A few years ago, I began advising a startup developing physical infrastructure for smart cities, with an AI layer on top. I vividly recall conversations with investors who told me, “We don’t touch anything hardware related.” They said it was too slow, too capital-intensive, too risky.
Fast-forward to today, that same company has rolled out its solution across dozens of U.S. cities and now employs hundreds of people. The very hardware once deemed “too heavy” has become the immovable foundation of its market leadership.
And yet this isn’t an isolated story. Some of the most valuable companies in the world today such as Nvidia and Tesla, are fundamentally hardware-driven. Their sky-high valuations stem not just from software, but from controlling the infrastructure that enables others to build.
In the age of AI, when software can be built (and copied) at lightning speed, hardware companies offer something far more durable: presence, permanence and defensibility. Here’s why I believe it’s time for venture capitalists — and entrepreneurs — to rethink their stance on hardware.
Hardware Is the new moat
Software is increasingly commoditized. No-code, AI coding assistants and open-source frameworks have narrowed the gap between vision and execution.
In contrast, physical hardware is much harder to replicate or replace once installed. When your device is literally bolted into a city’s infrastructure, the switching cost is not just technological, it’s political, logistical and financial. That’s a moat software alone rarely provides.
Software is still relevant, but it builds on hardware
The misconception is that hardware companies are “just hardware.” In reality, the best ones are platforms. Once deployed, they can continuously upgrade their offering via software, new features, analytics, integrations and even AI layers.
That base unit of hardware becomes your permanent sales rep on the ground, enabling upsells and renewals without reselling the core product.
Bias against hardware is an outdated vestige
Many investors avoid hardware because of legacy scars: high burn, manufacturing delays, complex supply chains. But those assumptions don’t always hold today. Advances in prototyping, global contract manufacturing and recurring-revenue models have reshaped the economics. When properly structured, a hardware business can achieve healthy margins, strong retention and scalable growth.
I urge founders and VCs alike not to dismiss hardware out of habit, because the next generation of enduring tech giants may be building their moat from silicon, steel and infrastructure.
Itay Sagie is a strategic adviser to tech companies and investors, specializing in strategy, growth and M&A, a guest contributor to Crunchbase News, and a seasoned lecturer. Learn more about his advisory services, lectures and courses at SagieCapital.com. Connect with him on LinkedIn for further insights and discussions.
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