Executive Summary

An Ecosystem at a Defining Inflection Point

Israel's defense-technology ecosystem stands at a defining inflection point. Since October 7, defense innovation has shifted from a specialized sector to a central pillar of national resilience. Talent mobilized rapidly. Capital reoriented. Government procurement accelerated. Founders with direct battlefield experience began building companies at unprecedented speed.

The question now is no longer whether Israel can innovate under pressure. It is whether Israel can convert urgency into durable industrial capability.

Israel has always excelled at improvisation. The challenge ahead is industrialization: transforming battlefield credibility into repeatable product development, scalable manufacturing, procurement fluency, and global export capacity.

As operators working closely with early-stage defense founders, government stakeholders, and capital partners across the ecosystem, we see firsthand where momentum converts into deployment and where it stalls. Our vantage point sits at the intersection of pre-seed architecture, operational validation, and procurement reality. This report is not a theoretical analysis of the sector. It is a synthesis shaped by direct engagement with the founders building, the institutions buying, and the investors underwriting the next generation of Israeli defense capability.

Market Reality (MAFAT + SNC 2025 Info)

Size, Structure & The Signals That Mattered at the end of 2025

Industry Footprint (2025)

Defense-tech is no longer peripheral. It is structured, measurable, and institutionally engaged. Approximately 63.7% of companies are located in central Israel, signaling clustering effects but also potential geographic concentration risk.

Procurement Flows & Sector Allocation (MAFAT + SNC 2025 Info)

Procurement & Capital

Government Orders

MAFAT has become a catalytic anchor. Companies that received a direct MAFAT order in 2025 raised $1.2B in total funding. For pre-seed and seed companies, MAFAT orders represented 34% of funding volume, compared to 17% in Series A and 15% in Series B+. This government validation functions as leverage capital.

Structural Gaps

Where the Ecosystem Breaks Down in 2026

IAI ELTA (Prime)

Should Fast, Innovative Startups Work with a Defense Corporation?

And No, It’s Not Just About Patriotism.

IAI | ELTA Division |
Strategy and Technologies

Nitai Kaniel - Open Innovation Lead

* This article reflects the author’s views only.

This article explores the changes reshaping the defense market, and why, despite the inherent frictions, startups should work with defense corporations.

It’s easy to start with the obvious: the value of working with a company like ours. In recent years, that value has become something that goes without saying. But it’s far from the only reason to work with a defense corporation.

If you were to ask many entrepreneurs what comes to mind when they look at defense corporations, you’d likely hear: rigid conservatism, long cycles, bureaucratic bottlenecks, and a pace that feels disconnected from the startup clock. There is truth in that, but it’s only half the picture. The other half is the step-change a successful partnership can create: a faster path to market, often much harder to achieve alone.

Each year, I review roughly a thousand startups and meet a few hundred in one-on-one conversations. In less than two years, we’ve run a few dozen proofs of concept (POCs) with startups, working closely with our business and technology teams, several have already matured into commercial agreements, while others are progressing in that direction. But the numbers themselves are not the story. They reflect something deeper: the beginning of a structured internal shift in how we partner with startups.

IAI ELTA (Prime)

Redefining the Defense Market

The shift in the defense market is tectonic. This isn’t just a new label, it's structural transformation. We are witnessing the biggest disruption this market has experienced in decades.

Some examples:

• Technological: beyond the technology leap itself, the entire lifecycle is being reshaped: from early development, through delivery of sensors and edge software, and into robotics and autonomous systems.
• New entrants: we are seeing new players from the civilian market, including companies that not long ago kept their distance and were highly reluctant to engage in this field, Google being a prominent example. Anthropic is another signal of the steep AI curve: it says Claude is deployed in classified national security environments and has a DOW/CDAO contract.

• Startups are being founded with a focus exclusively on the defense domain, such as Helsing, Saronic, Shield AI, Anduril. They are clear examples of something that was not common in the past, certainly not at these scales.

IAI ELTA (Prime)

Capital, budgets, and system-level validation.

Source: Based on Anthropic public disclosures, including the Series G funding announcement (Feb 2026) and subsequent executive statements and conference remarks (Apr–May 2026). Run-rate figures are annualized and not GAAP revenue.

