Australia faces is toughest security environment in decades. Rising geostrategic threats and rapid technological disruption will need to be mitigated through significant investment in Australia’s defence and security capabilities over decades. AUKUS and other national security capabilities will cost hundreds of billions. However, with pressure for more social spending, where is this investment likely to come from?

To support our defence objectives and make good on our commitments to regional allies and partners, Australia urgently needs to develop new public-private partnerships that leverage private sector nous and capital for national security purposes. Leveraging ‘non-traditional’ forms of national security financing is a mindset shift for the Australian defence and security establishment, as is adopting new approaches that draw together government, industry, the technological research community and finance sector.

The last two players are more critical than ever, as many of the most important technologies with military application will continue to emerge in the non-defence sector. Though still new territory for Canberra, there is much to be learned from the American experience.

It’s no secret that Silicon Valley’s emergence as a technology hub from the 1950s was primed by Pentagon money and programs, including through the Defense Advanced Research Projects Agency (DARPA), which helped in the creation of everything from GPS to the Internet itself. Less appreciated perhaps, is the role venture capital companies and private equity investors are now playing as part of the new tech arms race in conjunction with the US military.

A trailblazer on this front was In-Q-Tel, set up by the CIA in the late 1990s with an initial investment of US$28 million for innovative start-ups. Today, In-Q-Tel is instrumental in helping the US Government bridge the gap between the technology needs of the nation’s security, the rapidly evolving tech capabilities of the start-up community and the venture capital sector that funds those start-ups.

In 2003, the US Army opened its own venture capital operation. And in 2015, the Pentagon launched the Defense Innovation Unit. Since then, the Unit has invested US$300 million in nearly a hundred projects with seed capital for start-ups working on AI, autonomous vehicles, cyber security and more.

The US model of enlisting venture capital for defence tech projects has now reached critical mass. By one measure, the value of deals done in the US aerospace and defence tech sector rose from US$1 billion in 2017 to an estimated US$7 billion in 2022. Some Australian companies are already surfing this wave. For example, In-Q-Tel and US private investment firms such as KKR are funding Australian companies to develop robotic, navigation and quantum sensing solutions.

The Australian Government’s plans for defence R&D are centred on the Advanced Strategic Research Agency (ASRA). Based in the Department of Defence and deliberately modelled after the US government’s DARPA, ASRA is designed to fund research in breakthrough technologies that enhance national security, leverage private investment and increase Australia’s involvement in AUKUS R&D and technology sharing.

Still in the design phase, ASRA is expected to swallow the existing Defence Innovation Hub, with funding of A$1.2 billion pledged to the agency over the next decade. But, like everywhere in Canberra, taxpayers’ funds are scarce and in high demand.

The real art will be around mobilising private investment. Australia has the world’s fifth largest pension market, worth over A$4 trillion and predicted to grow to more than A$8 trillion over the next 20 years. Though a notoriously cautious beast, it has become a more active player, both as a minority stakeholder in companies and as a major investor in private equity firms. So too, we see a private investment and the VC community in Australia more willing than in the past to explore tech opportunities with a national security connection.

Amidst heightened geopolitical uncertainty, that defence budgets will continue to grow remains a pretty safe assumption. And with some of the larger tech firms in the United States shedding staff, the search for scarce talent for new ventures in the defence tech space may actually become a bit easier in the period ahead.

One thing is for sure: Other countries in our region – whether friend or foe or something in between – are not standing still when it comes to investing in the national security technologies of the future.

How, and to what degree, the Australian Government can incentivise private investment in military or dual-use tech is a serious conversation worth having in 2023.