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    The case that Silicon Valley’s financial incentives pull it back toward software

    A post argues that investors’ expectations of high margins and quick exits make factories harder to fund than software.

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    TLDR

    A post argues that Silicon Valley’s attempts to fund American manufacturing run into investors’ expectations of software-like returns. It points to a16z’s American Dynamism push and AI-branded industrial companies, warning that hardware businesses valued like tech firms may struggle to deliver comparable cash flows. The writer presents Musk’s storytelling and SpaceX’s government customers as a rare route to financing physical businesses.

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    2 Sources, first seen 7h ago

    Combined views

    5.1K

    2 Sources, first seen 7h ago

    46 likes
    7h ago
    first seen 7h ago
    46 likes
    18 comments
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    18 comments
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    2 Sources

    @Nicolas_Colin🇺🇸 I've been wondering why Silicon Valley keeps falling back on software after trying at least twice to reindustrialize America. The answer, I believe, is the cost of capital in a financialized economy. In today's America, return-hungry investors have calibrated their expectations on tech: gross margins above 80%, near-zero marginal cost, light balance sheets, and exits within 5-7 years. By contrast, manufacturing comes with heavy upfront capex, long lead times, inventory risk, and gross margins that tend to sit at 15-20%. With hurdle rates of 25-30%, a factory rarely clears the bar. As a result, capital flows to software, financial assets, and buybacks. 🏗️ The first attempt to reindustrialize began in April 2020, when Marc Andreessen published "IT'S TIME TO BUILD", blaming America's shortages of masks, ventilators, and housing on a failure to build. By 2022, a16z had turned the essay into its American Dynamism practice, calling on Silicon Valley to fund defense, aerospace, supply chains, and advanced manufacturing. At this point, I assume many LPs wanted to know where the margins were, and why a VC fund was considering paying for machine tools and test ranges. 🤖 The second attempt came with the blessing that was generative AI. The same industrial companies could now present themselves as AI-native robotics, autonomous defense, or smart factories, legitimately priced at tech multiples. Some raised at 30 to 50x revenue. The problem is, this might create a valuation problem down the road. Hardware costs fall along Wright's Law through cumulative production over many years. But a company priced like tech has to deliver tech-like cash flows to grow into its valuation. If it can't, down rounds and recapitalizations are bound to follow. I think Silicon Valley is already seeing the writing on the wall. As it rediscovers permitting delays, supply chain bottlenecks, and thin margins, the pitch is gradually moving back to code and the "agentic economy." A company such as Instinct has nothing to do with reindustrialization. The irony, of course, is that code still runs on atoms. Agents need GPUs, data centers, transformers, and gigawatts of power. Hyperscalers spend hundreds of billions a year on infrastructure, far ahead of what AI software earns. Investors expect software returns from something that increasingly resembles a utility buildout. I conclude that past a certain level of financialization, private capital markets alone struggle to reindustrialize a country. Hurdle rates are too high and horizons too short. As a result, building physical businesses requires a speculative narrative for private investors or the government as a buyer (or both). And because the plane can't really land from a purely financial perspective, physical ambitions tend to drift back towards software stories. Meanwhile, Elon Musk stands as the rare exception of a CEO persisting in the narrative of building tangible things. 🚗 Back in 2021, I argued that Tesla was a car manufacturer whose returns to scale could only go so far. Musk knew it perfectly, so he bet on the narrative: the market for electric cars would grow exponentially and Tesla would lead it. His storytelling became a pillar of Tesla's valuation, giving a mere carmaker access to capital at tech multiples. (That was before the rise of BYD and the demise of Tesla as the leading EV builder in the world.) 🏛️ Then he went after the government as a buyer. He bought Twitter in 2022, turned it into X, and used it to enter the political arena, all the way to his stint in the Trump administration in 2025. The goal clearly was a closer relationship with Washington. 🚀 Now his attention has shifted to SpaceX, which combines all three ingredients: reindustrialization powered by AI (rockets, Starlink, and now xAI), a speculative narrative (Mars), and the government as anchor customer (NASA and the Pentagon). Musk is (too) often praised as an industrialist or a first-principles manager. I think his main quality will prove to be his absolute lucidity about the state of financial markets in America./.8h
    @timoreillyRT @Nicolas_Colin: 🇺🇸 I've been wondering why Silicon Valley keeps falling back on software after trying at least twice to reindustrialize…2h

