Silicon Valley invests in Israeli startups in bid for US defence market

Driving the investment is the belief that Israeli firms will increasingly compete for contracts in the U.S. and in European countries where military spending is expected to surge in coming years. One Israeli startup called Kela has recently scored investments from two of the biggest U.S. venture-capital firms involved in the defense market, as well as from the Central Intelligence Agency’s investment arm.

“This is the first big venture investment in Israel," said David Cahn of Sequoia Capital, which funded Kela’s entire seed round. Lux Capital stepped in on the next round, the Series A. The funding from Lux and other investors brought the total amount raised for Kela to $39 million.

Kela’s product isn’t a specific weapon, such as a drone or missile, but software that integrates commercial and military technologies, for applications such as border defense. That product is just the first step for the company, which aims to compete for contracts to develop and integrate major weapons systems, said co-founder and President Hamutal Meridor.

“Outside of Israel, in the U.S. and Europe, we are going to go after big programs," she said.

Israel is hoping there will be more of these large investments in the defense-tech sector, which is still dominated by established companies such as Elbit Systems, Israel Aerospace Industries and Rafael Advanced Defense Systems. In December, Israel’s Defense Ministry and Tel Aviv University hosted the country’s first defense-tech summit to bring together investors, companies and government officials.

The Israeli startup Kela provides software for applications such as border defense. Its founders include, from left: Jason Manne, Hamutal Meridor, Alon Dror and Omer Bar-Ilan.

“There is a renaissance now in defense tech that plays absolutely perfectly into this ecosystem that exists here in Israel," said Lorne Abony of Texas Venture Partners in Austin, Texas, speaking at the summit. Abony’s venture company was launched last year with $50 million that it plans to invest in Israeli defense firms.

While Israeli defense startups are new to the market, Abony, who isn’t an investor in Kela, is betting on the country’s record in technology. “You’re five and a half times more likely to have a tech unicorn from an Israeli investment than a U.S. investment," he said.

U.S. defense startups are already taking center stage in the Trump administration. Elon Musk, the CEO of SpaceX, a significant defense contractor, is leading the Department of Government Efficiency. The Pentagon’s focus on shifting money to new technologies is expected to boost Silicon Valley-supported companies such as Palantir Technologies, whose stock price soared after last year’s presidential election, and Anduril Industries, whose latest investment round is set to close at a $28 billion valuation.

‘A strategic bet’

American venture-capital firms aren’t new to the Israeli startup scene. Israeli cybersecurity firms, many of which have drawn their founders from Israel’s famed Unit 8200, have benefited from Silicon Valley investment. The country also has a number of drone startups, such as Xtend, whose unmanned aircraft have been used by the Israeli military in Gaza.

Startup Nation Central, a nonprofit based in Tel Aviv, is tracking more than 300 Israeli companies operating in the defense sector, up from 160 a year ago, according to the organization’s CEO, Avi Hasson. The relatively large investment in Kela reflects the confidence investors have in the potential of Israeli defense startups, he said.

“It’s a strategic bet on the market and on the entrepreneurs and on the sector," he said.

U.S. startups, which have only captured about 1% of Defense Department contracts, face an uphill battle to compete with the five biggest American defense companies. The road for an Israeli company into the Pentagon market would likely prove even more challenging.

“You’ve got a large, growing pool of venture dollars chasing the fact that governments are increasing top-line defense spend and more importantly, shifting the mix of spend toward young startups," said Raj Shah, managing partner of Shield Capital, a venture-capital firm that funds defense startups.

The question is whether the Pentagon will buy from non-U.S. startups. “I don’t know if we know the answer to that yet," he said.

Kela’s approach takes a page from Palantir, which in its early days built its customer base using what it called “forward deployed software engineers," who served alongside soldiers operating in places such as Afghanistan. Similarly, Kela is marketing its engineers as “techno-warriors" who combine technical expertise with combat experience and can share their battlefield insights with the U.S. and Europe.

Oct. 7 impact

The parallels to Palantir aren’t an accident. Meridor previously served as the general manager for Palantir in Israel. Her pitch even mirrors that of Palantir CEO Alex Karp, who frequently describes his company’s mission in messianic terms, as waging a battle to save the West.

“The founding of Kela really is very tied to October 7, obviously. And I think what we realize now is that the West is very much still living in October 6," she said. “We feel like it’s our mission to prevent the West from having to go through an October 7."

Alon Dror, Kela’s CEO and co-founder, says the company draws heavily on Israel’s post-Oct. 7 combat experience.

“On the eve of the ground maneuver into Lebanon with Hezbollah, I went between the different platoons and we did an equipment count and we saw that each platoon commander or each company had a few night-vision goggles," he said.

Hezbollah’s forces, by contrast, had plenty of night-vision goggles that they bought online. “We realized that Hezbollah had one [pair of] night-vision goggles for each fighter, which is crazy," Dror said.

Kela’s software platform, he said, is designed to allow the military to integrate commercial and military technology, whether night-vision goggles, sensors or artificial intelligence.

It is precisely the military experience of Kela’s employees that makes them attractive, said Brandon Reeves, a general partner at Lux Capital. The percentage of engineers at the five major U.S. defense companies who have been in combat is negligible, he said, “but if you take Kela, I would imagine it rounds to a hundred percent. It’s a different DNA."

Clayton Williams, the managing director of the U.K. office of IQT, the CIA’s venture-capital arm, said his investment in Kela was precisely because of this sort of experience. “Companies that are learning from the battlefields and getting feedback from the front lines are developing their technology at a rate that I personally haven’t seen before," he said.

IQT, formerly known as In-Q-Tel, has made other investments in Israel, but Kela is its first stake in an Israeli startup specifically in the military market. Its investment is much smaller than that of Sequoia and Lux—but the imprimatur of a CIA investment has helped other companies, including Palantir, break into the defense market.

“We open doors," Williams said.

Even advocates of Israeli defense startups, such as Abony, say firms that have enjoyed success in areas such as cybersecurity and biotechnology are often unprepared to sell to the Pentagon. His firm works closely with Israeli companies to hone their pitches to the U.S. military.

“We came to that by watching some of our Israeli investee companies and potential investee companies try and pitch the DOD, and they were awful," he said. “They were not to be seen again."

Write to Sharon Weinberger at sharon.weinberger@wsj.com