A Two-Way Street: The Future of Dual-Use Technology

Technologies that have both military and civilian applications are taking off. What does such dual-use technology mean for Israel - and what does Israel mean for dual-use technology? To sustain our defense and security needs, we must have a strong and resilient economy. Dual use may serve as an outstanding opportunity for Israel to achieve the necessary economic success and, simultaneously, develop cutting-edge defense capabilities.

Technology is reshaping the military landscape in many ways, creating new theaters of operation and adding layers of complexity. Innovations that are already available in the civilian sector - such as certain cyber technologies, drones, autonomous platforms, proximity sensors - are sometimes "recruited" for use in military conflicts. In other cases, technologies or customizations developed specifically for the battlefield are seen to have legitimate civilian applications.

A technology with both civilian and military applications is called dual use - and it has been gaining a lot of interest around the world. Entrepreneurs and investors are taking note of both a growing demand for national security solutions in response to global instability and a desire in the civilian sector for reliable field-tested innovations.

Investing in dual-use technologies

The defense tech market was traditionally controlled by giant incumbents with huge budgets and government connections, with relatively little activity in the startup arena. However, given the pace of technological change today, it is increasingly clear that lengthy multi-year R&D programs for platforms or products to be ready to go live are a burden for national agencies and military forces facing an active adversary. This demand for rapid development cycles has led investors to pay closer attention to smaller, dynamic businesses that can quickly create or adapt innovative technologies for battlefield use.

The dual-use approach to defense technology takes this a step further, with investors seeking out companies that can produce solutions for both markets at once. To the defense market, they offer the speed and flexibility of entrepreneurs in the civilian sector and for the civilian market they offer the well-vetted innovations of the defense sector. Furthermore, developments in uncharted frontiers with potential military applications, like space exploration, and a tendency of modern wars to last longer and remain unresolved are both contributing to growth in the dual-use market.

Rapid market expansion can even create entirely new domains for financial, commercial and investment success. As the combined markets are bigger than either one on its own, some global investors have set up new funds specifically dedicated to supporting dual use.

Notably, several dual-use leaders are already demonstrating hyper-growth. SpaceX, for example, reduced the cost of manufacturing and launching rockets dramatically by eliminating needless requirements imposed by national defense and space agencies. As a private enterprise, SpaceX was able to freely scrutinize cost and efficiency, explore new options, and determine what measures were really necessary for success and what was merely bureaucratic inertia. The company has demonstrated how a dual-use approach - in this case, through privatization of what was previously a strictly national project - can both benefit the defense industry and earn the admiration of investors and entrepreneurs as a model for future endeavors.

Some other leading companies leveraging the dual-use nature of their respective technologies are Palantir and Anduril. Much like a standard successful startup, Anduril managed to gain significant valuation and scale up very fast.

Israel - dual-use knowledge, talent and experience

Israel is becoming an increasingly significant player in the field of dual-use technology due to several of its unique characteristics.

• The first of these is a fundamental aspect of our country: It's small, but innovative and certainly not risk averse. That means we are always looking for new, unexpected ways to use existing technologies, processes and products.
• Secondly, Israel is an excellent venue for achieving global product market fit in the defense industry as our military capabilities and hardware are regularly tested in the real world. Israel already boasts leaders in defense technology like Elbit, Rafael and Israel Aerospace Industries, and some large-scale accomplishments have recently become very visible on the international stage, such as Iron Dome and David's Sling. The practical optimization insights gained over the years have benefitted both Israel and other nations. For example, the Arrow anti-ballistic missile system was recently adopted by Germany in a very significant transaction. Moreover, many foreign companies developing dual-use technologies have expressed an interest in deploying their solutions here, as well. Their goal is to test their technology or hardware against the extensive experience of the Israeli defense industry.
• Israel's third advantage is its people and their know-how. Many Israelis who served in the military or in official defense industry bodies gain tremendous knowledge in their respective fields. They become excellent candidates to join or found startups or funds focused on dual-use technologies. They may be people in their 20s or early 30s, who did not pursue a military career, or those retiring early to pursue their hi-tech ambitions. The Israeli defense tech ecosystem consists of such fresh-faced startups, large defense companies and military elite tech units operating in overlapping fields. Due to the size of the country, those organizations' founders, executives, career soldiers and employees tend to frequently cross paths both in the military (mandatory and reserve duty) and in their social circles.

In addition, Israeli healthcare technology, services and techniques have also become dual use in many ways. Hospitals, frontline medics and healthcare workers have gained a lot of experience, especially in dealing with severe trauma and life-saving interventions, during current and past military conflict. They are now able to leverage what they have learned and the technologies they have optimized to treat people injured in accidents and other commonplace scenarios. This silver lining on the cloud of wartime injuries will, I believe, influence the flow of investment and innovation in the Israeli healthcare and health-tech sectors.

Challenges, limitations and opportunities

Companies that successfully navigate both sides of the dual-use market can build a bigger business, especially if there is receptiveness globally for the defense tech they offer. As such enterprises gain greater legitimacy, through IPOs, for example, overall growth in this market will be driven forward exponentially. Alongside the investment opportunities this offers, there are unique limitations and considerations every company sharing dual-use technology must take into account.

• Regulation - Concerns over innovative military-grade technology falling into the wrong hands or even undermining national defense strategies are serious and legitimate. The solution is to ensure that dual-use tech is regulated domestically, and that any international transaction is approved by the relevant state authorities.
• Perception - Dual-use technologies can run into an image problem if not handled correctly. They can create the perception of an economy that runs on exports of war and conflict. However, the same technology can be framed positively as critical for protecting and defending civilian populations. While every company developing dual-use technology will face criticism in certain circles and some investors will always be hesitant to get involved in such projects, the move toward cross-sector technological innovations is a natural evolution that is expected to continue into the foreseeable future.
• Alliances - The marketing and sale of dual-use technologies to foreign governments and militaries can become an element in shaping international alliances. This potential can be leveraged on both governmental and private levels, but as noted above, they should be coordinated.
• Competition - International alliances can also restrict the sharing of dual-use technology. It is important to avoid competing with allies and partners around the world, whether through sales in specific markets or through equipping their current or potential national adversaries.

What does the future hold?

Defense technology is poised for significant change driven by growing openness to dual-use solutions. Innovations by private-sector companies in areas such as space exploration, laser technology and artificial intelligence, to name a few, are igniting interest in connection with their potential military applications. At the same time, know-how and advanced technologies developed in and for the military are finding their way into the private sector for civilian uses.

This trend is critical to watch, as it offers compelling opportunities across multiple sectors for strategic investors. To obtain maximum buy-in, investment funds may need to consider obtaining formal consent from all their Limited Partners for investment in defense-related technologies or establishing a dedicated fund that embraces this domain.

As dual-use technology gains traction and receives increasing support from strategic investors, Israel will stand out as a hub of talent, innovation, and adoption.

Investment funds will need to decide where to focus their attention: established market leaders with active dual-use solutions or young, dynamic startups that can scale to become global dual-use players. Either way, they can play a key role in what is shaping up to be a transformative moment for both military and civilian technology sectors.