Jaime Medina
Almost every time I speak with a Venture Capital fund about their investment thesis, I hear it immediately: “We don’t do hardware”. And when I talk to an entrepreneur in hardware, the response is often the same: “It’s not easy with VCs because we are hardware”.
So, why does this happen?
Investment in hardware has long been overlooked by venture capital, especially in early-stage rounds. The advantages in software are obvious, specially due to their scalable distribution models and high gross margins, but this persistent focus has overshadowed the growing opportunity in data-intensive and defensible hardware businesses. The reluctance to invest in hardware often stems from its perceived risks. Unlike software, hardware requires significant upfront capital, physical distribution, and longer product cycles. However, these very characteristics can become strengths. Hardware ventures typically create stronger customer dependence, higher defensibility, and more durable competitive advantages.
This distinction becomes especially critical in industries where data absorption is not a luxury but a necessity. Industrial processes, smart cities, and sectors like energy, mobility, and food production require massive amounts of real-time, physical data. These sectors cover literally the World’s biggest problems, and cannot scale effectively with software alone. Hardware is essential for collecting and processing tangible data at scale.
Moreover, while hardware might seem less scalable due to its physical nature, the right economic structure tells a different story. If unit economics are solid, hardware businesses can scale profitably. High-value technologies often yield strong gross margins, and mature hardware businesses frequently have open access to non-dilutive financing solutions. This makes them resilient to cash flow pressures despite their nature and helps manage growth without excessive equity dilution.
Unlike software, which already attracts a lot of funding, hardware startups, especially in early stages, still don’t get much investor attention. But this lack of investment can actually be a good sign for returns. In many cases, the assets that receive less money end up offering better returns to investors. As more capital flows into software, hardware stands out as a smart place to put your money on for their long-term growth potential and strategic importance.
