Palestinian terrorists take control of an Israeli tank after crossing the border fence with Israel from Khan Younis in the southern Gaza Strip on October 7, 2023. (Said Khatib / AFP)
Palestinian terrorists take control of an Israeli tank after crossing the border fence with Israel from Khan Younis in the southern Gaza Strip on October 7, 2023. (Said Khatib / AFP)
Analysis'From A-Z, our defense system is broken'

In war with low-tech foe, startups could prevent costly failings – so why don’t they?

On Oct. 7, Israel’s $1 billion border fence sensors were blinded by cheap Hamas drones. Companies developing solutions claim they still face resistance from the defense establishment

Palestinian terrorists take control of an Israeli tank after crossing the border fence with Israel from Khan Younis in the southern Gaza Strip on October 7, 2023. (Said Khatib / AFP)

Not long after the outbreak of the Israel-Hamas war on October 7, it became painfully clear to Y., a computer vision AI engineer, entrepreneur and army reservist in a classified Israel Defense Forces unit, that the IDF had a major problem with enemy drones.

Hamas had blinded Israel’s $1 billion high-tech Gaza border wall — the opening shot of the war — by dropping bombs from cheap consumer drones onto the wall’s camera and sensor towers. Autonomous cannons stationed on the towers were cut off from targeting data and couldn’t respond. Officers in command and control bunkers couldn’t picture the situation or direct forces. Thousands of terrorists overran the border, crossed into Israel, and, butchering 1,200 people and kidnapping 251 to the Gaza Strip, delivered the bloodiest day in Israeli history and the largest slaughter of Jews since the Holocaust.

Weeks later, as IDF soldiers started operating in bigger numbers inside Gaza, Hamas drones were dropping grenades on Israeli troop concentrations and the terror group was publishing the videos on Telegram, reminiscent of Ukraine in 2022.

In the north, Hezbollah kamikaze drones were flying undetected by Iron Dome rocket defense radars, smashing into military bases, causing casualties and damage. The IDF, an army designed around quick wars fought on enemy territory with warplanes, tanks, artillery, submarines and missiles, struggled to coordinate an effective response against swarms of cheap drones.

Y., attempting to address the IDF’s drone detection gaps, coded a smartphone app for soldiers to serve as a “last mile” warning against drones for soldiers in the field. However, after months of failed attempts to test and develop the project under combat conditions through official Defense Ministry channels, Y. resorted to bypassing the system.

“I’m talking to soldiers on the ground who tell me that if it works, I want it tomorrow. But the defense establishment guys tell me the soldiers don’t need it. There’s a disconnect,” he says.

Tapping his network, he demonstrated the anti-drone app directly to commanders, leading to a quicker rollout. “I know my way around the army,” Y. says, “But a civilian entrepreneur isn’t going to make it. A startup’s chances of success in the Israeli defense establishment is very low.”

Y.’s experience echoes the frustrations of a dozen Israeli defense tech innovators, industry insiders, current and former military personnel, and investors who informed this article — several on the condition of anonymity as they are active in the reserves.

Many civilian entrepreneurs say they’re stymied by a system resistant to the very traits — fast prototyping, risk-taking, multidisciplinary approach, and a global-first outlook — that make Israelis world-beaters in fields such as cybersecurity, AI, digital health and life sciences, financial tech, enterprise IT, and other sectors.

Masked terrorists from the Izz-Ad-din al-Qassam Brigades, a military wing of Hamas, stand near a drone on the back of a truck while marching along the streets of Nusseirat refugee camp, central Gaza Strip, May 28, 2021. (AP/Adel Hana)

The challenges they describe in breaking into the Israeli defense industry are manifold: Projects can languish for months or even years, mired in evolving demands and personnel changes; spiraling development costs; a culture favoring established defense giants over disruptive upstarts; limited access to battlefield validation and data; onerous requests for information (RFIs) that risk IP exposure and don’t guarantee follow-on engagement; and heavy export regulations driven by opaque geopolitical considerations. Hardware startups face particularly acute challenges, often finding themselves at a disadvantage when competing for IDF contracts against entrenched firms.

“The moment you mention the word defense, the requirement for MIL-SPEC [military specifications] immediately rises, dramatically raising the development cost and risk,” says one defense tech entrepreneur.

