For the past decade, venture capital has been dominated by software. Software businesses are capital-efficient, scalable and have high gross margins — typically 70-80% compared with 30-50% for hardware businesses. The most successful venture investments of the 2010s — Facebook, Uber, Airbnb, Stripe — were all software companies. But the 2020s have seen a dramatic shift: deep tech — hardware, biotech, climate tech, advanced manufacturing, robotics, quantum computing — is attracting record investment. In 2024, deep tech companies captured approximately 40% of global venture capital dollars, up from roughly 20% in 2018, according to Boston Consulting Group.
The shift is being driven by a combination of necessity and opportunity. On the necessity side, the most pressing problems of the 2020s — climate change, energy security, supply chain resilience, healthcare costs — cannot be solved by software alone. They require physical technologies: new battery chemistries, carbon capture systems, fusion reactors, gene therapies. On the opportunity side, the cost of launching a deep tech startup has fallen dramatically. Cloud-based simulation and design tools reduce the need for physical prototyping. Contract manufacturing allows hardware startups to outsource production. And the flood of government subsidies for clean energy, semiconductor manufacturing and biotech research — the US Inflation Reduction Act and CHIPS Act alone commit roughly $400 billion — has created a historic pull for private investment into deep tech sectors.
Climate Tech: The Trillion-Dollar Opportunity
Climate tech has been the single largest beneficiary of the deep tech investment wave. PwC’s State of Climate Tech report tracked $55 billion in climate tech venture funding in 2024, with the largest allocations going to energy (battery technology, fusion, advanced nuclear), transport (EV charging infrastructure, sustainable aviation fuel), and carbon management (direct air capture, carbon accounting software). The Inflation Reduction Act, with its uncapped tax credits for clean energy production and investment, has fundamentally changed the economics of climate tech deployment in the United States. Solar and wind are already the cheapest sources of new electricity generation in most of the world, and the IRA’s incentives are accelerating the deployment of everything from grid-scale batteries to green hydrogen.
Fusion energy — long the punchline of “always 30 years away” jokes — has attracted over $6 billion in private investment, with Commonwealth Fusion Systems (a spin-out from MIT) and Helion Energy (backed by Sam Altman) leading the pack. While commercial fusion power remains years away at best, the technical progress — higher-temperature superconductors, more stable plasma confinement, AI-optimised reactor designs — has been genuine, and the climate stakes are high enough to justify patient capital.
Hardware and Robotics
The hardware startup playbook has been rewritten. Companies like Tesla, Apple and DJI have demonstrated that hardware can be a durable competitive advantage when combined with software differentiation. The smartphone supply chain — factories in Shenzhen, component suppliers across Asia, rapid prototyping services — has been adapted to serve hardware startups in categories as diverse as consumer electronics, medical devices and industrial automation. Y Combinator, the influential startup accelerator, has been actively recruiting hardware founders, and its Request for Startups explicitly calls for companies in robotics, space and manufacturing.
The economics are still harder than software. Hardware startups typically require $5-20 million to reach initial production, compared with $1-3 million for a software startup to reach product-market fit. The failure rate is higher, the time to exit is longer (hardware exits average 7-10 years versus 5-7 for software) and the venture-scale returns are harder to achieve. But the combination of massive addressable markets (the global manufacturing sector is worth $16 trillion), government incentives, technological maturity and a growing pool of experienced hardware founders and investors has made deep tech investing a legitimate venture capital category rather than a niche pursuit for wealthy eccentrics.