Investors turn to Israel’s battle-tested defense-tech start-ups as funding hits record $40.8b.

The firm estimates global defense-tech investment has climbed to nearly $70 billion over the past 12 months, $24.4 billion in funding during the first quarter of the year alone, marking the strongest quarter on record. Investors are increasingly concentrating capital into a smaller number of large deals, with major defense start-ups attracting unprecedented valuations.

"The defense sector has moved from the margins of venture capital toward its center," the report states, reflecting a broader shift in investor sentiment as governments seek faster access to advanced military capabilities.

According to the report, 24% of the funding went toward autonomous systems (including drones, unmanned surface vessels, and unmanned ground vehicles), followed by sensing, connectivity, and security at 16.8%, and then weapons and munitions at 14.4% (including directed energy weapons).

The report highlighted Israel’s growing influence in the global defense innovation landscape, with Western venture capital firms increasingly targeting Israeli start-ups, drawn by technologies developed and validated under real-world operational conditions.

Israel's ecosystem benefits from a steady pipeline of founders with military experience, many of whom have served in reserves over the past three-and-a-half years of war.

According to the report, one-third of Israeli defense-tech start-ups were founded after October 2023. The ecosystem has grown to roughly 350 active companies, from around 150 just 18 months earlier, and more than 100 have had technology adopted directly into IDF operations.

"Not only is Israel a frontline testing ground for new defense innovations, but many of Israel's founders are reservists or soldiers just out of service, who understand battlefield challenges firsthand and have been building ever since," said Lital Leshem, co-founder and managing partner at Protego Ventures.

"Since October 2023, many of them have been back in service and experienced both new threats and long-standing gaps. For investors, that's what matters: These companies start from a real operational need and get validated in the field long before a normal procurement cycle would allow, shortening the most arduous path in defense – from prototype to battleground product,” she added.

The report noted that the Defense Ministry’s Directorate of Defense Research & Development (MAFAT) placed NIS 1.08 billion in orders from defense tech start-ups, with 25% of those from foreign customers. The orders in 2025 were also a decrease from the previous year, when MAFAT placed NIS 1.22 billion in orders.

Protego Ventures’ report said that Israel’s defense start-ups possess a structural advantage because they are typically built for international markets from their inception.

"Israel faces threats across various terrains and landscapes, often simultaneously, so the unique added value is that systems built here work anywhere," said Lee Moser, co-founder and general partner at Protego Ventures. "What's also distinctive about Israel is that companies here build for export from day one, with products designed to integrate directly into Western forces and procurement processes. For a VC, that's gold: The home market proves the technology; the global market is where it scales."

One of the report’s most notable findings is the growing concentration of investment among top-tier defense companies.

Defense giant Anduril’s $5 billion Series H funding round accounted for nearly one-third of all global defense technology funding in the second quarter of 2026. Autonomous systems also dominated investor interest, capturing more than 42% of total quarterly investment.

Meanwhile, venture-growth companies in the sector achieved median pre-money valuations of $1.4 billion in the first quarter, nearly triple the reported median valuation in 2025.

Despite strong investor appetite, the report warns that most dual-use technology companies continue to struggle with defense procurement processes. Of the more than 15,000 dual-use scaleups operating across NATO and allied markets, only an estimated 5% to 6% have successfully secured government contracts.

The finding underscores the difficulty many start-ups face in translating commercial innovation into military adoption.

The report also points to a growing number of major exits as evidence that defense technology is maturing into a scalable venture category.

In August, Motorola Solutions completed its $1.5 billion acquisition of the Israeli counter-drone company D-Fend Solutions, valuing the company at roughly 22 times the $67 million it had previously raised. According to the report, it was “the most expensive Israel defense tech exit on record.”

A month later, drone and autonomous systems developer XTEND, a Protego portfolio company, debuted on the New York Stock Exchange with a valuation of approximately $1.5 billion.

The report suggests that Israel’s combination of military expertise, rapid development cycles, and real-world validation could position the country as a key supplier of next-generation defense technologies for allied nations in the years ahead.