For decades, venture capital firms largely avoided investing in sectors deemed “hard” – those characterized by lengthy development cycles, heavy regulation, and substantial capital expenditure. Industries like government contracting, defense, energy, manufacturing, and hardware were often considered too complex and slow-moving to deliver the rapid returns VCs typically seek. Instead, investment flowed towards the faster, more scalable world of software. But a significant shift is underway. Capital is now increasingly flowing into these previously shunned sectors, driven by a confluence of geopolitical pressures, technological advancements, and a reassessment of long-term value.
Historically, the barriers to entry in these “hard” industries were formidable. Public procurement processes, for example, can stretch on for years, constrained by budgetary cycles, legislative hurdles, and rigorous accountability frameworks. Energy projects face stringent regulatory compliance and permitting requirements. Deploying infrastructure and hardware demands extensive certification and lengthy engineering timelines. This meant startups often struggled to compete with established incumbents who had already navigated these complexities and built strong relationships with government and industry stakeholders.
However, the landscape is changing. Government technology spending more than doubled, and defense technology funding saw a similar surge in alone, according to recent data. Similar trends are emerging in robotics, industrial technology, and healthcare. This influx of capital signals a fundamental shift in investor mindset, fueled by the realization that these sectors represent substantial, and increasingly accessible, opportunities.
A key driver of this change is the rise of artificial intelligence. AI is lowering the cost of developing sophisticated solutions and accelerating adoption cycles, allowing startups to challenge incumbents in ways previously unimaginable. In sectors like construction, mining, manufacturing, logistics, and public services, AI-powered tools are delivering immediate performance gains, reducing the time and resources required to compete. As software becomes more easily replicated, the focus is shifting towards operational expertise, superior user experience, speed to market, and seamless integration with existing systems.
The geopolitical climate is also playing a crucial role. Events like Russia’s invasion of Ukraine underscored the critical need for advanced defense capabilities, prompting increased investment in defense technology. Rising tensions with China and ongoing conflicts in various regions are further accelerating this trend. National defense budgets are swelling globally, creating a powerful incentive for private capital to deliver innovative solutions faster and more efficiently.
Beyond defense, broader macroeconomic factors are contributing to the shift. Supply chain disruptions, energy insecurity, and infrastructure fragility have elevated industrial resilience to a national priority. Governments are investing heavily in modernizing grids, strengthening logistics networks, and upgrading critical infrastructure. This creates a structurally supportive environment for startups offering solutions in these areas.
The changing dynamics are also impacting how investors view regulation. Historically seen as a deterrent, regulation is now increasingly recognized as a potential moat. Startups that can successfully navigate complex procurement frameworks, compliance regimes, and industry standards build advantages that are difficult for competitors to replicate. This creates a barrier to entry and strengthens their long-term position.
Incumbent companies, while attempting to integrate new AI tools, often struggle to adapt their workflows and innovate at the same pace as younger, more agile startups. Their dominance has traditionally relied on the high cost of switching away from their solutions, but that advantage is eroding as new technologies and alternative business models emerge. Even industry giants like Salesforce are increasingly relying on acquisitions to stay competitive, demonstrating the disruptive potential of startups in these sectors.
a new generation of founders is entering these industries. Many are industry veterans with deep domain expertise and a clear understanding of the challenges and opportunities within these complex sectors. They are not constrained by the legacy thinking and operational inertia that often hinder larger organizations.
This shift isn’t just about attracting more capital; it’s about redefining the potential of these industries. By moving beyond narrow software categories and into the physical economy, startups are targeting markets measured in trillions of dollars, not billions. This opens the door for the creation of a new wave of large-scale companies – potentially even $100 billion-plus enterprises – built on the foundations of innovation in traditionally “hard” sectors. The focus is no longer solely on building better software; it’s about rebuilding the foundational sectors of the global economy.
