Microsoft forged the deal with Israel's Office of the Chief Scientist during Chairman Bill Gates's first visit to Israel. Microsoft will invest $1.4 million in the project over three years.
"The key point here is that this is not about actually investing in those companies. The availability of venture capital is very broad here," Gates told a news conference.
"The impact is not in terms of that number. The impact is that at a very early stage in those companies, because of the outreach we've done, they have an opportunity to see where they fit in to the Microsoft architecture, how they want to take advantage of that, how we can help better their business."
Companies chosen to work with Microsoft will initially receive technical consultation on Microsoft products, early exposure on future Microsoft software, technical advice on its open platform and consulting advice on intellectual property protection, Microsoft said.
In later stages, Israeli businesses co-operating with Microsoft would receive joint marketing and public relations as well as business development and additional exposure to international markets. "For anybody who builds on the Microsoft platform, it's great for us to take our global sales force and be able to promote the solutions," Gates said.
Gates called Israel a technology powerhouse and said Microsoft, which has a branch in Israel as well as a research and development centre, would continue to assist local companies that develop innovative technologies.
"This country is unique in advanced technologies, there is a willingness to take risks," he told reporters after meeting with Prime Minister Ariel Sharon.
"The future is bright for software, especially in this country."
Israel is considered second only to the United States in the number of high-tech start-ups and it has more companies listed on Nasdaq than any country outside the United States.
"In my role as chief software architect at Microsoft it's very important that I see the new developments taking place because I'm the one who gets to pick exactly what Microsoft bets on in its strategy and so knowing about the work here ... I see as a critical part of how I'm going to make sure I steer Microsoft in the right direction in the future," Gates said.
"I have to say I was even surprised at the great level of activity (in Israel)," he said at the news conference.
CHINA, INDIA COMPETITION: Microsoft Corp Chairman Bill Gates said on Wednesday the software giant faced growing competition from companies in China and India but, for now, the strength in those countries lies in software services.
Gates, on his first visit to Israel, said Israeli companies would also confront increased competition from China and India.
"There will be competitors for Microsoft and for Israeli companies coming out of those countries although today the success, particularly in India, has mostly been in the software services area, outsourcing work, doing call centres and things like that," Gates told a news conference.
Gates also welcomed competition from Google Inc, the Internet search company. "They're one of our newest competitors. It's a great thing for us to have a broad range of competitors," Gates said.