Venture capital has long avoided ‘hard’ sectors such as government, defence, energy, manufacturing, and hardware, viewing them as uninvestable because startups have limited scope to challenge incumbents. Instead, investors have prioritised fast-moving and lightly regulated software markets with lower barriers to entry.
End users in these hard industries have paid the price, as a lack of innovation funding has left them stuck with incumbent providers that continue to deliver clunky, unintuitive solutions that are difficult to migrate from.
However, that perception is now shifting. Investors are responding to new market dynamics within complex industries and the evolving methods startups are using to outperform incumbents.
Government technology spending more than doubled between 2021 and 2025, while defence technology more than doubled in 2025 alone, and we see similar trends in robotics, industrial technology, and healthcare. This signals a clear change in investor mindset as AI-first approaches are changing adoption cycles.
Shifting investor priorities
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Historically, those sectors had been viewed as incompatible with venture capital norms: slow procurement cycles, strict regulation, heavy operational and capital requirements, as well as deep integration into physical systems.
For example, on a global level, public procurement can take years, constrained by budgeting cycles, legislation and accountability frameworks. Energy projects must comply with regulatory regimes and national permitting structures, and infrastructure and hardware deployments require extensive certification and long engineering cycles.
Government and public-sector buyers also tend to prioritise reliability, compliance, track record, and legacy relationships over speed, meaning major contracts often go to incumbents rather than startups. Similar dynamics exist in construction, mining, logistics, and manufacturing, all sectors that are still dominated by legacy vendors, complex supply chains, and thin operational margins.
That view is now changing. Capital is increasingly flowing into sectors once seen as too bureaucratic or operationally complex. Beyond those headline sectors, construction tech, industrial automation, logistics software, healthcare, and public-sector tooling are attracting record levels of early-stage and growth capital.
The key question is: what is driving this shift in investor thinking?
What’s causing the change
The shift in investor priorities is partly driven by macro and geopolitical pressures. Supply-chain disruption, energyinsecurity and infrastructure fragility have elevated industrial resilience to a national priority. Governments are investing heavily in grid modernisation, logistics networks, and critical infrastructure, while public institutions face mounting pressure to digitise procurement, compliance, and workflow systems.
What were once considered slow, bureaucratic markets are now seen as structurally supported by policy and long-term demand.
AI is the driving force and is reshaping traditionally hard industries. By lowering the cost of building sophisticated software and enabling immediate performance gains with shorter adoption cycles, AI allows startups to compete with incumbents in sectors such as construction, mining, manufacturing, logistics, and public services from day one.
As software becomes easier to replicate, defensibility is shifting toward operational depth, substantial UI/UX improvements, speed to market, and more seamless integration into complex real-world systems.
Finally, saturation in horizontal SaaS has pushed investors to look elsewhere for differentiated returns. Crowded softwarecategories offer diminishing breakout potential and are often threatened by OpenAI and Anthropic’s fast pace of innovation, whereas regulated and infrastructure-heavy sectors provide less competition, stronger pricing power, higher switching costs, and gigantic TAMs.
SAP with a $200B cap is just an example, but the same goes for Caterpillar, Siemens, Big Utilities, Big Pharma, and many others.
Regulation, once viewed as a deterrent, is increasingly understood as a moat. Startups that successfully navigate procurement frameworks, compliance regimes, and industry standards build advantages that are difficult for new entrants to replicate and cannot be vibe-coded.
Founders leading the way
Legacy players, while trying to adopt new AI tooling as quickly as they can, still struggle to adapt their workflows and scale innovation as quickly as younger companies can. Their dominance has relied on the high cost of switching away from their solutions, but as attention and investment shift toward hard sectors, incumbents can no longer rely solely on their brand reputation.
Even industry leaders like Salesforce are relying more on acquisitions to keep up, showing how new technology and easier alternatives are lowering switching costs and making it harder for established companies to hold onto customers.
Startups are also increasingly being built by innovative industry specialists, who aren’t confined by the same limitations as legacy players. Many startup founders in defence, energy, healthcare, and government procurement come directly from these industries or have unique insights into their inner weaknesses.
Startups moving the narrative
The next wave of disruption will hit legacy companies hard, as startups prove they can innovate with the speed, flexibilityand focus that incumbents often lack. In sectors long protected by regulation or procurement friction, younger companiesare demonstrating that modern software, AI, and new business models can unlock performance improvements that established players struggle to match. Investor playbooks are already evolving, and that shift will likely accelerate in the year ahead.
At the same time, the total addressable market ceiling has been lifted. By moving beyond narrow software categories and into the physical economy, startups are targeting markets measured not in billions, but in trillions. As a result, we should expect more $100 billion companies to be built in this cycle. It’s no longer just about building better software.
It’s about rebuilding foundational sectors of the global economy.
