Hardware is eating the world, too | PitchBook News Summary

1. Key Themes

Theme 1: AI Is Driving a Hardware and Physical Infrastructure Investment Boom

After years of VC skepticism toward hardware, AI is forcing a dramatic rethink. a16z's new $1.1B Machine Age Fund explicitly targets chips, memory, networking, storage, data centers, robotics, and home AI appliances — the full physical stack underlying AI.

"Advances in physical AI are making hardware capable of things that weren't achievable a few years ago." — Nick Rescigno, PitchBook fund strategies analyst

"Hardware has long been out of favor with VCs due to heavy upfront capital costs, long build cycles, and thinner margins relative to SaaS. But the promise of embodied AI has made investors more willing to look for opportunities."

Theme 2: PE Is Following AI Capex Into Blue-Collar / Trades Businesses

Private equity deal activity in construction and engineering hit a record 529 deals in Q2 2026, up 56.5% year-over-year. Dealmaking is concentrating in specialty trades needed for data center site work: electrification, cooling, HVAC, fiber optics, and directional boring.

"HVAC contractors logged 76 PE deals worth $3.8 billion in the first half of 2026, already surpassing the 63 deals completed in all of 2025."

"We think there's going to be a lot of interest around equipment recycling, directional boring, fiber optics, electrical engineering." — Cory Markling, EisnerAmper

Theme 3: Data Center Construction Is a Divergent Growth Engine Within a Weak Real Estate Market

Data center construction is booming in isolation while the broader private nonresidential construction market is actually contracting — a stark bifurcation with implications for where capital should be deployed.

"Data center construction spending rose 46% from a year earlier in June. Stripping out data centers, private nonresidential spending instead fell 7.9%, according to an Associated Builders and Contractors analysis of Census data."

Theme 4: AI Is Reshaping Payments and Fintech's Strategic Role

Beyond infrastructure, AI is being cited as a catalyst for a new strategic relevance of payments infrastructure. Stripe walking away from a $50B+ PayPal acquisition signals discipline — but the underlying thesis is that fintech rails become more important, not less, in an AI-first world.

PitchBook's "latest fintech research argues that the payments sector could play a major role in an AI-first world."

Theme 5: AI-Driven VC Returns Are Leading All Private Market Strategies

VC led all private market strategies in 2025 returns, fueled by AI valuation rebounds — while real estate has clearly lagged over the past two years.

"VC led all strategies in 2025 as an AI-fueled rebound in valuations drove returns higher."

2. Contrarian Perspectives

Perspective 1: Hardware Investing Is No Longer the VC Graveyard It Once Was

The conventional wisdom has long been that hardware startups are uninvestable by VCs due to capital intensity, long cycles, and thin margins. a16z is directly betting against this, and deal flow data backs the shift — hardware now represents a meaningful share of a16z's portfolio.

"Hardware has long been out of favor with VCs due to heavy upfront capital costs, long build cycles, and thinner margins relative to SaaS. But the promise of embodied AI has made investors more willing to look for opportunities."

"Hardware startups now make up more than 20% of the firm's deal flow."

Perspective 2: The Real AI Investment Opportunity May Be in Trades and Blue-Collar Services, Not Software

While the market fixates on AI software, the most measurable near-term deal activity surge is in unglamorous construction and engineering businesses. The backlog data for data center contractors reveals a supply-constrained market with durable demand.

"Those working in data centers carry an average backlog of 11 months, versus 8.5 months for everyone else."

"If you think about where we are in the ball game of data centers," said Markling, "we're in the first inning, maybe second inning."

Perspective 3: China's AI Avatars Are Already Out-Earning Human Influencers at Scale

While Western discourse debates AI's creative displacement risk, China is already past the proof-of-concept stage — a digital clone generated $7.7M in product sales in seven hours, a concrete revenue-generation benchmark that hasn't been widely absorbed into Western investment thinking.