Anduril last raised at a $30.5B valuation (Jun 2025). Reported plans point to a potential new round targeting ~$60B (not yet closed).

• Capital Driven players are entering the defense domain "aggressively", including dual-use solutions, in numbers that simply did not exist before.
• New Business Models are emerging within the sector - Ondas is one example.

All of this is not happening in a vacuum. Global defense budgets are accelerating at a pace not seen for decades. In the U.S, national defense requests have now entered the trillion‑dollar range for a single fiscal year; Within NATO, Allies committed at the 2025 Hague Summit to invest 5% of GDP annually on core defense requirements as well as defense ‑ and security‑related spending by 2035; and in Asia, India’s defense budget (excluding pensions) roughly $60B per year In the last five years, while Japan has launched a historic $320B five year buildup.

This shift is not just financial, it is changing how solutions are built and adopted. So, with all this money flowing, why should a startup work with us, and what do we offer? In short: not a logo on an investor deck, but deep validation: technological, business, and system-level.

The advantage of working with us lies in validation against real needs, emerging directly from our customers, shaped through close work on diverse defense solutions. Much of this stems from decades of intensive defense-related work by our people.

IAI ELTA (Prime)

From POC to Production - Converting Proof Into Adoption

This comes together with infrastructure and the ability to integrate into combat-proven legacy systems backed by years of R&D and real-world deployment. If we succeed together, it also provides access through us to long-standing relationships with our customers across dozens of countries worldwide, as well as to a reputation built over many years.

All of this enables the delivery of system-of-systems solutions aligned with real market needs, combining startup innovation and speed with deep, accumulated experience to create a genuine 1+1=3 outcome. If a POC meets its KPIs and the commercial alignment is right, it creates a clear path to adoption from a scoped validation, through integration and qualification, to procurement-ready deployment unlocking faster go-to-market and stronger scaling potential than an independent route.

We acknowledge the deep gap built into the process: we do not work like a startup, and the terminology, approaches, and time rhythms are different.

Precisely because of this, we are continuously improving our fast-track lanes (even now) to reduce response times across procurement, finance, legal, business development and software. We also offer preferential terms and flexibility - there is no one-size-fits-all rubric. Each engagement is tailor-made, aligned with the startup, and supported by a clear post-POC roadmap.

For startups building long-term solutions in complex markets, this kind of partnership requires strategic patience. When applied correctly, it can become a significant competitive advantage - not "just" patriotism.

JCT & Schreiber LevTech (Education)

Expanding Israel's Defense-Ready Engineering Pipeline

JCT & Schreiber LevTech
Expanding Israel's defense-ready engineering pipeline.

The Opportunity

Israel's defense-tech sector, and the country's need for advanced technology for its own security, is surging.

Demand for skilled engineers with product-building experience is critical.

Yet one of the most capable, motivated, and untapped talent pools in Israel remains on the sidelines of this boom: the Haredi and Orthodox engineering community, men and women, from Israel and around the world. Highly educated, technically rigorous, values-driven, and deeply committed to contributing to Israeli society—they are ready.

The constraint is often not the number of startups or programs. It is the pipeline of engineers who arrive ready with hands-on systems experience, exposure to real defense challenges, and the mindset to operate under real constraints.

JCT and Schreiber LevTech exist to build that pipeline and to open it to student populations that defense companies have not traditionally drawn from. That is where the opportunity is.

JCT & Schreiber LevTech

Who We Are

The Jerusalem College of Technology (JCT) is Israel's leading engineering institution for the religious and Orthodox community with 4,500 students across software engineering, electronics, electro-optics, industrial engineering, and computer science. JCT trains approximately 12% of all women studying computer science in Israel. Students come from 38 countries; over 90% remain in Israel after graduation. JCT alumni have contributed at leadership levels to some of Israel's most critical defense systems and have received an outsized number of Israel Defense Prizes.

The Schreiber LevTech Entrepreneurship Center is JCT's applied innovation engine giving students hands-on experience building real systems while they are still studying. It has run hackathons with industry and technology partners, supported 38 active startups, and runs accelerator programs connecting students to industry challenges and commercialization pathways.