Battlefield innovations: High demand, low supply

As Israel’s war with Hamas, Hezbollah, and other Iranian proxies stretches well into its ninth month, Israelis and their allies are looking to the defense establishment to restore the country’s badly mauled military deterrence. The war — its official IDF designation is “Swords of Iron” — has become a hydra, with multiple simultaneous hot fronts on every one of Israel’s borders (and beyond).

Almost all the fighting is asymmetrical and urban: tanks versus tunnels, warplanes versus drones. The demand for battlefield innovations from field officers is coming in thick and fast, according to industry insiders. While it is true that an unknown number of battlefield innovations remain classified, the sources interviewed for this article say the defense establishment’s ability to rapidly supply those innovations remains unclear.

The IDF has achieved significant gains. However, the war’s stated aims — destroying Hamas’s military and governing ability and releasing the hostages — seem far from reach. The IDF is in a protracted, asymmetric, multifront war it was not designed for.

The price is high and rising: over 640 soldiers have died since the war’s outbreak (7 percent overall in friendly fire incidents and accidents). Many, many thousands are wounded, physically and emotionally. Hamas is still fighting, able to dictate hostage negotiation terms. Israel’s global legitimacy is in question, its allies are exasperated. Arms embargoes have been touted, and war crimes arrest warrants have been sought.

Troops of the Commando Brigade operate in southern Gaza’s Rafah, in a handout photo published June 15, 2024. (Israel Defense Forces)

With the government’s apparent political paralysis, an outsized share of the burden of the war has fallen on the defense establishment, which is scrambling to rearm, retool, and streamline innovation projects. If ever there was a time when Israel could consider drafting its startups to move fast and blow things up, insiders say, it is now.

The irony of Israeli startups struggling within their defense industry is not lost on these defense-tech innovators.

“Before this war, there was almost no room for Israeli startups in the defense establishment,” says Moshik Cohen, a tech entrepreneur with a resume spanning military R&D, academia, and the private sector rivaling that of Tony Stark — the Marvel universe engineering genius who designed a high-tech flying suit to become Iron Man.

“Our defense system is broken. From strategic management, through procurement and equipment, to politicking, as a system, it’s broken,” Cohen warns.

Tech entrepreneur Moshik Cohen. (Courtesy)

Cohen, 43, has PhDs in physical electronics and nanotechnology. He has published dozens of research papers in the world’s leading scientific journals, including Nature and Science, in disciplines ranging from quantum computing to generative artificial intelligence. He served in R&D and operational roles in the Israeli Air Force (IAF), where he developed a new munitions system installed in combat helicopters.

From munitions he pivoted to autonomous combat UAVs and rockets, working as a rocket scientist for five years with Israel Aerospace Industries (IAI), where he contributed to the development of the Arrow 3 and Barak 8 platforms — Israel’s best-selling missile defense systems. Out of the military, Cohen worked at Intel and Samsung, founded and sold several startups, and developed a nanotech system which he won a defense prize for, and which has seen operational deployment by Israel’s special forces.

He has deep experience on both sides of the military-civilian innovation divide.

In 2019, Cohen developed a small, autonomous situational awareness system for tanks against short-range threats such as drones and RPGs. Despite successful demonstrations, the Defense Ministry deemed it unnecessary, citing deterred enemies, he says. Five years later, Israeli armor in Gaza is being pummeled by those very threats.

Israeli soldiers demonstrate the operation of the Arrow anti-missile mobile launcher at the Palmachim Base in central Israel (AP/Eitan Hess-Ashkenazi)

“This wasn’t about tech, cost, or need. It was about the unbreakable coupling between defense officials and large contractors. They can’t move without each other,” Cohen says.

Bridging the gap between Startup Nation and military might

There has been some significant progress in Israel’s defense innovation, especially post-October 7. The Israel Innovation Authority, Finance Ministry, and Defense Ministry have set up a program to support early-stage ideas that can be applied in military and civilian markets, so-called dual-use tech models. The Defense Ministry’s Directorate of Defense Research and Development (DDR&D, or MAFAT in Hebrew), the body charged with sourcing, supporting, and scaling defense innovation projects into battlefield use, is experimenting with streamlined tenders and supplier onboarding.

Tel Aviv University and the Defense Ministry are collaborating on fast-track battlefield engineering problems, including solutions for booby traps, drone interception, adding night vision capabilities to mobile phone cameras, a USB phone charger for tanks, live video streaming for tactical dogs, and other applications. Unit 81, the IDF’s in-house tech unit (like Q-Branch of James Bond fame) has been broadly successful over a long period.

