being right was the newfound motivation that founders and investors had to build companies that aimed to help defend Israel and its allies from an increasingly chaotic geopolitical landscape.

If 2023 served as the motivation for building out Israel’s defense tech ecosystem, 2024 was defined by the industry’s momentum.

Both because momentum was something that the local defense ecosystem was lacking prior to this year and because this was the year in which the tech ecosystem as a whole woke up from their defense related slumber.

Beyond being anecdotal, a simple way of observing this momentum is in the number of defense opportunities that we saw at TLV Partners over the years:

While I readily admit that the 2020-2022 numbers do not accurately represent the ecosystem’s activity due to a lack of attention that we had as a fund towards defense, I believe that the year over year increase between 2023 and 2024 is quite representative of the industry’s activity as we already began to actively look for defense related companies over the last two years.

An article recently published by Globes also points towards the momentum in the domain and cites the fact that the Israeli Ministry of Defense has contracted with 86 startups since October of 2023 - a 5x increase compared to the previous year.

That said, the overall number of defense tech companies is still quite small compared to other categories, and…that’s ok!

The defense industry is layered with complexities that don’t exist in other markets. Go-to-market is defined by lobbyists and export regulations as opposed to account executives and webinars, the culture is defined by being methodical and thorough as opposed to moving fast and breaking things and oftentimes the stakes truly are life and death. Starting a company in this industry requires founders who understand the challenge, embrace it with open arms and have some level of familiarity with the the market.

So what did 2024’s defense tech momentum lead to?

Overhyped by Investors, Under-hyped by Founders

First and foremost it led to some truly fascinating companies being built. At TLV we invested in two defense companies and other companies¹ attracted investments from some of the top US based VCs.²

Some of these companies were able to secure their first government contracts (predominantly locally) and some have already been able to demonstrate their capabilities in the shetach (field).

Due to the above, investor interest has ballooned. I think most VCs in Israel would express interest in at least evaluating companies in the sector and a common question (sometimes even posed as a statement) that I’ve heard is: “is defense Israel’s next cyber security”?

And every time I hear that question I answer the same way: no.

I don’t expect there to ever be hundreds (let alone one hundred) of net new defense companies created annually in Israel.

The fact of the matter is that the true opportunity, in my opinion, is to create a new generation of defense primes. However I don’t believe there will be 50 new primes in the future. How many will there be? I’m not sure. But my guess would be closer to 10 than to 50 - and that’s on a global level.

But if I’m criticizing investors for attributing too much hype to the sector, I want to respectfully challenge founders for doing the opposite.

So much infrastructure exists in the market in order to help Israeli founders succeed in penetrating the defense industry that not enough founders are aware of.

• MAFAT (The Directorate of Defense Research and Development (DDR&D)) has been doing important work around creating a startup friendly ecosystem within the Ministry of Defense

• The US Department of Defense has several boots on the ground whose main purpose is technology scouting. Both the US Army Futures Command and the IWTSD are approachable and are legitimate paths to secure a first contract with the US

• Most importantly, there is an initial cohort of Israeli founders who have experienced various levels of success with selling to government agencies that I’ve found to be incredibly helpful when it comes to knowledge sharing, introductions and even active company advising (shoutout Tomorrow.io, D-Fend, and Xtend).

On second thought, perhaps my challenge to founders can actually be directed back at us investors. We need to be better at helping bridge the gap between interested founders and potential buyers.

Playing in the Sandbox

One additional area worth discussing is the role that local regulations play in helping foster or suppress innovation in defense.

Israeli defense companies face a major dilemma: should they sell to the local market? The simple answer to this question is yes - all of the founders are patriotic and due to ongoing conflicts there’s a unique opportunity to prove battlefield readiness quickly.

Unfortunately the longer answer is a bit…longer. Israeli export controls are too prohibitive. The regulators need to understand that the main markets for technology companies, defense included, are outside of Israel. If the country wants to continue to benefit from homegrown innovation in the private sector, they need to enable those companies to have a viable path towards selling abroad.

Additionally, Israel should consider instituting a more diverse set of non-dilutive funding paths akin to SBIR in the US in order to help encourage more founders to build in the space and make selling to the ministry of defense more accessible.

One of Israel’s greatest strengths can be its small size. Israel has the opportunity to be the defense-tech sandbox of the world, starting with local startups. But for that to happen, technology procurement needs to evolve.

Conclusion

2024 was an overwhelmingly positive year for Israel’s defense tech sector.

I firmly believe that the timing continues to be ripe for significant value creation in the domain, but also realize that the current constraint in the market is not venture dollars, but venture back-able ideas. I’m looking for ideas that have the ability to transform modern warfare, not ideas whose future is to be an add-on acquisition for one of the existing, or yet to be created, platforms.

If 2023 was defined by motivation and 2024 by momentum, I believe that 2025 will be defined by maturation. The maturation of investors’ ability to help founders get their ideas off the ground, the maturation of founders’ understanding of the opportunities that exist in the market, and the continued maturation of customer willingness to work with startups.

Realistically though, the next few years will require motivation, momentum and maturation in order for the promise of a new generation of Israeli founded primes to be realized.

1. Unfortunately, dear readers, all of the companies wish to remain in stealth mode - a term that actually makes both literal and figurative sense in the world of defense ;)

2. For the most part it seems that US funds who already had experience in defense were able to move faster than many local funds who were/are still troubled by, in my opinion, a mistaken conflict of morals when it comes to investing in this industry as well as a lack of imagination when it comes to the opportunity that defense represents.