The Golden Age For Deep Tech

Recently, I listened to a conversation between Peter Thiel and Joe Rogan that sparked some reflections on a comment Peter made. He mentioned that over the past 50 years, we've seen significant progress in the world of bits--information technology, computers, the internet, and AI--yet relatively little in the world of atoms, the physical world.

As I thought about this further, I realized that in my own lifetime, I haven't witnessed many meaningful changes in the physical world--public transport, airplanes, housing, and stores remain largely the same. In contrast, the digital world has evolved rapidly, with transformative changes in smartphones, social media, e-commerce, and streaming services to name a few. This divide is highlighted by the dominance of companies like Facebook, Netflix and Google over the past 20+ years. Their success has been driven by the widespread adoption of the internet, enabling business models with robust network effects, low COGS / CAC, and insightful data collection and utilization at an unprecedented scale.

However, recent breakthroughs in AI seem poised to profoundly change the world of bits. AI is democratizing access to tools and information, enabling people to create new things more easily. For instance, I can now design graphics using AI-driven tools like ChatGPT, something that would have required purchasing and learning how to use an expensive application like Adobe Photoshop just a few years ago. Similarly, on the B2B side, software companies that offer solutions now replicable by AI will face challenges in retaining customers and selling more subscriptions. As AI continues to evolve and become more widespread, many application-layer companies will become less competitive and valuable, as their moats weaken (i.e., why pay for a specific software solution when AGI exists?).

I believe that this paradigm shift in the world of bits presents an incredible opportunity for founders to now focus on building in the world of atoms--creating integrated hardware/software companies that leverage the latest technologies (often referred to as deep tech). These companies won't have the same margin profile as traditional software firms, but they will have much stronger moats than businesses that can now face significant challenges because OpenAI, Microsoft, Google, etc.. decided to offer that feature to its product offering.

Founders and investors have begun to recognize this opportunity, as we've seen a surge of innovation in sectors like energy (Base Power), space (SpaceX, Varda), electric vehicles (Tesla), robotics (Tesla - Optimus), and defense (Anduril, Shield AI, Dedrone) over the past few years. Even Y Combinator, which has traditionally focused on software, announced its first weapons company in its current batch--Ares Industries.

While the past 20 years have been dominated by internet companies, I believe the next 20 years will be defined by real-world companies that can effectively combine hardware and software to create large defensible moats.

We're in the early innings of a golden age for startups in the world of atoms.