The tragedies of October 7th are still fresh in our minds and will continue to be so for years to come. And while now is not the time, nor is this the platform, to litigate or discuss those barbaric events or what led to them – we believe that it is our responsibility to do what we can to help prevent something like October 7th from ever happening again.
Therefore, we are calling on founders to build software-based defense and intelligence startups out of Israel that are focused on selling to, and supporting, democracies around the world. We believe that local talent, expertise, industry and opportunity represent fertile grounds for the growth of outlier successful and impactful companies to be created in this domain.
Israel’s tech ecosystem and defense technology have, for the most part, been like oil and water. Side by side, but never quite interacting.
This is surprising because the root of Israel’s tech prowess can be attributed to the military experience that the majority of its founders have. Most Israeli founders spend years serving in the Military Intelligence, Air Force, Armed Forces, Navy, National Intelligence or other units, prior to beginning their entrepreneurial journey.
This should position Israelis to excel when it comes to developing superior defense technology. Alas, the vast majority of Israel’s defense technology has been developed within the walls of its three large defense contractors: Elbit (founded in 1966), IAI (founded in 1953) and Rafael (1948). These organizations are not often associated with agility and speed of innovation, but rather with bureaucracy.
While this lack of interaction is surprising it’s simultaneously unsurprising because the above is not a uniquely Israeli phenomenon. The rise of Silicon Valley’s tech prowess is also inextricably linked to the United State’s military ingenuity. (While it’s not within the scope of this article, watch The Secret History of Silicon Valley and listen to the Lockheed Martin Acquired Podcast episode which both provide riveting accounts of this history.) And yet, America’s tech landscape has also traditionally been detached from the defense sector. Its defense technology has also been dominated by large defense contractors, or, the Primes: Lockheed Martin, Raytheon, General Dynamics, Boeing, Northrop Grumman, L3 and more.
The past few decades in Silicon Valley have been focused on fast paced enterprise software and social media startups. Israel’s ecosystem, which receives its inspiration from The Valley, has followed suit.
The Rise of Defense Tech
This all began to change in the early 2000s with Palantir. Their mission was clear from day one: (from Palanti’s S-1) “We were founded in 2003 and started building software for the intelligence community in the United States to assist in counterterrorism investigations and operations”.
Now a $40bn+ company, Palantir paved the way for entrepreneurs to view building a technology company aimed at defending their country as a realistic, albeit ambitious, endeavor. Or at least it should have.
Truth be told, while Palantir might have been the trailblazer, it wasn’t until Anduril came along that the paradigm for building defense first technology companies was turned upside down. In 2017, Anduril set out to become an alternative, software first, Prime. Their success (they have raised over $2bn and secured massive government contracts) opened the eyes of investors and entrepreneurs across the US.
From Pitchbook: Defense tech investment and acquisitions were robust from 2016 to 2022—$135.3 billion was invested and 71.0% of VC exits were acquisitions. Some great examples of companies in this new wave of defense tech include Vannevar, Primer, Accrete and Rebellion Defense.
But this increase in appetite for defense tech has yet to truly reach the shores of the Mediterranean. We believe that needs to change.
Patriotism as a Service
Being patriotic and being a startup founder haven’t always gone hand in hand. Indeed Trae Stephens, a Co-Founder at Anduril and a Partner at Founders Fund, penned an article justifying the ethics of investing in defense tech companies in 2019. He felt compelled to write that article because it was a common sentiment that war is the business of governments, not startups.
This has been the sentiment within Israel as well.
Perhaps it’s precisely because most Israeli founders have had to experience war or military operations that Israeli entrepreneurs have stayed away from the industry, in an attempt to separate that part of their lives from their current unicorn aspirations. Or maybe it’s because continuing to work on defense by either remaining in the military or going to work at one of the government contractors was considered the easy path and Israelis are dead set on taking the road less traveled.
Whatever the reason, since Israel has become the Startup Nation the accepted path towards being a founder and a patriot was to incorporate your company in Israel and not the US. But as mentioned above, October 7th has revealed that we cannot remain on the sidelines when it comes to the protection of our beloved country and Western values of liberty and freedom.
This isn’t to say that our military and government agencies have failed – they remain some of the strongest agencies worldwide. But it does mean that we as an industry can augment their capabilities with the startup ethos and ingenuity that we’ve brought to most other industries.
The fact of the matter is that a new path for being a patriot and a tech founder has emerged: building a defense tech company.
Next Steps
At TLV Partners, we began our journey of looking into defense tech about a year ago. We have made one investment so far in an incredible company called Airis Labs (more on this soon) and are continuing to learn as much as we can about the industry. Here are a few things that are clear to us at this point:
- The World is Changing – Current conflicts in Israel and Ukraine have demonstrated that modern warfare doesn’t only take place on the battlefield, but rather across multiple fronts – including the digital world that we are all so entrenched in. Defense as a category encompasses deterrence and resilience as well: specifically, the ability to ensure that nations have the capabilities to withstand threats across various domains
- We Have the Talent – Israelis are uniquely suited to innovate in the defense sector. Both because of their backgrounds in the military, but also because of their unique skills in cyber security, computer vision, embedded software and signal processing
- Strong Local Market for Initial Sales – As opposed to other industries, the local Israeli market is ripe with 5-10 relevant agencies and organizations that can serve as initial customers. These agencies are well respected internationally and securing a few of them as happy customers will go a long way in opening doors in the US and Europe
- Software First – We believe that what’s been missing most from the local defense industry is a software first approach. This doesn’t mean a software only approach, but it does mean that the companies we are most interested in backing are ones that have a unique understanding of how government agencies can leverage next-gen software in order to be more efficient in their intelligence and defense efforts
- Defense First – A popular phrase in the defense-technology sector until recently was: dual-use. This referred to companies that sold to a slew of industries including governments. We believe that a defense first approach and not a dual-use strategy is necessary to building meaningful companies in the domain
- Developing Playbook for Go-to-Market Success – While it’s true that breaking into this sector and winning government contracts is more difficult than the traditional enterprise sales motion, there are mitigating factors for the risk of slow go-to-market motion. Firstly, government contracts are very large and very sticky. That is to say, once you’re in, the pay-off is worthwhile. Secondly, programs like Palantir’s FedStart provide software based companies with smoother paths towards working with governments
- Protecting Israel and its Allies – it is of utmost importance to be diligent and strict regarding the customer universe. It is untenable for Israeli defense tech to ever be used by adversaries and the axis of evil that aims to destroy Western society. But that’s easier said than done and requires setting clear policies from the get-go regarding sales and go-to-market
- Gen-AI – Applying the leaps in AI’s capabilities should play a central role in the founding of new defense focused startups
We believe that this is going to be a defining category for our ecosystem over the next decade. If you’re a founder who’s working in this area or are interested in learning alongside us – please reach out.
