Defence meets venture capital: Australia's AU$500 million co-investment plan

The Australian Government has announced plans to unlock private capital for the nation's defence industry, inviting venture capital investors to co-invest up to AU$500 million in Australian companies developing next-generation defence and dual-use technologies. The proposed funding of up to AU$1 billion targets Australian companies developing advanced technologies across cyber security, artificial intelligence, autonomous systems, electronic warfare, quantum technologies and undersea warfare.

What this means: strategic context

This initiative arrives against a backdrop of mounting pressure on the Australian Government to increase spending on sovereign defence capabilities. Against this fiscal context, intensifying geopolitical tensions in the Indo-Pacific and global supply chain pressures have prompted the Albanese Government to accelerate efforts to develop domestic industrial capabilities in defence technologies.

The initiative directly implements commitments made in the Defence Industry Development Strategy 2024, which recognised that traditional government procurement alone cannot move fast enough to meet national security requirements. By partnering with venture capitalists, the Government aims to inject capital into defence innovation, whilst maintaining strategic control over critical technologies.

Learning from Allied models

Australia is not the first to pursue this investment strategy. The United States has successfully deployed similar models through organisations like the ‘Defense Innovation Unit’, which has channelled capital into US startups developing dual-use technologies.

However, Australia's model differs in important ways. The emphasis on "co-investment" with private capital, rather than direct government venture funding, suggests a partnership structure designed to leverage commercial expertise whilst sharing both the risk and upside. 

The challenge will be adapting these international models to Australia's smaller venture capital market and the less developed defence-tech ecosystem. Success will likely depend on attracting both domestic VCs willing to navigate defence sector complexities and international investors seeking exposure to AUKUS-aligned supply chains.

Opportunities for Australia's venture capital and startup ecosystem

Whilst government grants support early-stage research and development, there has traditionally been limited capital available for Australian SMEs developing hardware-intensive or highly regulated defence technologies. The potential AU$1 billion on offer  could significantly reshape the tech and defence landscape in Australia and could provide the strategic capital needed to scale these businesses from the development stages through to commercial deployment.

The focus on "dual-use" technologies is particularly significant. Technologies applicable to both defence and commercial markets offer the revenue diversification and scalability that venture investors demand, whilst delivering the sovereign capability outcomes the Government seeks. Australian companies developing AI, cyber security, quantum computing or autonomous systems may find themselves uniquely positioned to benefit.

Next steps?

Critical questions remain unanswered about selection criteria, governance structures and how the initiative will balance commercial imperatives with national security considerations. To address this the REOI (Request for Expressions of Interest) is now open via AusTender, with private capital firms invited to submit proposals outlining how they would manage and deploy the co-investment funding. Selected firms will work with the Government to develop detailed investment proposals, including governance arrangements, investment focus areas and mechanisms to support Australian SMEs.