Why Venture Is Shifting Toward Physical Production
How AI and Automation Are Opening New Doors for Venture in Manufacturing and Physical Industries
For years, venture capital has mostly focused on digital businesses — companies built on software that scales instantly through a web browser. Think of the giants like Facebook or OpenAI. Their growth relies on speed, low distribution costs, and fast feedback loops.
But this focus has overlooked a massive opportunity: the physical world.
Industries like manufacturing, construction, chemicals, and logistics still rely on outdated systems. U.S. manufacturing alone is worth $2.5 trillion. Even capturing a small slice of that market offers true venture-scale returns.
What’s Been Holding Venture Back?
Investors have traditionally avoided deep tech in physical production. Why? Hardware took too long to build, was expensive to maintain, and required complex customer integrations. Many investors still remember failed bets in hardware that never scaled.
But 2025 is different. A major shift is underway.
AI has made it cheaper and faster to deploy powerful software into factories and supply chains. Tasks that used to need teams of engineers can now be handled by AI that configures itself. What used to take months now happens in days.
This transformation is flipping the math — and creating a new venture opportunity.
What Sets the Winners Apart
At CloudNC, where we build AI to speed up CNC machining, we’ve found that successful startups in this space all meet four key criteria:
- A serious, urgent problem: Customers must already be spending money to fix a pain point. If it’s not keeping executives up at night, it’s not urgent enough.
- A large, fragmented market: You don’t need to dominate the entire industry to build a big company. In the U.S. alone, there are thousands of precision-machining shops.
- Simple setup: The product must be easy to use. Today’s AI can self-integrate into existing factory software. At CloudNC, we designed our tools to plug directly into systems shops already use.
- A strong competitive edge: Whether it’s proprietary data, years of R&D, or regulatory advantages, winning companies build deep moats. At CloudNC, our AI is trained on data we had to gather ourselves, over years of factory work.
Meet all four, and you’ve got a rare thing: a software-like product that drives real-world results — and is very hard to copy.
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How Venture Can Win in Precision Machining
Take precision machining as an example. One aerospace part might need thousands of lines of code, traditionally written by hand. Our AI tool, CAM Assist, writes those instructions automatically. It turns days of work into minutes and unlocks millions in machine capacity for each plant.
Other sectors — from composite manufacturing to wastewater testing — are seeing similar gains. What used to be “too complex” for software is now being transformed by AI.
The model is clear: Find a common problem that’s been ignored. Fully digitize it. Let AI handle the messy details. Suddenly, what looks like a hardware company on the outside behaves like a software company on the books — with high margins and faster sales cycles.
Why This Is the Right Time for Venture
AI solutions are cheaper than ever to build. At the same time, Western governments are investing heavily in reshoring and modernizing manufacturing. In some cases, early adopters are getting paid to upgrade.
Yet few VCs are exploring this space. Many lack the knowledge to evaluate factory-focused startups. Others still prefer familiar SaaS models. This creates an edge for investors willing to learn the details — from machine utilization to industrial protocols.
If your venture thesis only looks at the digital world, you could miss the next Tesla-level opportunity. Yes, deep tech in the physical world requires more homework — but that effort creates a barrier to entry.
Work with experts from industry. Back founders with real-world experience. Understand the supply chain. The firms that do will claim high-potential markets long before others catch on.
The internet transformed how we handle information. Now AI is transforming how we control physical production. Founders who shorten months-long tasks to minutes will define the next decade of venture success.