One of the rallying cries of the Turnbull government when it comes to defence spending has been to link it to national economic growth and technological innovation. In terms of spending, they seem to be backing up the rhetoric with real change.

Next year the defence budget will expand to $34.7 billion, an increase of 6 per cent, and it is slated to reach 2 per cent of GDP by 2020-2021.

The technological innovation side of this spending is laudable. There is fairly broad agreement that Australia should try to maintain what regional technological advantage we have for as long as we can.

While the research and innovation on headline grabbing technologies like quantum computing and hypersonics in Australia is still done primarily in universities and government organisations, there are plenty of tech start-ups that are often ignored or underfunded.

To maintain a strategic technological edge requires us to also innovate how we invest defence technology dollars here in Australia.

Writing in these pages earlier this year, the CEO of Yellowfin, Glen Rabie, argued that the Australian government mantra on promoting innovation did not match its practice.

With "all the focus on local innovation", Rabie said, "nearly all of this technology spending will go to international consulting firms and vendors."

While he was talking about government technology spending in general, I believe the solution he proposes can be best applied to the defence sector.

Follow US lead

Rabie raises the example of In-Q-Tel from the United States, a venture capital firm that is financed by and works for the CIA.

An Australian defence "In-Q-Tel" would focus on investing in early-stage Australian technology companies and assist them in acquiring government defence contracts – a crucial hurdle in the life cycle of many start-ups.

In-Q-Tel, set-up in 1999 by a former president of Lockheed Martin, aims to leverage existing commercial technologies that are on the market for the strategic goals of the intelligence community in the United States.

Since it was founded, it has grown and now receives funding not just from the CIA but from other American intelligence and defence agencies as well.

The breadth of its investments has also multiplied, with areas of interest in everything from power and energy technology to digital infrastructure, data analytics and biotech.

The catch is that the firm is run entirely independent of the CIA.

It is staffed by people with backgrounds in the private sector and has a goal to have staff on relatively short contracts, ensuring regular turnover.

The CIA has a dedicated "interface centre" with the firm that canvasses the intelligence community for its technological needs and goals, declassifies the information and then feeds it to In-Q-Tel, informing investment priorities.

A bonus is that the firm is more or less self-sustaining. Profits from In-Q-Tel's investments are redirected into the operations of the firm and into new ventures.

This means in practice that its goals are for the strategic benefit of the intelligence community, rather than the financial profit of the firm.

It may not come as a surprise that In-Q-Tel operates in a fairly unique way compared to other venture capital firms. It focuses on the underlying technology and the strategic value of a start-up, rather than its business model, relying on its own in-house technical experts to work with companies in bringing their products to government tender standard.

This allows In-Q-Tel to add services that come with its investment; it can afford to spend the time and effort with firms that it has invested in, in order to guide them through technological and funding hurdles as well as the government tender process.

Because of In-Q-Tel's reputation for high standards, technical excellence as well as government backing, it's estimated that for every dollar the firm invests other venture capital bodies invest eight.

Big results

For some technologies, this has the added benefit of bringing solutions to government and defence that would otherwise be cost prohibitive. The data company Palantir, one of the biggest success stories of early In-Q-Tel backing, has expanded beyond the intelligence community into finance, medical research and insurance markets.

For Australia, something like In-Q-Tel might suit our needs. Australia's venture capital community has been repeatedly singled out as "risk averse" and reports have highlighted raising investment funds as one of the industry's biggest challenges.

Defence's Next Generation Technologies Fund is making investments in strategic areas, but most of its funding is concentrated in mid and large-scale projects, such as quantum computing research in major universities and hypersonic technology driven by Boeing and Lockheed.

For FY 2016-17, only $2.8 million has been put aside for smaller enterprises, of which $600,000 is dedicated to establishing a pilot program geared towards small business innovation.

Governments will always have to make investments in basic research that can't be funded or conducted by small, innovative technology companies. But In-Q-Tel could provide an interesting example for the Australian context, finding solutions and companies that already exist in the market and helping to bring them to government tender by injecting both capital and expertise.

The Defence Innovation Portal and the Next Generation Technologies Fund are both good steps towards reforming Australia's defence industry policy and driving basic research into technology critical to Australia's national security.

But a venture capital firm that is informed by, but separate from, government would remain nimble enough to keep up with the rapid pace of the technology and innovation sector while being a vehicle for capital and expertise.