Israeli defense tech to get state-backed guarantees to support innovation

Israel is set to allocate NIS 200 million ($60 million) in state-backed guarantees to support the launch of venture capital funds focused on defense technology innovation, with the aim of strengthening the country’s security independence and technological superiority on the battlefield.

The initiative comes as some European governments are canceling arms deals with major Israeli defense contractors, including Elbit Systems and Rafael Advanced Defense Systems, while seeking sanctions on Jerusalem due to the ongoing was against Hamas in Gaza.

As part of the initiative, two venture capital investment funds — selected via a tender process — will get state-funded guarantees for up to two years. State guarantees protect investors against the risk of losses and serve as incentives to encourage investment in new advanced defense technologies, which are considered high-risk. Full details about the conditions of the state guarantees will be published with the tender.

The state support is expected to attract local and international interest, and is hoped to help raise at least NIS 1 billion in capital for each investment fund.

Prime Minister Benjamin Netanyahu said Monday the ongoing war “limits our ability to import weapons and weapons parts, and threatens us with economic setbacks. It’s very difficult to influence that… at least in the coming years we will have to deal with these isolation attempts.”

“We will have to invest in our ability to develop defense and weapons industries here,” he added.

The Finance Ministry, along with the Defense Ministry’s Directorate of Defense Research and Development (DDR&D), sought approval on Sunday from the Knesset Finance Committee for up to NIS 200 million in state guarantees to promote the establishment of venture capital funds focused on the development and production of advanced defense technologies. The Finance Committee hearing ended without approval due to the absence of Defense Ministry representatives.

The government hopes these funds will help advance Israel as a local and global leader in the field of advanced military technology. The vision is to create a national ecosystem for the development of entrepreneurship and innovation, which will help ensure supply chains of critical military components and production and contribute to job creation and economic growth in the country.

“For the first time, we are launching a tender to establish state-guaranteed funds for [defense] innovation,” said Accountant General Yali Rothenberg. “The funds will encourage investment in advanced technologies in the defense sector, companies that establish manufacturing activity in Israel, with a focus on companies with growth potential, while bringing competition to the Israeli defense market.”

The joint initiative aims to bridge the gap between the current shortage of private capital and funds available for high-risk defense sectors, and the growing need for military innovation as underlined by the ongoing war and in light of the emerging geopolitical risks.

“We are in the midst of a security and economic campaign that requires not only a firm stand in the present but also investment in the future,” said Defense Minister Israel Katz. “The establishment of venture capital funds in the field of advanced security technologies is a strategic move aimed at strengthening the security and technological independence of Israel, ensuring superiority on the battlefield in the years to come, and creating a solid economic base that relies on Israeli innovation and creativity.”

The war with Hamas, which broke out with the terror group’s October 7, 2023, onslaught on southern communities in Israel, has fueled the growth of established defense tech companies and sparked a wave of entrepreneurial ventures to address the pressing security needs of a rapidly changing battlefield.

For the past decades, Israel’s defense industry has been dominated by a handful of major companies, including Rafael Advanced Defense Systems, Israel Aerospace Industries (IAI) and Elbit Systems. The large defense contractors have worked closely with the government, securing long-term procurement deals and developing proprietary technologies with little room for smaller startups. As a result, startups have found it challenging to enter the defense tech space due to lengthy regulatory bottlenecks, high entry barriers and a lack of venture funding.

“Defense tech can and should become the next technological locomotive of Israeli high-tech,” said Defense Ministry Director General Maj. Gen. (res.) Amir Baram. “It is based on the unique ecosystem built here, which connects high-tech warriors, proven operational experience, constant operational friction, and an Israeli culture of rapid development while taking risks and drawing lessons quickly.”

The number of ventures developing innovative technologies and solutions tailored to security and military needs doubled between 2023 and 2024, according to Startup Nation Central, which tracks the local tech ecosystem.

During the war “we adopted technologies from over a hundred startups directly for the IDF, and we saw how essential this innovation is to the country’s security and how it provides the IDF with a tremendous advantage on the battlefield,” said Brig. Gen. (res.) Dr. Daniel Gold, head of DDR&D. “We are now working to expand this engine: to encourage private investments in defense technology, to expand the industrial base and local production infrastructure, and to attract quality personnel to the field.”

Israel is home to more than 312 defense tech-related startups and firms, according to data collated by Startup Nation Central. The startups and firms operate across aerospace, defense, and Homeland Security (HLS) technologies, as well as autonomous systems, cyberdefense, AI, and robotics.