    2 Sources

    @Nicolas_Colin🇺🇸 I've been wondering why Silicon Valley keeps falling back on software after trying at least twice to reindustrialize America. The answer, I believe, is the cost of capital in a financialized economy. In today's America, return-hungry investors have calibrated their expectations on tech: gross margins above 80%, near-zero marginal cost, light balance sheets, and exits within 5-7 years. By contrast, manufacturing comes with heavy upfront capex, long lead times, inventory risk, and gross margins that tend to sit at 15-20%. With hurdle rates of 25-30%, a factory rarely clears the bar. As a result, capital flows to software, financial assets, and buybacks. 🏗️ The first attempt to reindustrialize began in April 2020, when Marc Andreessen published "IT'S TIME TO BUILD", blaming America's shortages of masks, ventilators, and housing on a failure to build. By 2022, a16z had turned the essay into its American Dynamism practice, calling on Silicon Valley to fund defense, aerospace, supply chains, and advanced manufacturing. At this point, I assume many LPs wanted to know where the margins were, and why a VC fund was considering paying for machine tools and test ranges. 🤖 The second attempt came with the blessing that was generative AI. The same industrial companies could now present themselves as AI-native robotics, autonomous defense, or smart factories, legitimately priced at tech multiples. Some raised at 30 to 50x revenue. The problem is, this might create a valuation problem down the road. Hardware costs fall along Wright's Law through cumulative production over many years. But a company priced like tech has to deliver tech-like cash flows to grow into its valuation. If it can't, down rounds and recapitalizations are bound to follow. I think Silicon Valley is already seeing the writing on the wall. As it rediscovers permitting delays, supply chain bottlenecks, and thin margins, the pitch is gradually moving back to code and the "agentic economy." A company such as Instinct has nothing to do with reindustrialization. The irony, of course, is that code still runs on atoms. Agents need GPUs, data centers, transformers, and gigawatts of power. Hyperscalers spend hundreds of billions a year on infrastructure, far ahead of what AI software earns. Investors expect software returns from something that increasingly resembles a utility buildout. I conclude that past a certain level of financialization, private capital markets alone struggle to reindustrialize a country. Hurdle rates are too high and horizons too short. As a result, building physical businesses requires a speculative narrative for private investors or the government as a buyer (or both). And because the plane can't really land from a purely financial perspective, physical ambitions tend to drift back towards software stories. Meanwhile, Elon Musk stands as the rare exception of a CEO persisting in the narrative of building tangible things. 🚗 Back in 2021, I argued that Tesla was a car manufacturer whose returns to scale could only go so far. Musk knew it perfectly, so he bet on the narrative: the market for electric cars would grow exponentially and Tesla would lead it. His storytelling became a pillar of Tesla's valuation, giving a mere carmaker access to capital at tech multiples. (That was before the rise of BYD and the demise of Tesla as the leading EV builder in the world.) 🏛️ Then he went after the government as a buyer. He bought Twitter in 2022, turned it into X, and used it to enter the political arena, all the way to his stint in the Trump administration in 2025. The goal clearly was a closer relationship with Washington. 🚀 Now his attention has shifted to SpaceX, which combines all three ingredients: reindustrialization powered by AI (rockets, Starlink, and now xAI), a speculative narrative (Mars), and the government as anchor customer (NASA and the Pentagon). Musk is (too) often praised as an industrialist or a first-principles manager. I think his main quality will prove to be his absolute lucidity about the state of financial markets in America./.8h
    @timoreillyRT @Nicolas_Colin: 🇺🇸 I've been wondering why Silicon Valley keeps falling back on software after trying at least twice to reindustrialize…2h