📶 is hardware cool again?

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Good morning 👋

When you think of VC investing, you probably think of software companies.

That hasn’t changed, but for the first time in a long time, hardware companies are gaining more attention (and capital) from venture investors.

We break down our two cents in this week’s piece.

TL;DR:

• 📰 News

• 🔗 Links

• 🐥 Tweet

• 🌃 Visual

• 📌 Jobs

• ✅ Recs

• 🗳 Poll

• ☕️ Memes

• 📊 Results

NEWS
Is hardware cool again? 🤨

OpenAI is trying to raise trillions for chip manufacturing. Anduril is becoming one of the hottest companies in the US. More and more VCs are investing in deep tech. Nvidia continues to rip.

For the first time in a long time, hardware has more hype than software in venture markets.

Anybody who has invested in either hardware or software will tell you that the evaluation process of these types of businesses is entirely different.

Here’s what we think.

Why it matters: 

Competition within traditional software has made it harder to create and back the next billion-dollar SaaS company. Combine that with the fact that AI has made it easier for feature parity to play out, and you have yourself a tricky situation both as a founder and as an investor.

Many of the investors we’ve talked to believe SaaS peaked in 2018 - 2021 for a variety of reasons. We’re not here to argue whether that’s true or not, but we’ll definitely admit that software investing today is not what it was five years ago.

The world has changed and investment preferences have too. VCs have already started to move away from software-only mandates, talent is flowing into hardware, and the news is starting to catch on.

We try to err on the conservative side when tons of capital, talent, and attention flow into a new space quickly. That said, if this trend continues to play out, here are some things we’re thinking through.

What happens next: 

Expect more capital to flow into the following four categories of hardware:

• Climate tech: After talking with enough people, our opinion is that climate is not a problem that can be solved with software alone.

• Space / defense tech: Anduril and True Anomaly are two examples of breakout companies that have attracted more capital to the space (no pun intended).

• Robotics: Manufacturing companies will continue to reduce labor costs by investing more in robotics (see Figure as an example).

• Consumer hardware: Humane and Rabbit are two examples of hardware AI assistants that promise to handle mundane tasks for customers.

But as more money flows to hardware companies, we’ll resurface some questions that scared away hardware investments in the past.

How much capital is required before finding true product-market fit? What are the supply chain risks? What are the inventory risks? Are you comfortable with lower margins compared to software investments?

These are some things we’re thinking through. If you’re investing in hardware, we’d love to hear if we’re thinking about anything right or wrong.

LINKS

🎧 Cyan Banister (Investing for a Higher Purpose): One of the best angel investors of all time gave her world view on Invest Like the Best

📓 Investor reading list: Curated by Colossus

🤷‍♂️ Things I Don’t Know About AI: Elad Gil’s take

🤖 You should be playing with GPTs: 20 examples of how people are using custom GPTs to make their teams more effective

👉 What VCs get right and wrong: One of the better takes you’ll read today

📍 Confluence.VC Fund Directory: Filter thousands of funds by sector, stage, and geography

🔎 YC’s request for startups: What do you think?

🧭 Newsletter Navigator: How to calculate newsletter profitability

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DEAL FLOW

Thanks for reading this far and giving us a little bit of your attention this week.

Feel free to unsubscribe whenever this stops becoming valuable to you.

- Clay

P.S. Here are the results from our poll question in last week’s piece:

What's closest to the right mix of institutional vs. non-institutional for a sub $100m venture fund?

🟨🟨🟨🟨🟨⬜️ 100% institutional (12)

🟩🟩🟩🟩🟩🟩 75% institutional / 25% non-institutional (13)

🟩🟩🟩🟩🟩🟩 50% institutional / 50% non-institutional (13)

🟨🟨🟨🟨🟨⬜️ 25% institutional / 75% non-institutional (12)

🟨🟨🟨🟨⬜️⬜️ 100% non-institutional (9)

59 Votes