The Talent Pool Defense Companies Are Missing

JCT draws from student communities that are highly capable, deeply committed to Israel's security and largely absent from defense company hiring pipelines. Not because of ability, but because the doors have not been opened.

JCT & Schreiber LevTech

Talent Pool, Proof Points, and DefenseTech Center

These engineers get to working proofs of concept fast. The hackathons and startup portfolio demonstrate it. The DefenseTech Center can build the on-ramps that connect this talent to the companies that need them.

JCT & Schreiber LevTech

What We're Building: The DefenseTech Center

Building on a decade of running intensive extracurricular training rograms, deep engineering degree programs, and a demonstrated ability to get students to proofs of concept fast, JCT and Schreiber LevTech are establishing a DefenseTech Center.

Its purpose: move defense innovation upstream by developing talent earlier, integrating it more broadly, and anchoring Jerusalem as a complementary defense-tech hub alongside Tel Aviv, Be'er Sheva, and Haifa.

JCT and Schreiber LevTech expand Israel's capacity to build, integrate, and deliver defense technologies by developing talent earlier, broadening who participates, and strengthening new centers of gravity.

A Message From Abroad | Ariel Remer (Angel Investor)

North American Angel Investor supporting pre seed startups that make Israel safer.

Ariel Remer

North American Angel Investor supporting pre seed startups that make Israel safer.

Israeli founders have always been exceptional builders, especially in defense and dual-use technologies. That part hasn’t changed. What has changed is the moment we’re in. There’s a growing recognition globally that the next wave of defense innovation will come from startups, teams that can move quickly, think differently, and build with a level of urgency that traditional systems often can’t match. For Israeli founders, that creates a very real opportunity to build companies that matter far beyond the local market.

At the same time, breaking into North America brings a different set of challenges. It’s not just about the quality of the technology, which is often world-class, but about how that technology is communicated, positioned, and understood in a new market. A lot of the work I’ve found myself doing with founders is around that layer. Sometimes it’s helping refine a deck so the story is clearer. Sometimes it’s making an introduction at the right moment. Sometimes it’s just pressure-testing how an idea is being framed for a North American audience. None of it is particularly glamorous, but it’s often where things start to click.

What makes The Sandbox valuable is that it brings structure to that process. It gives founders a place to sharpen what they’re building, clarify how they’re thinking, discover where it fits, and how markets will receive it. It creates an environment where small adjustments in messaging, in timing, in positioning can have a meaningful impact. In this current environment, those details matter.

There’s real momentum building in defense and dual-use technology. The capital is paying attention. Governments are more open than they’ve been in the past. The opportunity is there. The founders who can translate what they’ve built into something the market can immediately understand are the ones who will move the fastest. It’s been exciting to spend time alongside teams as they work through that process, and I’m looking forward to seeing more of them break through in the months ahead.

Industry Voice | Greenspoon Marder Israeli Practice

Greenspoon Marder Israeli Practice Collaboration with LDS: Your U.S. “One-Stop Shop” is Here.

Greenspoon Marder Israeli Practice

How We Are Going to Help You.

Industry Voice | Fresh Defense (Seed Investor)

Why the Next Wave of Defense Innovation Starts at Pre-Seed

Commentary from Fresh Defense — Pre-Seed Fund, 16 defense investments since 2020

Fresh Defense

Pre-Seed Fund, 16 defense investments since 2020

The nature of defense innovation is shifting at an unprecedented pace. For decades, technological breakthroughs emerged from government labs and prime contractors through development cycles spanning years. Today, the epicenter of disruptive capability has shifted toward startups, specifically those at the pre-seed stage. This is where ideas are boldest, teams are agile, and core architectures are forged before legacy constraints take hold.

As a pre-seed fund that has led 16 defense investments since 2020, 12 of them in the past year through Fresh Defense, we’ve seen this play out in real-time within the Israeli defense tech ecosystem, one that punches far above its size and serves as a bellwether for global innovation trends.

