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Australia’s Trillion-Dollar Defence Tech Boom: A Call to Action for Founders

  • Published July 01, 2025 12:00PM UTC
  • Publisher Bella Battsengel
  • Categories Capital Insights, Executive Interviews, Trending, Venture Investor Interviews

The global defence technology landscape is no longer a niche for the select few. For Australian founders, it represents a monumental, yet frequently underestimated, investment opportunity. Fuelled by escalating geopolitical tensions and a fundamental re-prioritisation of global spending, this sector is experiencing an unprecedented tailwind. According to Steve Baxter, Lead Investor at Beaten Zone Venture Partners and a prominent Australian expert in defence tech investment, the allied addressable market alone is a “staggering US$1.7 trillion opportunity.”

“Australia and its roughly 50 allied nations can access this colossal market without restrictive ‘gun runner’ regulations,” highlights Baxter, adding that this figure is based on current spending, which remains historically low despite recent increases.

The End of a “Holiday from History”

The post-Cold War era saw many nations, particularly in the West, succumb to “peace drunkenness,” leading to significant cuts in defence expenditure. As Baxter points out, “pre-2000 expenditure was considerably higher, a stark contrast to current levels.” Even the United States, often perceived as the world’s largest defence spender, has been operating at historical lows relative to its economic output.

Europe’s situation is even more pronounced, with many nations consistently falling “well way below 2% of their GDP” on defence – a key benchmark for NATO members. Canada, for instance, sits at a meagre 1.4%. Recent forceful actions by the US, including a temporary withdrawal of military support and intelligence sharing from the Ukraine effort, served as a brutal demonstration of their determination to alter these attitudes.

“The US has proved how quite determined they are to change people’s attitudes with respect to defence,” Baxter observed. This push for increased spending, potentially targeting 3% to 5% of GDP for NATO members, signals a monumental growth trajectory for the market.

Geopolitical Imperatives Driving Unprecedented Spend

The shift is undeniable. “The holiday from history is over,” Baxter declares. Several critical geopolitical flashpoints are driving this accelerated defence spending:

  • The War in Ukraine: Russia’s large-scale mechanised ground war in Europe, the first in 70 years, has shattered any lingering illusions of peace.
  • Middle East Tensions: Flashpoints around Iran and the Red Sea, coupled with US naval involvement in trade security, have underscored global instability.
  • The Taiwan Question: Chinese President Xi Jinping’s stated intention to “reunite with Taiwan by diplomatic or other means by 2027,” coupled with his directive for the armed forces to be ready, is a significant driver of readiness and investment in the Indo-Pacific. “The last time we ignored a dictator was February 2022 in Ukraine,” Baxter soberly reminded.

Innovation at the Forefront: Where to Invest

Beyond the sheer volume of capital, the nature of modern warfare is creating unique opportunities for tech innovation, particularly beneficial for Australian ingenuity:

  • Precision and Counter-Precision: The shift from mass artillery to precise, GPS-guided systems has been met by adversaries’ ability to degrade GPS. This creates a critical need for alternative precision targeting and guidance systems, offering a rich area for Australian R&D.
  • Unmanned Systems & Drones: The conflict in Ukraine has showcased the rapid evolution and deployment of drones and other unmanned systems across all domains – air, land, sea, and sub-sea. From sophisticated platforms like the TB2 to rapidly adapted commercial drones, this area is a hotbed of innovation. “The common innovations over there at the moment are actually quite amazing,” Baxter noted.

Navigating the Defence Tech Investment Landscape

While promising, defence tech investing has its nuances. Steve Baxter outlined key considerations for Australian founders and investors:

  • Hardware vs. Software: Defence often involves “heavy things for robust men” (hardware), which can be capital-intensive and slow to commercialise. Baxter advises portfolio construction that balances hardware with software solutions, acknowledging that “hardware from an investment point of view… it’s hard to make money from.”
  • Customer Perception vs. Reality: The notion of a single customer (e.g., the Australian Defence Force) is a misconception. “There’s 50 nations in the allied addressable market,” Baxter highlighted, each with multiple armed forces branches and specialised units with distinct purchasing pathways.
  • ESG Considerations: While Environmental, Social, and Governance (ESG) concerns can sometimes limit investment capital in defence, Baxter sees this as an opportunity. “I like investments that are irrationally unloved,” he said, suggesting that a lower valuation for defence tech due to ESG concerns can lead to attractive entry points for savvy investors. This is a critical point for Australian investors looking for undervalued assets.
  • Demand-Driven Innovation: Avoid building “really cool weapons and really cool capabilities and systems out there that no defence force wants.” Baxter’s firm focuses on identifying clear demand signals from “exquisite users” within allied nations, ensuring a budget exists before pursuing an opportunity.
  • Non-Dilutive Capital: Leverage government R&D programs and grants, such as those offered by the Office of Defence Industry Support (ODIS) and Australia’s Economic Accelerator (AEA), to fund scientific projects and build minimum viable capabilities before seeking private investment.
  • Accelerating Exits: The defence tech market is maturing, with increasing capital flow and accelerating exit opportunities, particularly in the US. Over US$6 billion has been raised for defence startups recently, with valuations for even pre-revenue companies reaching “triple digit millions.”

The defence tech sector is shedding its traditional image and emerging as a dynamic, high-growth arena. For Australian founders with the ambition to build critical capabilities and a keen understanding of global security needs, this “irrationally unloved” market presents a unique window to build impactful, scalable ventures with significant financial upside. The tailwinds are strong, the capital is flowing, and the world is watching.

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