"A digital double generated $7.7 million in product sales in seven hours as AI-generated hosts and actors sweep through China's livestreaming industry at a fraction of the cost."

3. Companies Identified

Andreessen Horowitz (a16z)

Description: Tier-1 VC firm
Why mentioned: Launched a $1.1B Machine Age Fund dedicated to physical AI infrastructure (chips, networking, robotics, data centers)
Quote: "The Machine Age Fund will invest 'into all of the computer infrastructure on which AI runs, including chips, memory, networking, and storage,' and that this includes 'full systems for running AI: from data centers to robotics to home AI appliances.'"

Nexthop AI

Description: Startup building network switching equipment for AI workloads
Why mentioned: a16z-backed company; raised a $500M Series B in March — a signal of the scale of AI infrastructure checks being written
Quote: "a16z backed [Nexthop AI] in March when the company raised a $500 million Series B."

Mind Robotics

Description: AI robotics startup spun out of EV maker Rivian
Why mentioned: Co-led $500M Series A by a16z and Accel, illustrating cross-sector AI hardware momentum
Quote: "The firm announced it had co-led alongside Accel a $500 million Series A for Mind Robotics, an AI robotics startup spun out of EV maker Rivian."

Anduril / Shield AI / Skydio

Description: Defense-tech hardware companies
Why mentioned: Cited as core of a16z's AI hardware and infrastructure defense portfolio
Quote: "The firm's AI hardware and infrastructure checks have mostly concentrated in defense, a portfolio that includes Anduril, Shield AI and Skydio."

Stripe

Description: Payments technology company
Why mentioned: Led a group considering a $50B+ acquisition of PayPal, then walked away — signals strategic discipline and M&A market activity in fintech
Quote: "A group led by Stripe and Advent International decided against pursuing a $50 billion-plus acquisition of PayPal."

Owner

Description: AI marketing and tech tools for small businesses
Why mentioned: Raised $240M at a $2.3B valuation, led by Goldman Sachs Growth Equity Alternatives
Quote: "Owner, a startup specializing in AI marketing and technology tools for small businesses, raised a $240 million round... at a $2.3 billion valuation."

Adaptyv

Description: Swiss startup developing automated labs for agentic biology
Why mentioned: Raised $40M Series A, notable as an AI-meets-biotech hardware play
Quote: "Adaptyv, a Swiss startup developing an automated lab for agentic biology, raised a $40 million Series A led by Highland Europe."

Nemera

Description: Manufacturer of pens for injectable medicines including GLP-1s
Why mentioned: Potential ~€3B exit by Astorg Partners and Montagu Private Equity — notable for GLP-1 drug delivery exposure
Quote: "Astorg Partners and Montagu Private Equity are in talks to sell Nemera, a manufacturer of pens for injectable medicines including GLP-1s, in a deal that could value the company at around €3 billion."

Lovable / Legora

Description: Hot Swedish AI startups
Why mentioned: Alumni from these companies are already founding new companies, feeding Sweden's self-reinforcing startup ecosystem
Quote: "Employees leaving hot startups like Lovable and Legora are already founding new companies, a historical repeat of Spotify alumni driving the current wave."

DigitalBridge Group

Description: PE firm focused on digital infrastructure
Why mentioned: In the process of being acquired by SoftBank; agreed to acquire Plus ES, an Australian energy metering and data services provider
Quote: "DigitalBridge Group, a PE firm in the process of being acquired by SoftBank, agreed to acquire Plus ES."

Pasqal

Description: French quantum computing company
Why mentioned: Completed a SPAC combination — a notable exit for European deep tech
Quote: "French quantum computing company Pasqal completed its combination with blank check company Bleichroeder Acquisition Corp. II."

Amazon

Description: Big Tech / hyperscaler
Why mentioned: Signed a deal to buy electricity from four Swedish wind farms to power Nordic data centers — illustrates the energy demand cascade from AI infrastructure
Quote: "Amazon signed a deal to buy electricity from four Swedish wind farms developed by Eolus AB and EQT-owned OX2 AB to meet Nordic data center demand."