Throughout this year we’ve met with over 150 defense companies (and founders), working in different defense sub-domains trying to build the protection of the future. The founders we met were determined, mission driven and fueled with a deep sense of purpose. They are planning to take their battlefield experience and bring it into the industry in the aim of solving the most pressing problems armies and entities currently suffer from.

The Global and Israeli Defense Innovation Landscape

Defense venture funding has grown significantly worldwide and reached an historic “Supercycle” in 2025 as investors and governments seek tomorrow’s technologies today.

Global startup funding in aerospace and defense crossed $19 billion in 2025, nearly doubling prior years as technologies like AI, autonomy, and secure communications attracted capital.

Fresh Defense

Why Pre-Seed and Why Now

This trend is mirrored in Israel, where the ecosystem demonstrated remarkable resilience; in 2025, Israeli startups raised over $15.6 billion, with defense-tech attracting over $1 billion in activity, a record that underscores Israel's role as a global anchor for critical security technologies.

What makes Israel remarkable is not just total capital, but stage distribution: a high proportion of early-stage ventures intensely focused on next-generation capabilities like spectrum sensing, AI-enabled defense systems, and secure communications, the very domains reshaping modern battlefields.

This "market pull" is fueled by geopolitical realities, with global military expenditure reaching $2.7 trillion. Modern militaries are actively seeking alternatives to legacy prime contractors, with a significant portion of new AI and autonomy contracts now flowing to tech-first startups rather than traditional primes.

This is the fertile ground in which pre-seed defense startups thrive, and why investors who enter before traction often get the greatest strategic and financial leverage.

In dynamic domains like spectrum sensing, secure communications, and fusion analytics, pre-seed innovation sets the trajectory for entire categories. Startups like R2 Wireless (who were our first investment in defense back in 2020) demonstrate the power of this timing; by securing early backing, they gained the runway to develop differentiated IP that positions them as strategic partners to larger entities. Investors who enter at this stage gain significant leverage, as these companies often grow into massive late-stage rounds evidenced by the $2.5B and $600M "mega-rounds" seen in 2025 or become prime acquisition targets for industry leaders looking to buy proven, cutting-edge technology.

Fresh Defense

How to win today’s defense market

However, the path forward for defense startups in the next two to three years involves navigating specific, high-stakes hurdles. The first is capital intensity; unlike software-only SaaS, defense ventures, particularly those with hardware components, require significant R&D and compliance investment before reaching scale. Reaching a Series A often requires substantial follow-on funding, making pre-seed validation a critical gatekeeper. Furthermore, the "Valley of Death" , the gap between a successful pilot and a full government contract remains a daunting obstacle. Startups must navigate lengthy acquisition cycles and rigorous certification requirements while proving reliability to risk-averse procurement officers. Additionally, as the sector matures toward 2028, we expect accelerating consolidation, where the ability to scale manufacturing and secure specialized talent in fields like tactical AI will separate the market leaders from the rest.

Despite these challenges, the case for pre-seed defense investment has never been stronger. The current environment offers a unique window where early-stage ventures can outpace legacy cycles and define the future of national security. As we look toward 2026, we see it as a pivotal year for the sector to demonstrate its resilience and disruptive power. By providing founders with the runway they need to build and grow and the network to reach global stakeholders, pre-seed funding acts as the ultimate catalyst. The race for a technological edge is already underway, and for those seeking to lead the next wave of defense innovation, the starting line is at pre-seed.

To founders building in defense today, here are a few things that might help you navigate through this market; first of all understanding that the real optimization is not product-market fit, but trust-market fit. The data shows that the companies that scale, survive procurement cycles, and ultimately drive premium outcomes are those that behave early like long-term defense counterparties rather than scrappy startups: they design their organizations, documentation, compliance posture, and decision-making for scrutiny and stress; they are intentional about who their first reference customer is and over-invest in credibility over short-term growth; they protect their information asymmetry with primes until real leverage exists; and they build systems that work not just in demos or peacetime, but under degraded, wartime conditions. In a market moving rapidly toward consolidation, where acquisition decisions are driven more by strategic trust and survivability than by revenue multiples, founders who internalize this early create disproportionate advantage because in defense, reputation compounds faster than growth, and organizational trust is the scarcest asset of all.

