The Unstoppable Rise of ‘Hard Tech’: Why Venture Capital is Finally Investing in the Real World
For years, venture capital firms chased the next shiny software app, largely ignoring sectors like defense, energy, manufacturing, and healthcare. These “hard tech” industries were deemed too slow, too regulated, and too capital-intensive. But a dramatic shift is underway. Investors are now pouring money into these traditionally overlooked areas, recognizing a potent combination of geopolitical pressures, technological breakthroughs, and untapped market potential.
From Niche to Necessity: The Geopolitical Catalyst
The invasion of Ukraine in 2022 served as a wake-up call for Silicon Valley. Suddenly, “weapons of war” – and the technologies that underpin them – weren’t just ethically questionable, they were strategically vital. This realization, coupled with rising tensions with China and ongoing conflicts in the Middle East, has underscored the urgent demand for cutting-edge defense capabilities. National defense budgets are swelling, creating a powerful incentive for private capital to deliver modern solutions faster and cheaper.
This isn’t limited to defense. Supply chain disruptions, energy insecurity, and infrastructure fragility have elevated industrial resilience to a national priority. Governments are investing heavily in grid modernization, logistics networks, and critical infrastructure, creating a structurally supported market for innovation.
AI: The Great Equalizer
Artificial intelligence is arguably the biggest driver of this change. AI lowers the cost of building sophisticated software and enables rapid performance gains with shorter adoption cycles. This allows startups to compete with established players in sectors like construction, mining, manufacturing, and logistics from day one. Where once startups faced years-long procurement cycles, AI-first approaches are dramatically shortening the time to value.
As software becomes easier to replicate, defensibility is shifting towards operational depth, superior user experience, speed to market, and seamless integration into complex systems. This favors agile startups over lumbering incumbents.
Beyond Software: The Allure of Trillion-Dollar Markets
Saturation in horizontal SaaS – the crowded market for general-purpose software – is also pushing investors to seek differentiated returns. These markets offer diminishing breakout potential, threatened by the rapid innovation of companies like OpenAI and Anthropic. Regulated and infrastructure-heavy sectors, provide less competition, stronger pricing power, higher switching costs, and, crucially, gigantic total addressable markets (TAMs).
Regulation, once seen as a barrier, is now understood as a moat. Startups that successfully navigate complex procurement frameworks and compliance regimes build advantages that are difficult for new entrants to replicate.
The New Breed of Founders
Legacy players are struggling to adapt. While they attempt to adopt new AI tooling, they often lack the agility and focus of younger companies. Their dominance historically relied on the high cost of switching away from their solutions, but that advantage is eroding. Even industry giants like Salesforce are increasingly relying on acquisitions to stay competitive, a clear sign that disruption is underway.
A new generation of founders is leading the charge. Many come directly from these industries, possessing unique insights into their inner workings and weaknesses. They aren’t constrained by legacy thinking and are building solutions tailored to the specific challenges of “hard tech.”
Investment is Surging: A Look at the Numbers
Government technology spending more than doubled between 2021 and 2025, and defense technology funding more than doubled in 2025 alone. Similar trends are emerging in robotics, industrial technology, and healthcare. The NATO Innovation Fund, backed by 24 allied nations, is deploying over €1 billion in deep tech focused on defense, security, and resilience.
What Areas are Seeing the Most Action?
Beyond defense, several key areas are attracting significant investment:
- Novel Materials and Manufacturing: Innovations in materials science are driving sustainable solutions across industries.
- Energy: Focus on cleaner, more efficient energy solutions and grid modernization.
- Space: Continued investment in space technology for both commercial and defense applications.
- Artificial Intelligence: AI is being applied across all sectors to improve efficiency and unlock new opportunities.
- Autonomy: Advancements in autonomous systems are transforming logistics, manufacturing, and transportation.
- Quantum Technology: Early-stage investment in the potentially revolutionary field of quantum computing.
- Biotechnologies: Innovations addressing global health challenges and promoting sustainability.
- Hypersonic Systems: Ongoing development of advanced security and mobility technologies.
FAQ
Q: Is this a temporary trend?
A: No. The shift towards “hard tech” is driven by fundamental geopolitical and technological forces, suggesting it’s a structural and cultural change, not just hype.
Q: What are the biggest challenges for startups in these sectors?
A: Navigating complex regulations, long procurement cycles, and securing capital remain significant hurdles.
Q: What kind of returns can investors expect?
A: The potential for outsized returns is significant, given the large TAMs and limited competition in these markets. We should expect more $100 billion companies to be built in this cycle.
Q: What role does government play?
A: Governments are increasingly acting as both customers and investors, providing funding and creating a favorable regulatory environment.
Did you know? The U.S. Is eyeing a near-$1 trillion defense budget, signaling a strong commitment to innovation in this sector.
Pro Tip: For startups targeting these markets, building strong relationships with government agencies and understanding the regulatory landscape are crucial for success.
The era of dismissing “hard tech” is over. Venture capital is finally recognizing the immense opportunity – and the strategic imperative – of investing in the foundations of the global economy. This isn’t just about building better software; it’s about rebuilding foundational sectors.
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