A new “tech commando unit” is being formed jointly by the army and a group of alums from the IDF’s main IT unit, the Center of Computing and Information Systems, better known by its Hebrew acronym MAMRAM. The unit provides the army with its IT infrastructure, data centers, servers, and other computing needs.

IDF soldiers operate robots in the field. (Courtesy IDF Spokesperson’s Unit)

“It’s like the IDF’s AWS,” says Yossi Melamed, a MAMRAM grad, tech entrepreneur, and chairperson of the unit’s alumni association, referring to Amazon Web Services, the cloud service on which most startups run their businesses.

Together with around 500 alumni, Melamed is in the early stages of cobbling together a unit of talented reservist techies who team up to write code and develop apps based on the army’s needs. In wartime, reservists will be called up on emergency notices (Tzav 8), as some of them are now. The unit, which calls itself The Seventh, a reference to October 7, will report to the commanding officer of LOTEM, part of the army’s Teleprocessing Corps.

But these promising initiatives remain exceptions rather than a system-wide movement.

“Israel needs to bridge the divide between Startup Nation innovation and military might. If it does, it could emerge stronger and smarter. But tough bureaucracy can stifle the entire sector,” says Hamutal Meridor, a veteran of Unit 8200, serial founder, venture capitalist, and former general manager of American data analysis company Palantir’s Israel operation.

Israeli startups aren’t accustomed to being stifled. While military R&D has long underpinned Israel’s tech industry, defense tech has never been a big part of the ecosystem, says Meir Valman, author of an upcoming book “The Network Effect: The Origins of Israeli High Tech.”

“From the earliest days, the Defense Ministry preferred buying sophisticated equipment abroad and created a procurement network to do so. Early startups that tried to work with them often found it difficult due to this bias, as well as long decision times and frequently changed specs. Entrepreneurs found it easier to adapt army-learned tech to civilian markets,” Valman says.

Defense technology startups represent only a small fraction of Israel’s startup ecosystem.

Indeed, for the past two decades, the country’s tech industry boomed into the world’s third largest, and became Israel’s economic engine. Local and foreign VCs pumped money in at record levels and speeds. The government largely stayed out of their way. While other sectors boomed, defense tech wasn’t on many radars.

It didn’t help that the perception of the defense industry in Israel has been colored by the dominance of established contractors, which, like their counterparts in the US and elsewhere, were hardly thought of as nimble or entrepreneurial in spirit. Now, however, some of the best talent in Israel is flocking to the defense sector, says Meridor.

But that talent finds its path blocked by deep-rooted barriers. One insider recounts the frustration of seeing a project spiral in scope and complexity: “The problem is that once the person you closed with [on a deal] departs, someone new arrives who doesn’t agree with the project that has already been closed. You enter a spiral that’s very hard to get out of. Only big contractors can handle such engagements, often sourcing tech from small firms and doubling the price,” they say.

Post-October 7 shakeup

The fallout of October 7 will likely disrupt old patterns, especially in the short term.

“October 7 brought unprecedented transparency; it’s a game changer,” says Cohen, who is developing an AI-based counter-drone solution.

“Everyone saw what $300 RPGs and $5,000 drones did to Israel’s $1 billion wall and $5 million tanks. Hezbollah’s drones openly violate our borders daily. It’s out in the open; nobody can deny the need now. This could be a chance for true disruption by innovative defense startups,” says Cohen, who is launching a new defense startup of his own.

Those startups’ most immediate challenge is proof of concept validation. Access to field units is limited. Often, the army and buyers lack in-house professionals to give feedback.

“You need someone who understands both security and business; it’s very hard to find,” says an entrepreneur who has struggled with defense establishment procurement.

Hamas drones found by Israeli troops in a residential building in Gaza City’s Sheikh Radwan neighborhood, November 9, 2023. (Israel Defense Forces)

Navigating complex defense procurement and export regulations isn’t unique to Israel. Even well-funded US success stories like Anduril and Palantir have grappled with their defense sector’s complexities. Yet Israel’s system seems ironically ill-equipped for rapid battlefield innovation, despite abundant local talent and a live-testing environment.

Some entrepreneurs chafe at a “culture of over-classification,” where tech, operational requirements, and units are shrouded in secrecy. This hinders startups’ ability to test concepts and leverage innovations commercially. A reservist focusing on visual intelligence recounts being unable to provide commanders with all available intel, not due to lack of it, but because of over-siloing.

