War and rising nationalism are likely to trigger a venture capital boom in a sector once taboo in Silicon Valley: defense technology.

The wars in Ukraine and Israel have prompted venture capitalists to open their pockets for so-called defense technology, that is, equipment and systems used to defend national interests, according to a report by AIN Ventures. Between 2021 and 2023, investors poured $108 billion into defense technology companies that WashingtonPost was reported in February citing PitchBook data.

For years, private equity and venture capital firms have been making big money investing in software. Video conferencing service Zoom, corporate workplace messaging service Slack and mortgage software maker Ellie Mae are just a few examples of companies that have delivered huge returns to investors through IPOs or acquisitions.

But the rush to fund software startups will eventually subside, warned Jenny Xiao, partner at Leonis Capital, during a panel discussion on July 17 at Fortunes Brainstorm Tech Conference in Park City, Utah. The reason: AI will reduce the cost of creating software to almost zero, making it a difficult business to make money in because of the competition, she said.

“Software will not be such a good business in the next 20 or 30 years. Mainly because of AI – because AI makes it so easy to develop software,” Xiao predicted.

Instead, hardware, a sector that is something of an ugly duckling in the technology industry due to the high costs of starting up and manufacturing, will undergo a metamorphosis, she argued. That’s why defense technology is a good investment. “You almost always have to have some kind of hardware and some kind of hard technology,” Xiao said.

Of course, defense technology is not a new sector, as startups have played a major role in developing new defense technologies for more than 20 years, according to consulting firm McKinsey in a February report. Moreover, a few technology companies are already making a splash in defense technology, including aerospace company SpaceX, data mining company Palantir and defense technology startup Anduril.

In fact, venture capital funding for defense technologies fluctuates significantly from year to year. A large funding round for a handful of startups can lead to huge swings in industry-wide investment numbers over time.

For example, according to Crunchbase, venture capital investment in defense startups was down 62% by mid-May this year compared to the same time in 2023. Much of the decline was due to large funding rounds last year for robot maker Gecko Robotics, defense startup Shield AI and aerospace company True Anomaly.

Marcus Ryu, partner at Battery Ventures, agreed that technology sectors outside of software are likely to do well in the coming years. “There’s a general awareness that there can be value creation for companies in areas other than SaaS software, which is a good thing,” he said, referring to cloud-based software that has dominated venture capital investing over the past decade.

Nathan Poon, co-founder and CEO of medical drone delivery service Avol Aerospace, predicted that the strained relationship between the U.S. and China could be a boon for some companies. He expects the U.S. government to crack down on products made in China and U.S. companies that rely on Chinese components, just as the federal government has already done with high-end semiconductors. “We’re going to see a lot of domestic drone companies based in the U.S. become extremely profitable,” Poon said.

Currently, military conflicts like the war in Ukraine can also serve as a testing ground for the technologies companies are developing, Poon said. Companies don’t have to pay pilots, they can “just send drones to Ukraine to test the latest firmware,” he said, referring to the software embedded in the drone hardware.

Panelists also discussed the rise of U.S. nationalism and growing conservatism in Silicon Valley. Earlier this month, former President Donald Trump officially accepted the Republican presidential nomination at the Republican National Convention and chose Senator JD Vance (R-Ohio) as his running mate. Vance is a former venture capitalist who worked at Peter Thiel’s Mithril Capital and Steve Case’s Revolution before starting his own investment firm.

Until recently, many technology companies avoided working with the U.S. government on defense technology. In 2018, Google decided not to renew a contract with the Pentagon for technology that could be used for lethal purposes after Google employees raised objections.

Recently, however, that aversion has changed. Leonis Capital’s Xiao noted a global trend toward conservatism that has made working on and investing in defense-related startups more popular. The shift in thinking is reflected in part in Silicon Valley billionaires increasingly supporting conservative candidates. Earlier this month, Ben Horowitz and Marc Andreessen, co-founders of venture capital firm Andreessen Horowitz, endorsed Trump for president, while Elon Musk pledged to donate $45 million a month to a pro-Trump action committee.

“We are definitely seeing a trend toward conservatism, and I think that is one of the reasons why investing in defense technology is no longer taboo,” Xiao said.

Recommended newsletter: CEO Daily provides the most important context to the news that leaders across the business world need to know. Every weekday morning, more than 125,000 readers trust CEO Daily for insights into the C-suite and its surroundings. Subscribe now.