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For more than a decade, the venture capital world revolved almost entirely around software, chasing SaaS efficiency, product-led growth, and asset-light digital scale. But today, the energy in the market is shifting. We are quietly navigating the “SaaS-pocalypse” (see my previous post), a fundamental repricing of software economics driven by the AI boom and it’s making VCs assess what investments are defensible against the commoditisation of software by AI.
As an early-stage VC, I am seeing this reality play out in private markets: the days of pure software moats are coming to an end, and hardware is finally investable again. Recent AI breakthroughs, such as Claude Code’s ability to nearly autonomously build and run software, have rattled public markets and wiped billions off legacy software valuations. While not immediate, it feels like we’re seeing the venture market swinging from bits to atoms.
The Death of the Software Moat
Software was historically incredibly valuable because it was scarce. Engineering talent was a bottleneck, and technical know-how was hard to acquire. Today, AI coding assistants and open-source frameworks have commoditised code. If a model can write code or design a product overnight, software simply stops being scarce. Even the mighty Google recently mentioned that 75% of its new code is written by AI.
As a result, what once made software startups attractive, their code and the engineers who built it, no longer carries the same value. In fact, it is estimated that any enterprise software company built over the last five to ten years could be rebuilt in six months or less. The user interface (UI) moat is also collapsing to zero; when AI agents can mediate workflows directly and execute tasks, the friction of learning a UI disappears, and software loses its visual differentiation.
The Migration to “Atoms Over Bits”
With software abundant, venture capital is aggressively hunting for new scarcity. This scarcity is migrating downstream toward the systems that power intelligence and the physical infrastructure that AI cannot easily replicate: datacentres (which drove much of the US GDP growth in 2025), robotics, energy, space, defence, and advanced manufacturing.
This macro investment shift toward “atoms over bits” is already showing up in the numbers. Over the last three years, deeptech and hardware investment has grown its VC market share globally by approximately 40%. While enterprise software deals have slowed, funding for AI hardware, defense, and automation is seeing massive rounds.
Why Hardware is the Ultimate Defensible Moat
Investors have historically avoided hardware because of legacy scars – it was viewed it as too slow, capital-intensive, and risky. But hardware offers something software cannot: presence, permanence, and true defensibility.
- Political and Logistical Switching Costs: When your hardware is literally bolted into a city’s physical infrastructure or a factory floor, the switching cost is immense. It is not just a technological hurdle; it is a financial and logistical barrier that pure software rarely provides.
- Physical Constraints Create Monopolies: Real-world constraints offer durable competitive positions. You cannot simply use an LLM to generate a physical weapons system, a satellite network, or a cleared facility. Examples in Defence tech include Anduril, Shield AI, and Chaos Industries, which are securing massive funding rounds and practically building durable monopolies based on sovereign demand and physical constraints. In space tech, Stoke Space and Astranis are creating an infrastructure scarcity moat that software commoditisation cannot erode.
- Giving AI a “Body”: We have essentially built a digital god and trapped it in a text box. For AI to become infinitely more useful, it needs a physical body to collect passive, ambient context from the real world. Whether it’s glasses collecting hand-motion data to train factory robots or wearables tracking biomarkers, the AI ghost needs a physical shell, and typing into a laptop is not the final form. Many robotics companies are raising mega rounds of $100M+. One of the latest examples is Mind Robotics, which raised a $500M Series A in April 2026. It’s a spin-out from EV maker Rivian, this startup focuses on manufacturing-specific robotics, or Robot Era, A Beijing-based humanoid robotics company that joined the unicorn club this year after raising $145M in March 2026, focusing on general-purpose robots for industrial use.
The New VC Playbook
Many hardware startup founders are familiar with the saying: “Hardware is Hard”. And investors have internalised this all too well. Compared to SaaS companies, hardware is ‘further from the money’ and closer to deep tech in monetisation. Beloved metrics that VCs use to assess companies like Customer Acquisition Cost (CAC) and rapid Monthly Recurring Revenue (MRR) growth do not map cleanly to hardware companies. Hardware requires deep design work, longer timelines, supply chain risks and a tolerance for higher upfront capital. It’s a whole new ball game for non-hardware specialists.
However, the assumption that hardware is a bad business model is an outdated vestige. Thanks to global contract manufacturing, advances in rapid prototyping, and recurring-revenue software models layered on top of physical devices, hardware economics have been completely reshaped. Today, a base unit of hardware acts as a permanent sales rep on the ground, enabling continuous software upsells and renewals.
VC investors can no longer afford to dismiss hardware out of habit. The era of building yet another app is ending. The next generation of enduring tech giants will be those that establish their moats not with code, but with silicon, steel, and infrastructure. We’ve yet to do a hardware investment at Remagine Ventures to date, but we’re certainly considering it and started reviewing opportunities. From sensors to camera related tech. If you’re an Israeli founder in the earliest stages building hardware that can be empowered by AI, we’d love to speak with you.
He is a former General Partner at Google Ventures (GV) in Europe, former head of Google for Entrepreneurs in Europe, and founding head of Campus London, Google’s first startup hub. Eze writes on Israeli tech, venture capital, artificial intelligence, and founder strategy.
He is also the founder of Techbikers, a nonprofit that brings together the startup ecosystem on cycling challenges in support of Room to Read.