“Some intel is so secret and complex even I can’t know the source, let alone download it onto a map for a commander in Gaza,” he says. “I’m a reservist. I care about the units — they could be my family. The clearance is secondary. I want to give them everything. Think about it: forces went in without full intel because of a clearance process.”

The problem with Gaza’s vast underground tunnel network is another acute example. Hamas covers its tunnel shafts with sand and other materials, hiding their existence from visual intelligence collection methods. But tunnels need infrastructure, which can leave signs.

“The army didn’t go outside to startups that know how to quickly develop solutions for things like detecting air ducts, water drains, and electricity lines. There wasn’t one address for this, like there is for hostages. Different units worked separately. We made mistakes with tunnels,” the reservist claims. “It’s still operating like this.”

Secrecy and bureaucracy are tough. So is intellectual property. Startups must disclose sensitive information to RFIs, risking exposure. They walk a tightrope between IP protection and RFI demands. And RFIs don’t guarantee follow-on engagement.

Hamutal Meridor, veteran of IDF Unit 8200 and former general manager of Palantir Israel. (Courtesy)

“IP becomes a double-edged sword in defense,” an insider notes. “What’s enough for a VC’s diligence should be enough for the establishment.”

Financial hurdles are equally daunting. Startups need significant capital for R&D, testing, certification, and sales cycles. Applications in new materials, hardware, energy, lasers, radio frequencies, GPS navigation and disruption, robotics, AI and autonomous systems, biotech, nanotech, space, and quantum computing take much longer to develop than another scheduling tool or work task dashboard.

Risks and timelines are lengthy. Traditional VCs have shied away, leaving startups unable to bring innovations to fruition. They risk running out of runway or being acquired by larger firms — stifling competition and innovation.

“Defense and dual-use tech require deep pockets before you see oil,” says Meridor, who worked at top Israeli tech fund Vintage Investment Partners. Recently she announced she was leaving to found a defense startup.

Trending positively but still a long way to go

In the US, change is starting on the investment front. A handful of big American VCs are setting up dedicated defense practices. Israeli VCs are taking tentative steps. TLV Partners explicitly seeks defense startups. Ibex Investors hosts events for aspiring founders with combat backgrounds.

“It’s trending positively but there’s still a long way to go,” Meridor says of generalist tech VCs.

For thousands of reservist techies who in their day jobs are software developers, system architects, product managers, DevOps engineers, CTOs, heads of R&D, and many other titles, the urgency is keenly felt. Many have seen combat up close and have firsthand experience of things that need quick tech solutions.

IDF soldiers operate inside a Hamas tunnel in Gaza in this undated photo from the 2023-2024 Israel-Hamas war. (Courtesy IDF Spokesperson’s Unit)

The needs include tunnel detection, tunnel warfare tech, missile defenses for tanks, armored personnel carriers, and bulldozers, counter-drone measures, mobile electronic warfare kits, phone-based AI facial recognition, AI-powered sensor analysis, predictive gun sighting, and plenty of robotics.

“We’re creating tools to protect our soldiers and bring them home alive,” says one entrepreneur.

The central challenge, according to MAMRAM’s Melamed, is that the startup ecosystem is fundamentally open to foster collaboration, while the military is a fundamentally closed ecosystem, to protect forces.

“The military can’t take the risk of working on beta products with startups. There’s too much uncertainty in the early stage. When startups mature to a certain level where it’s a real business, then the army is more likely to engage,” Melamed says. “Twenty years ago it would take five to seven years for civilian tech to make its way into the army. That’s not the case today.”

Balancing secrecy with collaboration

To move innovation faster through the defense establishment, several structural changes are needed, says Meridor. The first step: recognizing defense innovation as critical to Israel’s long-term security. That demands streamlined bureaucracy, simplified procurement, and a culture shift valuing speed and agility over rigid protocol. “Software built for scale differs from an excellent prototype for a specific mission,” Meridor says.

That shift means moving to a “faster/cheaper/more” mindset in some areas rather than a “slower/exquisite/few,” says Meridor. This is also the reality of asymmetric warfare, where, for example, swarms of cheap drones can disable big, expensive, slow-moving platforms that are hard to hide, such as tanks and anti-missile platforms.

“Armies around the world, including the IDF, did not adequately prepare for full asymmetric war,” says Eli Friedman, vice president of innovation at defense giant Elbit Systems.

