Venture Capital Shifts from Software to Deep Tech

For more than two decades, software has been the driving force behind venture capital. Its efficiency, scalability, and unmatched potential for outsized returns made it the default investment. Capital flowed freely into SaaS platforms, marketplaces, and digital infrastructure, fueled by a model that prized speed and low marginal costs. I was part of that era and witnessed its power firsthand.

Now, a clear transformation is underway. Venture capital is pivoting toward deep tech builders, and this is no longer a niche strategy. It is becoming a substantial portion of capital deployment, driven not by ideology but by structural economic shifts.

A major catalyst has been the collapse of the long-held belief that hardware cannot deliver venture-scale returns. That assumption once discouraged investment in sectors requiring time, infrastructure, and deep engineering. But it has been decisively challenged. Companies like SpaceX have proven that hardware-intensive businesses can generate strong, durable returns. Elon Musk reset expectations for what is achievable in the physical world.

The ripple effects are still unfolding. Even if outcomes like SpaceX are rare, the precedent reframes how investors assess risk, capital efficiency, and long-term value. It also changes how founders approach building companies.

Meanwhile, the economics of software have shifted in less favorable directions. While zero marginal cost remains a feature, it is only part of the picture. Customer acquisition costs have risen, competition has intensified, and retention demands continuous investment. Maintaining market position now often requires aggressive, ongoing capital just to stay visible.

The rise of artificial intelligence has accelerated this trend. AI lowers the barrier to entry for building software, but it also creates fragility. If a product can be replicated in a weekend, defensibility becomes weak. Differentiation moves from the product itself to distribution, marketing, and capital. That is not a sustainable advantage.

In contrast, deep tech operates under different constraints. It requires time, capital, and specialized expertise. For years, these were seen as disadvantages. Today, they are recognized as structural strengths. The difficulty of building in the physical world creates natural barriers to entry. It forces rigor in execution and demands that teams solve real problems before scaling.

I have lived this reality. During my time at SpaceX and in the companies I later built, I saw how these constraints shape outcomes. You cannot shortcut physics. You cannot deploy unfinished systems into the real world and hope they work. That discipline creates a different kind of company, harder to build but also harder to replicate.

There are also overlooked structural advantages. Once a deep tech company gains a foothold, it can access forms of capital unavailable to most software businesses. Asset-backed lending, infrastructure financing, and long-term contracts become viable. These mechanisms allow for more capital-efficient scaling over time, even if initial investments are higher.

The talent landscape is shifting as well. A decade ago, top engineering talent gravitated toward software. Now, that distribution is changing. The influence of SpaceX and similar organizations has created a new generation of builders focused on aerospace, energy, manufacturing, and defense. This shift is reflected in growing demand, with a report estimating the sector could need 3.8 million new workers by 2033, with 1.9 million roles at risk of going unfilled.

Government support has also played a role. Early-stage funding, particularly in areas tied to national infrastructure and defense, has helped de-risk some of the initial challenges of deep tech. This does not eliminate complexity, but it changes the equation enough to attract more private capital.

What I find most compelling is that this shift is still early. Many generalist venture firms are only beginning to allocate capital to deep tech, and it often represents a minority of their portfolios. But the trend is clear. More investors are entering the space, more founders are building in it, and more capital is following.

At the same time, global instability has underscored the importance of physical systems. Supply chains, energy production, and industrial capacity are no longer abstract concerns. They are central to economic resilience. That reality is pushing both governments and investors to rethink where innovation needs to happen.

None of this suggests software is disappearing. It remains essential. But it is no longer the only frontier. The next generation of transformative companies will not exist purely in the digital realm. They will operate at the intersection of software and the physical world, solving problems that require both. After all, Silicon Valley’s origins were in hardware. Although that feels like a distant memory, the current situation is returning to that once-strong stance, continuing the cycle of the tech landscape.

That is why I believe venture capital is shifting toward deep tech builders. Not because it is fashionable, but because the fundamentals are changing. The combination of proven outcomes, evolving economics, and global necessity is creating a new center of gravity.

The next wave of innovation will not be defined by how quickly we can write code. It will be defined by how effectively we can build, deploy, and scale physical solutions in the real world. For investors willing to understand that shift, the opportunity is just beginning.