Israeli Startups and “Adversarial Capital”

In a CET Sandbox session, Tom Feddo–former Assistant Secretary for Investment Security at the U.S. Treasury and the first to lead the Committee on Foreign Investment in the United States (CFIUS)–offered hard-earned insights on how Israeli startups can navigate the growing complexity of U.S. national security reviews. With increasing scrutiny on foreign investments and geopolitical tensions on the rise, understanding adversarial capital and the role of CFIUS is more important than ever.

Overview

The session centered on how foreign investment, particularly from adversarial nations like China and Russia, is increasingly seen as a national security risk in the U.S. Israeli startups and their investors must understand the nuances of U.S. review processes to avoid unforeseen blocks to investment, government contracts, or market access. CFIUS, long an interagency process for inbound investment reviews, has grown in scope and influence–and its rules are evolving fast.

What is CFIUS and Why Does it Matter?

CFIUS functions like a specialized National Security Council focused solely on the risks posed by foreign investments in U.S. businesses. Its nine voting members include secretaries from key departments like Defense, Energy, and Homeland Security. While it began as a voluntary process, filing with CFIUS now offers safe harbor from future government interference. For Israeli companies, especially those expanding into the U.S., knowing when to file is critical.

What Triggers a Review?

The scope of CFIUS jurisdiction has expanded beyond controlling stakes to include minority investments that grant access or influence. The key consideration is whether the foreign investment could be used to exploit vulnerabilities in critical technologies, sensitive data, or infrastructure. Even a minority stake that allows board access or rights to sensitive data can trigger a review.

How Does CFIUS Evaluate Risk?

CFIUS uses a threat-plus-vulnerability model to assess risk. The threat assessment looks at the foreign investor: Do they have connections to adversarial governments? Could they exploit access to harm U.S. national security? The vulnerability side evaluates the U.S. business: Does it handle sensitive data, critical tech, or key infrastructure? Risk emerges at the intersection of these factors.

What is Adversarial Capital and Why Should You Care?

Adversarial capital refers to foreign investments that create vectors of influence or control for governments hostile to the U.S. While not always formally defined in law, it includes funding that could impact where data is stored, how IP is managed, or which contracts are pursued. If your cap table includes such capital, even indirectly through VCs with adversarial LPs, it could raise red flags.

What Israeli Startups Should Watch Out For

Israeli companies are increasingly being asked by U.S. investors to make reps and warranties around adversarial capital. U.S. regulators and investors are also scrutinizing limited partners (LPs) in VC funds. Even if an Israeli founder is unaware of an LP’s ties, the presence of adversarial capital in a fund backing them can jeopardize future U.S. activity.

Key Takeaways

• CFIUS assesses both threats and vulnerabilities to determine risk in foreign investments
• Even minority investments can trigger CFIUS scrutiny if they offer access or influence
• Adversarial capital–from sources tied to China, Russia, or other U.S. adversaries–can harm your ability to operate or raise capital in the U.S.
• Israeli startups with a U.S. footprint may fall under CFIUS jurisdiction even if the investment flows into the parent entity
• U.S. VCs are increasingly demanding clean cap tables; adverse capital can be a dealbreaker

Conclusion

As U.S. national security frameworks become more expansive and assertive, Israeli startups must treat capital sources as strategic decisions. Getting this wrong can mean lost deals, barred contracts, or regulatory entanglements. The good news: With foresight and the right advisors, these risks are manageable. But they can no longer be ignored.