The rise of physical AI is supported by a parallel revolution in low-power microelectronics. This allows entrepreneurs to build and deploy specialized, smaller models on inexpensive hardware, bypassing the need for massive cloud resources and opening up a wave of new opportunities.

According to a partner at Radical Ventures, the frontier for AI startups is expanding beyond software ('bits') into the physical world ('atoms'). The next wave of high-impact AI companies will tackle complex challenges in sectors like energy, critical minerals, and manufacturing.

The impact of AI isn't limited to software. Hardware development is being accelerated, allowing a small 7-person team at Hop Aero to achieve the development velocity of a company with 50-70 engineers.

The AI revolution is driving a renaissance in hardware and the physical sciences. Disciplines like server rack design, material science for substrates, and power engineering are no longer peripheral but central to progress. The insatiable demand for compute has made the physical world of tech exciting and lucrative again.

The AI revolution isn't just about software. For the first time in years, venture capital is flowing into hardware like specialized semis and even into energy generation, because power is the core bottleneck for all AI progress.

For decades, hardware startups failed because building the necessary bespoke software was too difficult and expensive. The rise of general-purpose AI provides a powerful, adaptable software layer "out of the box." This dramatically lowers the barrier to scaling for hardware-intensive businesses like robotics and drones, making them more attractive for creative financing.

YC Partner Harj Taggar notes a significant shift in investor sentiment. The rise of powerful foundation models has made SaaS feel vulnerable to being obsoleted, causing VCs to pivot capital towards previously hard-to-fund hardware and hard tech companies, which now seem more defensible.

The venture capital industry has reversed its historical aversion to hardware. In an AI-driven market where software moats are shrinking, the difficulty and capital intensity of building physical products like robots are now seen as a source of strong, long-term defensibility.

AI is simultaneously creating two divergent paths for YC startups. One path involves AI-native software companies achieving significant revenue quickly. The other involves AI enabling capital-intensive, long-term "moonshot" hardware and defense companies where revenue is a distant goal but the potential impact is massive.