Eli Friedman, vice president of innovation at Elbit Systems. (Courtesy Elbit)

To get the army what it needs to fight both symmetrically and asymmetrically, now and in the future, the IDF, startups, and defense contractors need to work to their strengths, Friedman says. “With symmetric war, the army and defense industry work very well. With fully asymmetric war, it’s been hard for them to adjust in time.”

Friedman, who spent some 30 years in key electronic warfare research and development positions in the Israeli Navy and Defense Ministry, now works directly with startups, VCs, and other partners, part of Elbit’s philosophy to connect with defense and dual-use startups as early as possible. He says a key issue in working with startups is integrating their standalone products, like new sensors, drones, or software applications, into wider military systems.

“When startups meet the army, they meet a wall. Apart from regulations and culture, they aren’t designed to integrate their solutions into bigger systems and provide maintenance, which is what the big defense firms specialize in. The army might want their technology, but the army needs sustainability and endurance. Startups aren’t sure they’ll be around in six months, let alone 20 years,” Friedman says.

To sustain defense tech and dual-use startups, new funding models need to be created with a mix of government grants, tax incentives, and dedicated defense-tech funds. Rethinking IP rights, revenue agreements, and export controls for easier commercialization could also help.

“We should get a package deal,” says a defense tech entrepreneur currently serving in the reserves. “The IDF offers itself as a design partner or demo site, while VCs guarantee investment upon successful validation. This way, we see both sides’ continued willingness.”

Israel must also better balance secrecy with openness and collaboration, say the entrepreneurs. This could mean secure innovation hubs or “defense innovation sandboxes” — isolated environments for startups to develop and test using real military data and scenarios, allowing experimentation without compromising secrets. One entrepreneur suggested allowing startups to engage directly with IDF units, with corps-level legal approval. Others advocate a joint IDF-Israel Innovation Authority “defense startup accelerator” for promising technologies.

There is some precedent for this collaborative innovation approach: Innofense, a dual-use accelerator established in 2020 by DDR&D and SOSA, a company that connects startups with investors and corporations, shows how this can work. Graduates receive $50,000 in non-dilutive funding and six months to produce a proof of concept, without compromising IP. So far some 40 companies have completed the program.

One of them is Wonder Robotics, a drone autonomy solution company that helps drone service providers, drone manufacturers, and end users operate on a scale of one operator to many drones. Its software allows drones to land autonomously in dense urban areas or where GPS is denied. This is important as most drones primarily rely on GPS for navigation, but on the battlefield, enemy electronic warfare scrambles or blocks GPS, which can often disable drones. Wonder Robotics credits Innofense with helping it diversify from a commercial focus to also include homeland security and defense.

Wonder Robotics founder and CBO Or Epstein. (Courtesy)

Presenting the solution to defense industry contractors led to VC investment and new business, says co-founder and CBO Or Epstein.

“The Innofense model is a roadmap for opening the establishment to dual-use innovation,” Epstein says.

Innofense’s September 2024 call for proposals hints at future battlefield innovations, including startups in medical and frontline response (examples include tech for PTSD treatment and inducing deep sleep in noisy environments), AI, drone navigation, and minefield detection.

To tackle secrecy, suggestions include a “Dual-Track” classification system distinguishing between highly sensitive information and shareable tech. This could create a “classified-lite” designation for less sensitive projects.

In parallel, startups understand they need robust security protocols and a keen understanding of regulations. They must build trust, demonstrating they can handle sensitive data responsibly.

Elbit’s Friedman gives a recent example. When it became clear that the enemy drone threat was more severe than anticipated, Elbit partnered with Israeli automotive startups to retool their camera, sensor, radar, and AI technologies into a cheap and scalable capability the army needed. It took only three days.

MAFAT, meanwhile, says its work with defense and dual-use startups is proving itself on the battlefield. Speaking at recent public conferences, Col. Nir Weingold, the head of the unit’s planning, economics and IT department, says his department is working with entrepreneurs in a “flexible, accessible, and enabling way.”

“But even if things don’t work out as we want, we know how to make quick adjustments and recover,” Weingold says.

But for the reservist wanting to get critical intel to commanders in the field without red tape, the key change is classic Israeli: “Ego is the enemy. The moment commanders see startups can boost their success and promotion, they’ll connect. I don’t mind if they get credit. The goal is our children growing up safe, the next generation secure, not experiencing what we are now.”

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