Israeli defence tech: New frontier for US investors and military contracts Article by The Wall Street Journal

Venture capital firms that have been investing heavily in US defence startups are now expanding their focus to Israeli military technology companies. 

According to the latest article by The Wall Street Journal, the growing interest in Israel is driven by the belief that Israeli firms will increasingly compete for defence contracts in the US and Europe, as military spending is expected to rise in the coming years, per Caliber.Az.

One notable Israeli startup, Kela, has attracted investments from major US venture firms, including Sequoia Capital, Lux Capital, and even the CIA’s investment arm. The funding round for Kela raised a total of $39 million, with Sequoia Capital providing Kela’s full seed round, and Lux Capital participating in the Series A round.

Kela’s product is not a traditional weapon, but a software that combines commercial and military technologies, designed for applications such as border defence. The company is planning to expand into more significant defence contracts, aiming to integrate and develop larger weapons systems in the US and Europe. Hamutal Meridor, Kela’s co-founder and president, emphasized that the company’s goal is to compete on an international level, with a focus on major programs outside of Israel.

Israel hopes that Kela's success will be a model for other defence tech companies in the country. The Israeli defense-tech sector, traditionally dominated by large companies such as Elbit Systems, Israel Aerospace Industries, and Rafael Advanced Defense Systems, is seeing a new wave of smaller, innovative startups. In December, Israel’s Defense Ministry and Tel Aviv University hosted the country’s first defense-tech summit to connect investors, companies, and government officials. Lorne Abony of Texas Venture Partners, which launched with $50 million to invest in Israeli defence firms, stated that the current climate in Israel is perfect for a defence tech “renaissance.”

The potential of Israeli startups in the defence market is seen as significant, with Abony pointing to Israel's record in technology and its higher success rate in creating tech unicorns compared to the US. This interest comes at a time when the US defence industry, particularly startups, is gaining prominence. US defence firms like Palantir Technologies and Anduril Industries, which have seen significant investment in recent years, are benefiting from a shifting focus at the Pentagon toward newer technologies.

The entry of Israeli startups into the defence market comes at a critical moment as the US faces growing competition from other countries. While American startups have captured only about 1% of the Defense Department's contracts, the competition from Israeli companies may be more challenging due to the complexities of working with the Pentagon. Raj Shah, managing partner of Shield Capital, which funds defence startups, noted that while the US military is shifting its spending toward newer technologies, the question remains whether the Pentagon will buy from foreign startups.

The CIA’s investment in Kela, though smaller than the contributions from Sequoia and Lux, is significant. Clayton Williams, managing director of IQT (the CIA’s venture arm), expressed confidence that the company’s battlefield feedback-driven development would help Kela stand out in the defence sector. IQT’s involvement is seen as an endorsement that could help Kela break into the highly competitive defence market, much like Palantir did in its early years.

While Israeli defence tech companies are gaining attention, venture firms like Abony’s Texas Venture Partners have worked with Israeli companies to refine their approaches for pitching to the US Department of Defence. Despite the challenges, the general sentiment is positive, with investors believing that Israeli defence startups have significant potential in the growing global defence tech market.

By Tamilla Hasanova