Venture capital backs unlikely horse in 2018 — hardware

There are few things venture capital firms fear more than hardware startups. Any business that requires a significant initial capital outlay to get spun up and running efficiently will usually put off most VC’s. Why invest your money in something that’s risky, requires a boatload of funding up front and may be replaced or dominated by the big players and pushed out of the market?

Apps or services are much cheaper to fail quickly with…

Nowhere has that reticence been more true in recent years than computer chips. Why would a venture capitalist stake his or her claim on a computer chip manufacturer that’s expected to compete with Intel — the blue behemoth that controls 80 percent of the personal computer market? Even in nascent markets (by albeit dated computer hardware standards, but still) like mobile chip manufacturing, monsters like Qualcomm and Nvidia are ready to elbow new entrants out of the market at the first sign of insurgence.

But in the last year, something changed. A big something.

As it turns out, artificial intelligence (A.I.) requires a different kind of chip and chip architecture to work most effectively. While the big players like Google, Microsoft, Facebook, and yes, Intel and Nvidia have significant resource advantages over a startup entrant, their technological prowess might not account for much considering the winning player in this space may have to invent the winning technology from scratch anyway.

The altered market conditions and unique opportunity have spurned real investment in the space over the last year:

“Today, at least 45 start-ups are working on chips that can power tasks like speech and self-driving cars, and at least five of them have raised more than $100 million from investors,” Cade Metz reported in The New York Times. “Venture capitalists invested more than $1.5 billion in chip start-ups last year, nearly doubling the investments made two years ago, according to the research firm CB Insights.”

Despite the historical barriers to entry, investors are eagerly eyeing the A.I. market opening, placing bets on upstarts that could either upend the industry, find a highly profitable niche, or get acquired for a healthy return on investment.

“Because it’s a new market — and because there is such hunger for this new kind of processing power — many believe this is one of those rare opportunities when start-ups have a chance against entrenched giants,” Metz concluded.

It’s not just the chips that have to change, though — yes, the chips are being rebuilt, but the way the chips communicate and how information is shuttled throughout the system have to evolve and improve too:

“…in addition to building chips specifically for neural networks, start-ups are rethinking the hardware that surrounds them…” Metz said. His article goes on to quote Bill Coughran who “helped oversee the global infrastructure at Google for several years and is now a partner at Sequoia, the Silicon Valley venture capital firm”:

“Machine learning and A.I. has reopened questions around how to build computers… This is not just about building chips but looking at how these chips are connected together and how they talk to the rest of the system.”

His belief is so strong, his VC firm just invested in “Graphcore, a British start-up that recently joined the $100 million club.”

All this is to say that artificial intelligence is opening up new doors all over the place, not just in how we do things or what computers can do, but also in how we can make money via investments.

Most of these startups probably won’t succeed — but that’s ok! Because as Metz put it in the NYT, “The explosion [in investment] is akin to the sudden proliferation of PC and hard-drive makers in the 1980s. While these are small companies, and not all will survive, they have the power to fuel a period of rapid technological change.”

That means that regardless of what happens to each individual startup, we the consumers and enterprises of the world will reap the proverbial A.I. whirlwind for decades to come because of what’s happening in the hardware scene today. And thankfully, some forward-thinking VC’s are putting their money where the market is.