We are confident that, together, the exceptional Israeli founders building defense technologies today and the seed to growth investors who recognize the strategic importance of this sector will play a central role in bringing Israel’s frontier defense innovation to global markets. By leveraging Israel’s most advanced and battle-tested technologies, this ecosystem is uniquely positioned to support allied nations in addressing current and emerging global security challenges, a process that, as we are already witnessing, begins at the earliest stages and compounds over time.

Industry Voice | Protego Ventures (Growth Investor)

Turning Israeli Battlefield Credibility into Global Delivery

Commentary from Protego Ventures — Early-Growth Defense Tech Investor

Protego Ventures

Early-Growth Defense Tech Investor

The second half of 2025 brought a long-awaited sense of relief. The defense sector’s frame shifted from survival to sustainability, raising a new question: could Israel’s defense innovation engine sustain and scale its momentum once the wartime pressure eased?

One answer came in September, when the Tel Aviv Stock Exchange launched dedicated defense indices representing 20 companies with a combined market capitalization of roughly ₪110 billion. The message was not only that defense had outperformed, but that public markets were beginning to treat the category as investable and durable, rather than a wartime anomaly.

In November, the private market delivered its own signal. Three Israeli homeland security and defense technology companies were acquired in quick succession: Carbyne, which was co-founded by our Managing Partner, Lital Leshem, was acquired by Axon in a $625 million cash deal; Orbit Communication Systems, a military SATCOM leader, agreed to be acquired by Kratos for $356.3 million; and Sentrycs, a counter-UAS company, was acquired by Ondas in a $225 million transaction.

Protego Ventures

Readiness stack and U.S. delivery

Taken together, these are markers of an ecosystem maturing, slowly but visibly. When exits begin clustering, public indices form, procurement expands, and defense innovation moves from episodic urgency to institutional permanence. On the policy side, Israel’s 2026 budget is isncreasing defense spending to around ₪112 billion, reinforcing that the demand environment and procurement pipeline are set up to remain structurally higher than pre-war baselines. Critically, the Ministry of Defense is not only buying more, but also signaling a stronger intent to channel R&D into startups and SMEs through MAFAT (DDR&D), tightening the loop between operational need and venture-scale delivery.

What changes next is the bar for what “ready” actually means. Combat validation still matters, but the companies that win globally are the ones that pair performance with real-world readiness.

At Protego Ventures, we evaluated more than 30 companies in the past six months, across sectors and platforms, and several consistent patterns emerged. 1. TRL, on its own, proved to be a weak proxy for maturity. 2. Intellectual property extended far beyond patents into deployment know-how and hard-earned operational lessons. 3. Regulatory and compliance constraints shaped system architecture earlier than many teams anticipated. 4. Integration into legacy environments surfaced as the most common breakpoint, not because the technology failed, but because the surrounding infrastructure had not been designed for institutional adoption. 5. Teams with deep, hands-on defense experience consistently outperformed larger teams without it, and 6. business models built around standalone product sales struggled against long procurement cycles and platform-centric buyers.

That readiness stack matters most in the U.S., because it is the largest defense market and the most demanding environment for repeatable delivery. The U.S. does not reward novelty on its own. It rewards solutions that can be integrated into existing architectures, transitioned through real procurement pathways, and sustained without breaking operational baselines. The timing is particularly compelling because U.S. acquisition is widening its aperture for nontraditional suppliers and faster pathways to fielding. The Army’s FUZE construct alone has already aligned roughly $750 million to this model, reflecting a broader shift toward accelerated transition and deployment for technologies that can be delivered with discipline.

Protego Ventures

From battlefield credibility to institutional delivery.

Washington is now reinforcing that shift from the top down. Secretary of Defense Pete Hegseth has launched what the department describes as a warfighting acquisition overhaul, intended to flatten acquisition hierarchies and push more decision authority into mission-aligned portfolios. The stated goal is to move faster from requirement to contract to fielding, with clearer incentives for production and sustainment outcomes. In parallel, President Trump publicly called for a step-change in U.S. defense spending, proposing a $1.5 trillion military budget for 2027, up from $901 billion in 2026, signaling multi-year demand and procurement runway for companies positioned to scale.

