Bits and Atoms Mastery – Both Needed
Venture Capitalists are hungry for more innovative startups in the Artificial Intelligence space, investing heavily. The funding for hardware...? Not so much. And yet reinventing our physical world is sorely needed.
How come?
Rich Karlgaard dives into this disconnect and pleads for a new balance: one in which both software and hardware thrive.
The time to start is now. Enjoy.
By Elke Boogert, Mach49 Managing Editor
Bits and Atoms Mastery – Both Needed
By Rich Karlgaard , Forbes Futurist and Editor
Toxic political divisions are seen everywhere in the world today. But rest easy. We are not going there today! Here is another divide. It shapes how nations and large companies invest in their future. This divide is between?bits?and?atoms.?Think of it as software and the hardware. Code writing and metal bending. Venus and Mars.
This stark divide is understood when you look at public companies ranked by market cap. Apple, Nvidia and Microsoft top the list, then Amazon, Google and Meta.
Amazon's retail operation is physical – think of distribution centers and trucks – but AMZN’s $1.9 trillion value is mostly in software (Amazon Web Services). Even the world’s richest-valued hardware company, TSMC, exists by powering software.
In venture capital, bits crush atoms
Venture investing goes overwhelmingly to software companies, including AI. Much less goes to reinventing the physical world, even where reinvention is badly needed: Carbon capture, modular nuclear, solar film coating, feeding and housing the world’s 8 billion, and so on. The reason is simple.
Imagine you’re a venture capitalist, betting the money of limited partners. Or you run a corporate VC unit, earmarking precious cash flow for riskier ventures. Here’s your choice.
You can make 50 investments in software startups to prove if they work or not, and scale or not, all within a few years.
Or you can make five investments in cutting edge materials, new energy sources, 3D construction for skyscrapers, a new electrical grid, and supersonic travel. It will take 10 years to know if they work. And decades of scaling to reach profitability.
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Sounds like a no-brainer for bits over atoms. But in fact, the best performing countries and companies in the future will have mastered both.
Remaining lopsided will exact a high price
China is lopsided. It has decided to bet on atoms. Result: It now has 90 million unoccupied new apartment units – that’s a lot atoms gone to waste. In his 2025 plan, President Xi embraced technology investment, even as he shunned bitsy consumer software beloved by westerners. President Xi wants China’s top minds working on hard tech: military uses chief among them. Whether President Xi can get his brilliant tech minds to?innovate?remains to be seen.
Robust future national economies and large companies will be allocating capital to?both?bits and atoms. In a world where free trade is losing support, the classic idea of comparative advantage – focus on what you do best and trade for the rest – won’t work as well. In the future, you can’t afford to be lousy in anything that touches your business.
Another imbalance
Germany and Japan, the exemplars of complex manufacturing, have attained mastery over atoms. Their factories are world class. Their grasp of bits, alas, is not as strong. Germany’s best known software company, SAP, was founded 52 years ago. Today, much of SAP’s software development is done not in Germany but in California. The imbalance of Germany and Japan’s economies has been costly. Both are stuck in a slow growth mode. Their lopsided dependence on atoms is holding them back. This imbalance directly contributes to their relative lack of venture-capital and fast-growth startups.?
America’s most populous state is an extreme example of bits-atoms imbalance. California’s software, venture capital and startup ecosystem leads the world. But its roads are cracked and its public transportation system barely exists. A recent public investment of almost $100 billion in high-speed rail produced less than one mile of track. California would be better off if its atoms abilities caught up to its bits excellence. California needs to re-learn how to build.
The same idea of bits-atoms balance applies to large companies. The richest bits companies will find their future health requires atoms mastery. Data centers have to be constructed. Electricity has to be generated and transmitted. Neither can be white-boarded into existence. Microsoft and AWS are even now hiring nuclear physicists and engineers to design small modular reactors and perhaps unlock fusion’s potential. Smart of them.
And if they don’t adopt a bits-style growth mindset, their R&D investments will be money pits. They will sadly depend on investment bankers and M&A teams to find “growth.”
Countries and companies that thrive tomorrow will have mastered excelling in both bits and atoms. No country or company can count on frictionless global trade to make up for their bits-atoms imbalance.
Rich Karlgaard was the Forbes publisher from 1998 to 2018. He is now the publication’s editor-at-large, global futurist, and columnist for Forbes Asia.