Will Australian VCs get a slice of the US$400 billion AUKUS pie?

AUKUS could become a gold mine for US venture capitalists — just ask the founders of a new business network set up to take advantage of the deal.

While pillar one of the US-Australia-UK defence pact — the transfer of nuclear-driven submarines to Australia — has received the most attention in Australian media, it’s the second pillar that’s most interesting to US private investors.

A new group called AUKUS Defense Investor Network, launched in December brings together hundreds of private venture capitalists from all three AUKUS countries and claims to represent more than $400 billion in funds.

The Silicon Valley-based chair of the US arm of the network, Heather Jo Richman, listed the opportunities for US investors that have become available thanks to the defence deal in a podcast appearance earlier this week.

“Australia has some very key rare earth materials and metals that are very key to our defence industry,” Richman told the US-based Daily Scoop Podcast.

“There are some Australian investors looking at the mining, the harvesting of those materials. And I think there are some really ripe opportunities, actually, for investors in the United States to get involved. The size of our venture community here in the US is orders of magnitude larger than in either the other two countries [in AUKUS].

“I think having access to our US defence industry … I think can only be helpful and really expedite how quickly we can get some of these materials into the hands of the warfighters.”

The chairs of the network are all linked to BMNT, a US-founded defence business that describes itself as “an innovation company that uses startup methods” to “change the way Silicon Valley and the [US] Department of Defense work together”.

Jamie Watson, the chair of the Australian arm of the network and the chief executive of BMNT Australia, is described on the firm’s website as an operator and researcher with 30 years of experience working with Australia’s Defence Department. He was contacted for comment by Crikey but did not respond before deadline.

In April 2022, the White House briefed reporters on the eight priority research areas that the pact partners hoped would be advanced through AUKUS: undersea capabilities, quantum technologies, artificial intelligence, advanced cyber capabilities, hypersonic capabilities, electronic warfare, innovation and information sharing.

Several of these were highlighted by Richman as interesting to US investors.

“AI is at the tip of everyone’s tongue right now, many experts have said whoever harnesses AI is going to win … Cyber is another one, quantum is another one that’s definitely going to be a longer-term investment,” she said.

“The dollars being put into quantum right now are astronomical, there’s amazing quantum coming out of Australia and the UK. So I think it’s to our benefit for us to be having those conversations with those investors that are seeing the landscape in those other countries as well.”

A PwC report released in 2022, in collaboration with the American and British chambers of commerce in Australia, said Australia comprised 4% of total defence expenditure across the AUKUS nations.

The report said Australian investors would have access to “significantly larger markets” thanks to AUKUS, but added there was a risk most of the benefits would flow to the seven major multinational defence companies: BAE Systems, Boeing, Lockheed Martin, Northrop Grumman, Raytheon, Rheinmetall and Thales.

“A lack of certainty is particularly insidious for [small-to-medium enterprises], where (unlike the defence ‘primes’: the seven multinational defence companies) defence contracts often represent only a small proportion of their commercial output,” the report said.

“As and when advanced technologies such as AI and quantum computing become more prominent in defence budgets, the issue of providing greater certainty to SMEs in the manufacturing schedule will likely grow in importance.”

United States Studies Centre research associate Sophie Mayo said AUKUS-linked reforms in US export controls, known as International Traffic in Arms Regulations (ITAR), would allow Australian investors to benefit from the pact.

“Not all three economies are the same size, but now that we have ITAR reform there are removed barriers to investment in sensitive technology, which will advantage those companies who develop the best tech irrespective of which country they are in,” she told Crikey.

“We will likely see greater US investment into Australian defence companies and greater opportunities for manufacturing and production to occur in Australia too. A good example is the announcement this week that Lockheed Martin will produce long range missiles for the army in Australia.”

She also pointed to two Australian startups — The Whisky Project Group and Hypersonix Launch Systems — that had received contracts from a US defence program known as the Defence Innovation Accelerator.

“These are two examples of Australian startups backed by Australian investors, developing AUKUS pillar two-adjacent advanced capabilities who have been awarded contracts by the US government.”

A bill to loosen trade restrictions between AUKUS partners was introduced to the Australian Parliament before Christmas and will go through a committee before being voted on.

Some Australian researchers have complained the updated restrictions might have a chilling effect on trade and collaboration with countries outside the trilateral pact.

This article was first published by Crikey.