So what does this mean for Israeli founders and the broader defense technology ecosystem? It means the U.S. is opening a larger, faster-moving window for companies that can translate Israeli battlefield credibility into institutional delivery. The opportunity is not only to sell into the U.S., but to become embedded suppliers inside enduring defense programs by building the manufacturing discipline, integration posture, compliance architecture, and U.S. presence that create trust.

This is where Protego Ventures comes in. We invest in early growth defense tech: companies that have already demonstrated real demand from serious customers and moved beyond experimentation, and are now at the stage where the question shifts from “does it work?” to “can it be delivered repeatedly, under real constraints, with the operational maturity that primes and program offices require?” Early growth is where interoperability becomes a product discipline, manufacturing becomes a strategic capability, and the U.S. market becomes accessible only once a company has built the foundations of presence, program fluency, and a delivery system that holds.

XTEND, our first portfolio company, demonstrates what operational maturity looks like in practice. Its progress in the U.S. was not the result of a single moment. It was built through deliberate investment in American presence, manufacturing readiness in Tampa, and the compliance and delivery infrastructure required to execute inside U.S. defense ecosystems. When primes choose to integrate startup capability into their own platforms, it signals a durable shift in the market: speed and interoperability are now strategic advantages, and startups that can deliver both are becoming embedded contributors to how the U.S. fields next-generation systems.

The winners will be founders who treat delivery as a core product, build for integration from day one, and invest early in the operational maturity that makes scale repeatable.

Startup Spotlight | Intact

Eliminating Friendly Fire on the Modern Battlefield

By Meir Rapaport, CEO, Intact

Intact
A soldier's personal safety system.

While running a B2B startup and meeting our first customers, two close friends of mine were killed by friendly fire, learning that ~25% of casualties during war are caused by friendly fire incidents. I understood that I need to create a winning team to build, create and develop a technology to prevent the next unnecessary death. That commitment became my entry point into the defense world.

The defense industry is not easy. It is tough, complex, and dominated by giants with decades of experience, deep budgets, and long-standing relationships. The processes are slow, bureaucratic, and often frustrating. Validation takes time. Trust takes even longer. You cannot rush credibility in this field — it must be earned through persistence, performance, and resilience.

B2G vs. B2B vs. B2C: A Reality Check

To succeed in the defense industry, technology alone is not enough. You need patience, long-term commitment, thick skin, and real resilience. Progress is slow, setbacks are frequent, and credibility must be earned over years, not months. More than anything, you need purpose and love. Love for your country, love for the people who serve and protect it, and love for the problem you are committed to solving. This industry will test you professionally, emotionally, and strategically. If your motivation is only financial, the pressure, the bureaucracy, and the obstacles will eventually wear you down. But if you are driven by something deeper than profit — by responsibility, mission, and impact — then you have a chance to succeed.

For me this industry is not just business, it is a chance to save lives. It is purpose.

Startup Spotlight | Intact

The Problem Intact Solves

Founded in 2022, Intact was established with a single, urgent mission: to eliminate friendly fire on the modern battlefield.

Today's combat environment is faster, more complex, and more electronically contested than at any point in history. Drones, warfighters, armored vehicles, and autonomous systems operate simultaneously in dense, multi-domain battlespaces — often under persistent Russian, Iranian, and Chinese electronic warfare pressure.

Historically, up to 25% of battlefield casualties in certain conflicts have been attributed to friendly fire, underscoring the urgent need for a survivable identification solution that works even when communications are denied and forces cannot visually confirm one another.

Intact's technology delivers real-time positive identification between warfighters, drones, and vehicles without exposing positions or creating exploitable signatures. It enables recognition through obstacles, obscurants, and complex terrain — reducing fratricide risk while increasing operational tempo, survivability, and confidence in maneuver.

Intact is not just an IFF solution. It is a survivable, covert identification and awareness infrastructure built for the present and future battlefield where saving lives, maintaining combat effectiveness, and operating under constant EW threat are inseparable.