Tech Memo interview: Talking 'atoms' and 'bits' with Eclipse's Joe Fath

Travis Kalanick, the founder of Uber, is making a noteworthy return to the tech scene with his latest venture, Atoms. This startup is set to revolutionize various sectors including manufacturing, logistics, mining, and robotics. Kalanick isn't alone in this pursuit; industry titan Jeff Bezos is also exploring similar opportunities in the physical realm. But what drives the shift from digital 'bits' to tangible 'atoms'? I spoke with Joe Fath from Eclipse, a venture capital firm investing in these challenging physical assets. Fath, who previously collaborated with Henry Ellenbogen at T. Rowe Price, shared insights into the evolving investment landscape. Traditionally, businesses focused on software and the internet required significantly less capital to achieve profitability, allowing for quicker returns. In contrast, sectors dependent on physical goods often faced uncertainty in achieving what investors call 'escape velocity'—the point at which a company can sustain itself without ongoing funding. However, this is rapidly changing. The acceleration of artificial intelligence is a key factor behind this transformation. AI is enhancing digital operations, particularly in white-collar jobs, as advancements in large language models (LLMs) unfold. Furthermore, these capabilities are beginning to bridge into the physical world, digitizing traditionally analog environments through innovations like video, language, and action models. For the first time, AI is rendering physical industries more programmable, which could lead to faster scaling with reduced capital and labor requirements. Fath notes a crucial shift in perception: while AI is generating an abundance of digital content, the inherent complexities of physical products may preserve their value. He concurs with the perspective that while Marc Andreessen famously claimed, 'Software is eating the world,' AI is now consuming software. This shift is contributing to mounting pressure on software as a service (SaaS) companies, especially in public markets. In sectors like manufacturing, logistics, energy, and defense, AI serves as a powerful ally, streamlining operations and improving returns without fully replacing the need for human involvement. Fath emphasizes that despite AI's transformative impact, the requirement for physical construction and operational management remains paramount. Eclipse is witnessing this transitional dynamic across its portfolio, with companies such as Wayve, Anduril, True Anomaly, and Redwood Materials demonstrating the potential of this approach. The firm continues to explore investment opportunities in general-purpose robotics, defense technology, next-generation manufacturing, and more. However, Fath cautions that the journey in physical industries is fraught with challenges. Scaling operations is notably complex, and even with AI's assistance, finding skilled workers remains a significant hurdle. The need for substantial capital investment adds another layer of difficulty, particularly as more entrepreneurs enter this competitive space. As the landscape evolves, Fath acknowledges the importance of strategic capital allocation, emphasizing the need to support resilient, high-impact ideas led by exceptional founders. The interplay between AI and geopolitical factors is also a consideration; improvements in international relations could slow the push for re-shoring and digital transformation in physical industries, leading to a potential return to lower-cost production overseas. The conversation with Fath underscores a pivotal moment in the intersection of AI and physical industries, revealing both the opportunities and challenges that lie ahead in this new frontier.