Silicon Valley’s roots are at the intersection of atoms and bits – an area that’s taken a backseat in recent years amidst the rapid ascension of the software industry. Looking to the future, we’re bullish about the potential for subscription hardware businesses to solve some of humanity’s most pressing problems in healthcare, climate, and beyond.
The birth of microchips, Moore’s Law, and the Silicon Valley innovation machine
Six decades ago, in the summer of 1957, a band of scientists and engineers dubbed the “Traitorous Eight” defected from their employer to establish their own startup, Fairchild Semiconductor Corporation. The startup identified a new kind of silicon transistor, and the invention was particularly timely in the midst of national urgency to recoup a loss of technology leadership to the Soviet Union, with military contractors engaging in crash programs to improve the reliability of aerospace electronic systems.
Fairchild was arguably the first technology company on the West Coast to receive a new form of finance, originally called “adventure capital,” and its quick ascent to becoming the largest producer of performance silicon transistors in the United States helped establish the Valley’s preeminence and pave the way for other innovators. Fairchild made history not only for their success, but also for their foresight in recognizing key principles driving innovation in computing, including “Moore’s Law,” which states that the speed and capability of computers can be expected to double every two years, as a result of increases in the number of transistors a microchip can contain.
Like Fairchild, the technology companies that defined the early days of Silicon Valley innovated at the intersection of “atoms” (hardware) and “bits” (software), a paradigm famously dubbed by MIT Media Lab co-founder Nicholas Negroponte. Businesses like Intel, Apple and NVIDIA solved hard scientific problems and made strides that fundamentally changed the world of technology.
However, in recent years, thanks largely to the availability of cheap, elastic cloud compute resources, we have seen a move away from this type of innovation in favor of a one-directional shift from atoms to bits–towards digitization and software-only businesses. Many of our peer venture funds focus only on software investing and the list of unicorn (billion-dollar private market valuation) companies leans strongly toward software-only businesses, and for good reason. Software businesses have the potential to be infinitely scalable, have high gross margins, and more granularly align price and value.
But we believe that over the next few years we may see a rekindling of the valley’s origin story, bringing the power of data and computation to the physical world.
Four innovation areas at the heart of the atoms and bits renaissance
Back in 2015, we were lucky to be one of the early investors in WHOOP, a Boston-based company that makes a wrist-worn health and fitness tracker. Among WHOOP’s many innovations was a fundamentally new business model for a consumer hardware business–charging a software subscription. We saw firsthand their transition from a one-time purchase consumer hardware company to a subscription software business. It provided a new template for how smart hardware companies can seek to monetize, and inspired a new set of atoms plus bits innovators.
Today, a number of emerging startups have formed that similarly combine innovations in atoms and bits. Many of these charge end users a software subscription or give them the ability to pay over time. They range from health and fitness (Oura, Eight Sleep, and Mirror) to gaming (Backbone) to physical security (Flock Safety, Verkada, Latch) and even to life sciences (Opentrons). We are particularly excited by subscription hardware businesses because, like their SaaS peers, they have the potential to more granularly align price to value. The connected software component allows them to have an ongoing relationship with the end consumer, increasing potential customer lifetime value and continuously gaining feedback to iterate on the product.
But what we love most about these businesses is that they have the potential to tackle some of humanity’s most pressing problems in healthcare, climate, and beyond. Take for example how innovation at the intersection of atoms and bits could unlock significant strides for precision medicine, where the combination of sequencing genomes and improving how data is gathered and applied could accelerate getting cures into the hands of patients. Or how use cases in quantum computing could help us avert climate disaster and accelerate the journey to net zero, such as smarter battery design solving for major challenges around energy density, safety, charge time, use of rare or conflict minerals, and more.
We expect the atoms and bits renaissance to make its mark through its commitment to solving some of the biggest problems of our time.
So what has led to this renaissance, and where will it take us? We’re eyeing the convergence of four broad innovation areas:
Computing | First and foremost, the same computing innovations that have led to software-only innovations have similarly benefitted smart hardware businesses. Elastic storage and compute resources from the major cloud providers have given these devices a level of connectivity never seen before. Now, companies can charge for software features in addition to just hardware, providing over-the-air updates and maintaining a relationship with the end consumer post-purchase. Additionally, Moore’s Law has enabled cheaper and better cameras and sensors, bringing the performance and price point of these devices to the mass market.
Algorithms | Many of these products utilize machine learning to provide analysis and automation leveraging user data. This would not be possible without the machine learning and data infrastructure innovation of the past decade and the fact that many of these algorithms are now free and open source. These include, but are not limited, to tools like Pytorch, sklearn, Tensorflow, and Caffe.
Logistics | Global supply chain issues have been made much worse by the COVID-19 pandemic, making it all the more important for atoms and bits innovators to solve for an increasingly complex, fragmented system. The last wave of innovation made it possible for a US-based startup to do business with a contract manufacturer halfway around the world, or for users to go from purchasing a product online to having it at their doorstep within a week with the ability to easily return that device if they aren’t satisfied. Not to mention the bevy of eCommerce tools like Shopify that enable merchants to spin up a web store in just a few clicks. The next set of innovators will help overcome current issues across the design, planning and execution of global supply chain management.
Financial infrastructure | Last but not least, the cheap debt capital environment of the past decade has been hugely helpful to startups looking for non-dilutive means of financing inventory. Moreover, a number of payments infrastructure innovations have also made it easier than ever to pay vendors, offer subscription billing options, and access working capital.
Paving the path for a new generation of category-defining businesses
At Two Sigma Ventures, we’re excited about supporting atoms and bits founders who apply their inventiveness towards championing progress–not just in terms of business success, but in the impact they make on the world. To learn more about the not-so-distant future of the atoms and bits renaissance, spend time with our startups who are working on actively creating it:
- WHOOP develops wearable technology that enables athletes, trainers, and coaches to optimize performance based on heart rate and movement data. Information collected from the WHOOP wristband records physiological indicators including heart rate variability, resting heart rate during sleep, and other measures that become the basis for actionable insights into how much exertion and recovery will lead to optimal performance.
- Formlogic is building towards the more efficient, and eventually automated, production of parts over time. Formlogic provides precision machining as a service to customers who need complex parts for their end products, and equips their machines with third-party sensors to capture data as parts are produced. Their core innovation is their “virtualization technology,” which enables specialist engineers to plan production remotely and execute the job in an autonomous factory.
- Supply chain setbacks impact all of us, especially small businesses that tend to bear the brunt of disruptions. Tive re-imagines supply chain visibility with sensor-driven awareness and analysis tools for in-transit goods.
- Home security is made smarter by Canary, who brings smart technology and enhanced features to home security, combining camera and microphone technology with extra sensors for carbon monoxide, temperature, humidity, and acceleration.
We are excited to make more bets in this category and to continue to support the brave entrepreneurs aiming to innovate at this intersection. Additionally, we are also excited to continue to support next-gen infrastructure providers. These include, but are not limited to startups seeking to modernize the supply chain, improve both b2b and b2c eCommerce experiences, and make it easier to build and deploy machine learning algorithms.