American hardtech venture is finally being taken seriously. Deep tech funds are outperforming conventional VC. The opportunity is real, and it’s being funded the way it should be, by investors who bear the cost of being wrong.
But there’s an elephant in this room, and it isn’t a coastal fund getting into the game without the capital, infrastructure, or institutional knowledge to truly back physical technology. It’s a structurally different kind of competitor entering the exact same categories—quantum, physical AI, hardtech, humanoids—that doesn’t play by the rules that make venture capital work in the first place.
GOVERNMENT-FUNDED INVESTMENTS
Last year, Chinese data provider Zerone reported that 90% of committed capital in China’s private equity market came from state-affiliated investors, up from about 79% in 2021. The shift reflects a clear priority from Beijing. China’s president, Xi Jinping, has repeatedly called on financial capital to “invest early, invest small, invest for the long term, and invest in hard technology,” a directive now reflected in China’s national investment strategy.
This is not “government money in venture capital,” which is neither new nor inherently distortive. The United States has run public venture capital for decades with programs like SBIC and In-Q-Tel, which has spent 25 years proving a government-linked investor can operate as a market facilitator rather than a market maker, co-investing alongside private capital instead of replacing it.
By comparison, OECD data shows government-affiliated investors participate in no more than 3% of all VC deals in the United States, and 11% across Europe. China’s 90% isn’t a bigger version of the same thing. It’s a different thing.
CREATIVE DESTRUCTION
Here’s why that distinction matters more than the raw dollar figures.
Venture capital works because it is disciplined by loss. Roughly two-thirds of all early-stage VC investments lose money. The industry survives that failure rate because the winners return enough to cover it and because losing is expensive enough that capital only goes to ideas that can plausibly clear a real bar. Professional VC funds, for all the money sloshing through the system, still invest in only about 0.2% of new U.S. businesses. That selectivity is the entire mechanism.
The term “creative destruction” coined by economist Joseph Schumpeter is an essential fact of capitalism and functioning markets. It is not a side effect to minimize, but the process that works. The failures are how the system finds out what’s real.
What happens when a fund doesn’t have to answer to that discipline? Or when the same institution supplying the capital can also extend the runway indefinitely, or become the customer through preferential procurement, or reprice the next round itself?
We’ve already run this experiment once. In Japan through the 1990s and 2000s, banks kept insolvent firms alive rather than recognize their losses. By 2002, roughly 30% of firms were on life support, holding 15% of all assets. That congestion suppressed entry of the more productive firms that should have replaced them and led to decades of stagnation.
A partner at Ivy Capital told Reuters in June that the current climate around funding for Beijing’s “future industries” push was a “level of frenzy…I have never seen in my entire career.” The same reporting described a company founded just three months earlier pitching investors on a valuation more than 30 times its current level on the strength of government backing rather than a demonstrated product.
The categories where this is happening fastest are the ones that matter most. China’s robotics sector raised more capital from January through mid-May 2026 than in all of 2025 ($5.6 billion versus $4.3 billion). Quantum computing funding in the first three months of 2026 exceeded the full 2025 year’s total. These aren’t peripheral bets, but the frontier technologies that will define the next decade of innovation. They are being funded at a pace and with a risk tolerance no market-disciplined investor would rationally match.
This is already showing up as policy. The U.S. recently banned imports of foreign-made humanoid and quadruped robots, citing documented cybersecurity exploits and supply-chain risk. The European Union signaled it intends to extend the same security-and-data logic that it applied to Chinese EVs to autonomous vehicles. They are recognizing that market share built through capital that never had to answer to loss is a different kind of dominance than one earned by surviving the two-thirds failure rate that discipline demands.
So what do we do with that? Not match it. You cannot out-subsidize a state. Trying only import bans and tariffs creates similar distortion.
THE CASE FOR HARDTECH
The U.S. answer should be the quality of what survives: technologies vetted by real customers, tested against real manufacturing constraints, and disciplined by investors who bear the cost of being wrong. This is why the rush of new money into American hardtech matters, but also why it isn’t enough.
Hardtech companies need somewhere to build. They need engineers, equipment, and specialized infrastructure to iterate. They also need customers willing to test something that hasn’t existed before. They need manufacturers that can turn a prototype into a repeatable product. And they need capital structured around the longer, messier path from invention to commercial scale.
The physical AI moment is a test of whether the system that rewards technology with capital can keep doing that faster than the system that doesn’t have to.
Haven Allen is CEO and cofounder of mHUB and managing partner of mHUB Ventures.
