Jump in Defense Ministry orders from Israeli startups

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In the first year of the war, the Ministry of Defense placed orders worth NIS 601 million with 86 startups and small companies - five times more than in the previous year.

During the first year of the war, between October 2023 and September 2024, Israel's Ministry of Defense placed orders worth NIS 601 million with 86 startups and small companies - five times more than in the previous year, according to data from the Ministry of Defense Directorate for Research and Development (DDR&D) (MAFAT), shown exclusively to "Globes."

During the war, the volume of orders by the Ministry of Defense has jumped and unlike in the past it includes close cooperation with startups as well as the major deals with the large defense companies. The collaborations with startups, led by Ministry of Defense director general Gen. (res.) Eyal Zamir and MAFAT head Brig. Gen (res.) Dr. Danny Gold will reach its peak at the Defense Tech Summit held by Tel Aviv University's Blavatnik Interdisciplinary Cyber Research Center in cooperation with MAFAT this week.

As of the end of September 2024, MAFAT had worked with 284 startups and small companies, 200 directly and 84 through external mechanisms. This is an increase of 38 companies since January 2024. As for direct orders, in the third quarter of 2024 alone, deals wirth NIS 134 million were made, with an interesting issue being how GTG (government-to-government) transactions are not only reflected in large companies. Since the beginning of the year, MAFAT has linked 13 startups and small companies in deals worth NIS 74.5 million with foreign countries, the majority with the US. The Ministry of Defense sees these increasingly advanced contracts as a catalyst for the IDF's technological progress. A breakdown of the Ministry of Defense's orders since January 2024 shows that 37% of deals were with pre-seed stage startups, 25% with A-round startups, and 19% from stage C onwards.

At the same time, when dealing with companies with direct ties to MAFAT, the proportion of companies after the pre-seed or seed stage jumps to 64%, while 16% of companies are after the Series A rounds. Following the war, more than 20 startups moved from the development stage to the production stage or accelerated the production stage, including Third Eye, Regulus, Robotican, Smartshooter, and NextDim. Segmenting orders by field during the war finds that what is being sought, primarily, in startups and small companies: 55% of the orders were directed to autonomous platforms.

"Vital flexibility for war

In the indirect channel, the Ministry of Defense nurtures early stage startups, through the INNOFENSE Ministry of Defense accelerator program, which has completed four cohorts with 58 startups so far. These companies are engaged in various fields, including artificial intelligence, navigation and deep-tech, with 58% of the projects completing their participation after proof of feasibility (POC). Of these companies, five have received orders during the war: Alumor, Xmetix, NextDim, Convex, and Nisaba. The defense industry worldwide is moving towards duality: use for both defense and civilian needs. For this purpose, the Ministry of Defense has signed non-binding framework agreements with three venture capital funds: AWZ, Chartered Group and Dual Impact. So far, according to the funds' reports, they have invested about NIS 264 million in 15 companies, five of which have direct ties to MAFAT: Xtend, DeepKeep, Xrodes, Viisight, and Corsound.

Another indirect channel in which MAFAT is involved, in collaboration with the Israel Innovation Authority, is Meimad, which began operating 12 years ago to provide grants for companies with innovative dual-use technologies, in the proof of concept stage.

Out of 73 startups and small companies operating, which received grants from Meimad, 41 have received orders and a supply number from MAFAT. The known amount of funding raised by all these companies ia about NIS 1.3 billion, with NIS 273 million raised by one company: Quantum Source.

"In a small company, by virtue of being small, all the paperwork processes are faster. Instead of waiting for a legal department, a board of directors, things are easier," explains Col. Nir Weingold, head of the IDF Planning, Economics and Systems Analysis Department.

He says, "A startup needs to close deals quickly, move forward with funding, and create a business that is stable. Flexibility and the desire to obtain achievements quickly are essential for war."

Col. Weingold is optimistic about innovation trends in the field, and says the conference constitutes another stage in the development of defense innovation in Israel: "The first day will deal with the way technology affects the battlefield, and the second with innovation and investors. The separation is made to show that it works. "To illustrate how startups have managed to come a long way, and create that force multiplier of a strong defense industry, with academia and startups growing with money from funds."

Published by Globes, Israel business news - en.globes.co.il - on December 8, 2024

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