The venture capital perspective on hardware has completely flipped. Previously seen as a difficult and capital-intensive area to be avoided, hardware is now considered one of the few remaining defensible moats. Physical products like WHOOP and Eight Sleep create customer lock-in that software alone cannot.

Unlike software, a deep-tech hardware startup's first product is essentially a prototype, according to Cerebras CEO Andrew Feldman. The second iteration refines the technology, and only the third generation truly scales and achieves market traction. This necessitates a decade-plus timeline and immense capital before success.

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.

Investor Shaun Maguire posits that the hardware industry is moving beyond the silicon-centric scaling of Moore's Law. The next wave of innovation will branch into entirely new "tech trees" such as humanoid robotics, silicon photonics, and orbital data centers, creating decades of new progress and distinct from semiconductor advancements.

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.

As AI commoditizes software, hardware is re-emerging as a key defensibility layer for startups. A decade ago, VCs avoided hardware, but now a physical device tied to a software subscription creates powerful stickiness and justifies high valuations, representing a major shift in investment strategy.

YC intentionally groups deep tech and defense tech companies into the same office-hour sections. This creates a specialized peer group—a 'brain trust' of founders working on missiles, submarines, and robotics—fostering a unique support system for those tackling exceptionally hard problems.

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.