4. People Identified

Martin Casado

Description: General Partner at a16z
Why mentioned: Co-leading the new $1.1B Machine Age Fund focused on physical AI infrastructure
Quote: "General partners Martin Casado and Raghu Raghuram will lead the new strategy."

Raghu Raghuram

Description: General Partner at a16z
Why mentioned: Co-leading the Machine Age Fund alongside Casado
Quote: "General partners Martin Casado and Raghu Raghuram will lead the new strategy."

Nick Rescigno

Description: PitchBook fund strategies analyst
Why mentioned: Provided analytical context on the physical AI hardware investment shift
Quote: "Advances in physical AI are making hardware capable of things that weren't achievable a few years ago."

Cory Markling

Description: Partner and Head of Private Equity Deal Services at EisnerAmper
Why mentioned: Key expert voice on PE's move into trades and data center-adjacent construction
Quote: "We think there's going to be a lot of interest around equipment recycling, directional boring, fiber optics, electrical engineering... If you think about where we are in the ball game of data centers, we're in the first inning, maybe second inning."

Jacob Robbins

Description: Technology Reporter, PitchBook
Why mentioned: Author of the a16z Machine Age Fund story

Esther Luz

Description: Private Equity Reporter, PitchBook
Why mentioned: Author of the PE-into-trades story

5. Operating Insights

Insight 1: Specialty Contractors Serving Data Centers Should Be Actively Consolidating or Raising Now

The PE deal surge into HVAC, electrical, and engineering contractors is accelerating faster than most operators realize. HVAC alone saw more PE deals in H1 2026 than all of 2025. Operators in these trades have a narrow window before multiples rise further and the best PE partners are committed elsewhere.

"HVAC contractors logged 76 PE deals worth $3.8 billion in the first half of 2026, already surpassing the 63 deals completed in all of 2025."

Insight 2: AI Hardware Startups Should Position Toward Defense and Infrastructure, Not Consumer, to Access Institutional VC Capital

a16z's hardware bets are concentrated in defense (Anduril, Shield AI, Skydio) and core AI infrastructure (Nexthop AI). Hardware founders seeking large checks should orient their narrative and customer traction toward these segments, as that is where the largest, most committed institutional capital is flowing.

"The firm's AI hardware and infrastructure checks have mostly concentrated in defense, a portfolio that includes Anduril, Shield AI and Skydio."

Insight 3: Data Center Backlog Is a Leading Indicator to Watch

An 11-month average backlog for data center contractors versus 8.5 months for all others is a concrete, trackable signal of sustained demand. Entrepreneurs building in adjacent sectors (energy management, materials, workforce software) can use contractor backlog as a proxy for long-term pipeline.

"Those working in data centers carry an average backlog of 11 months, versus 8.5 months for everyone else."

6. Overlooked Insights

Insight 1: Sweden Is Quietly Becoming a Self-Reinforcing AI Startup Ecosystem

The Spotify alumni flywheel is now repeating with the current generation of AI startups. Employees from Lovable and Legora are already founding new companies — a compounding talent and founder network effect that makes Sweden a disproportionate source of European AI deal flow worth watching.

"Employees leaving hot startups like Lovable and Legora are already founding new companies, a historical repeat of Spotify alumni driving the current wave."

Insight 2: Private Market Returns Have Broadly Cooled — But VC Is the Exception, Not the Rule

The chart-of-the-day note buries a significant asset allocation signal: across the board, private market returns have cooled versus the prior two decades. Real estate is the clearest laggard. This context matters for LP allocation decisions and for founders thinking about which pools of capital are actively seeking deployment.

"Private market returns have cooled across the board compared with the past two decades. Real estate has lagged clearly over the past two years, while VC led all strategies in 2025 as an AI-fueled rebound in valuations drove returns higher."