Steve Baxter: Why I’ll only Invest in Australian Defence Startups that Are Serious About the US
•February 10, 2026
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Why It Matters
The shift forces Australian defence innovators to chase the world’s largest defence market, reshaping funding criteria and accelerating global export ambitions.
Key Takeaways
- •Fund mandates US market entry for defence startup funding.
- •US defense budget dwarfs Australia's, offering scale opportunities.
- •Proximity to US customers crucial for procurement success.
- •Australian drone funding pales compared to US Replicator program.
- •Lack of US focus limits venture‑scale returns for local firms.
Pulse Analysis
Australia’s defence technology sector has earned a reputation for ingenuity, yet its domestic market remains too small to sustain venture‑scale companies. Start‑ups can prototype locally and secure early contracts, but without a path to a multi‑billion‑dollar customer base, growth stalls. This reality mirrors other niche industries where domestic demand caps valuation, prompting founders to look abroad for the next growth horizon. By positioning the United States as the primary market, investors aim to align capital with the scale required for meaningful returns.
The United States’ defence spending dwarfs that of any allied nation, with the Department of Defense allocating upwards of $1.5 trillion annually. Programs like the Replicator initiative pour half‑a‑billion dollars into autonomous systems, creating a rapid procurement pipeline that Australian firms cannot match at home. Moreover, defence contracting is a "proximity sport": regular interaction with program managers, participation in industry days, and on‑site demonstrations build the trust needed to win contracts. For Australian drone and autonomous‑system startups, the disparity is stark—Australia’s Advanced Strategic Capabilities Accelerator offers roughly $1.2 million across a dozen firms, a drop in the bucket compared with U.S. funding streams.
Baxter’s policy signals a broader trend where venture capital in defence is increasingly market‑driven rather than patriotically motivated. Start‑ups that embed themselves in U.S. ecosystems—through co‑working spaces, accelerators, or direct hires—gain faster feedback loops and access to larger contracts, enhancing their exit potential. While the move raises barriers for founders lacking resources to relocate, it also encourages strategic partnerships and joint‑ventures with U.S. firms. In the long run, this could elevate Australia’s reputation as a source of high‑quality defence innovation, even if the bulk of revenue flows overseas, ultimately strengthening the nation’s sovereign capability through global success.
Steve Baxter: Why I’ll only invest in Australian defence startups that are serious about the US
If you want to build an Australian defence business with genuine scale, you need to go to the United States, and you need to go now. Not as a tourist, and not as a founder who thinks ‘in market’ means quarterly trips and an occasional LinkedIn selfie.
You must go now to become locally relevant. Go to stand close enough to the customer that you can feel the temperature of procurement, politics and urgency shifting in real time. Go to create the path of least resistance for the only customers that can make your vision commercially viable.
This unavoidable realisation has spurred my firm’s New Year’s investment resolution: to only back Australian defence startups that are serious about scaling into the US market.
Here’s the rationale behind it.
Australia’s defence tech firms solve hard problems with a level of ingenuity that routinely outruns the size of our economy. What they lack is the one thing venture‑scale defence companies require above all else: a market large enough, fast enough, and consequential enough to reward that effort.
Defence contracting is a proximity sport
It runs on access, repetition, trust and timing. From Australia, you can build formidable prototypes and win encouraging conversations. You will also lose the deal to someone who was there when it counted. A distant supplier is easy to admire and even easier to ignore.
Why Australia must create defence companies that win globally
I have been investing in early‑stage businesses since 2010. I invest to see outcomes and I measure success by results, not sentiment. When I was an angel investor, I was risking my family’s capital, and only my family’s capital. Today I run a fund that stewards other people’s money. They did not entrust it to the firm so we could feel virtuous. They entrusted it so we could deliver returns.
That creates a particular tension in defence investing, because patriotism is always nearby and pragmatism is often treated as impolite. I see it differently. Patriotism does not exclude pragmatism, and the end result will be good for Australia.
The only way this country builds durable sovereign capability is by creating defence companies that win globally, export globally, and remain standing long after the press releases have faded. The capital follows winners, and winners are what allow us to invest repeatedly.
The scale argument is decisive. Australia’s defence budget is roughly US$35 billion. The United States is tracking toward US$1.5 trillion. It is the difference between a pond and an ocean. If you are building a venture‑backed defence company and treating Australia as your core market, you are optimising for limitation.
It becomes even clearer when you look at drones, now the most obvious symbol of modern conflict and the brutal pace of battlefield innovation. The US Department of Defense Replicator initiative launched with US$300 million in FY2023 and has moved toward US$500 million in FY24 and FY25, with the explicit aim of fielding thousands of attritable autonomous systems quickly. Australia’s innovation funding through Australia’s Advanced Strategic Capabilities Accelerator went to market in early 2024 with around $1.2 million spread across 11 drone companies. Anyone serious about building at scale should be able to do the maths without reaching for a calculator.
So how do you attack the US market? Like any other startup, you live in it. You show up every week. You become part of the ecosystem. You make yourself familiar enough that your presence stops being novel and starts being assumed. If you are not close to the customer, your competitor is, and in a climate increasingly shaped by “America First” instincts, being offshore is not a neutral fact. It is a weakness your opponent will happily use.
The US is where the demand is
Now, back to that new investment policy.
Beaten Zone will no longer invest in Australian defence firms that do not already have, or do not aggressively intend to establish, a US presence. Where a potential investee says they “plan to” enter the US, we will contractually withhold capital, so it is used for that purpose. This is not theatrical. It is simple alignment. A company that remains Australia‑bound is unlikely to produce venture‑scale outcomes, which makes it unlikely to deliver venture‑scale returns, which means it becomes a poor use of other people’s money.
The objections are predictable. It is hard, expensive, crowded, and political. It is all of those things. But difficulty is not a counter‑argument, it is the entry fee. The US is the only allied market where defence entrepreneurs can plausibly build large outcomes at speed. But as in any bureaucracy, the invisible are often ignored.
Europe may one day stop announcing intentions and start spending at scale, but until then, the United States is where the demand is, where the urgency is, and where the ecosystem compounds.
Australia remains a superb place to build. It is a strong place to test early capability. It is even a decent place to secure a first customer. But it is not, for most companies, the arena where scale happens.
The path to the US is well worn. Incorporation is straightforward. The visa system is far better than most founders realise, particularly for us lucky Australians. There is no shortage of co‑working spaces, accelerators and defence networks to plug into. Very little stands in the way except the decision to go, and the willingness to stay long enough to matter.
So, here is my open invitation to Australian defence entrepreneurs. If you are building something serious, if you are willing to embed in the United States and compete properly, I want to hear from you. Come with intent, come with a plan, and come ready to build a company that can win on the largest stage. That is how you build enduring success, and it is how you build a stronger Australia as a consequence, not a consolation prize.
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