Hardware Is the Contract: Building Moats in Physical Security and Compliance

Hardware Is the Contract: Building Moats in Physical Security and Compliance

By: Jeff Klemens, William Kunin, Siddhi Chandak, Sasha Pasmanik

AI advancements are forcing founders, management teams and investors to rethink what makes businesses defensible. As model quality improves, the question becomes: which characteristics create long-term durability? We believe long-term value will accrue to companies with proprietary data, mission-critical workflows, regulatory barriers and distribution / network effects.

Physical security and compliance has several of these characteristics. The companies worth watching in this category are not just competing on model quality. They are deploying hardware that generates proprietary data in the field (footage from a specific hospital corridor), detecting threats in real time, ensuring regulatory standards are met (monitoring devices) and leverage unique distribution angles. Competitors can easily iterate on their algorithms, but these other components are much harder to replicate and replace.

Why the Hardware + Software Model Is Now Scalable

Combining sensors with software has been the ambition of physical security for decades. During the 2015 / 2016 IoT hype cycle, VCs invested more than $1 billion annually into IoT companies but some struggled to scale due to challenging unit economics. Manufacturing and deploying physical sensors was expensive, hardware had uncertain lifecycles and deployments could stall at the pilot phase. Deploying hardware capable of computing on the edge required financing and manufacturing scale that most growth-stage companies could not support.

That math has changed.

Today, hardware costs have declined meaningfully. The average cost of a sensor has fallen from roughly $1.30 in 2004 to under ~$0.35 today per QYResearch. Camera and edge compute costs have moved in the same direction. The limiting factor is increasingly distribution and operational discipline, not capital intensity.

Edge computing has existed since the mid-2010s but running AI inference at the edge, with the latency physical security demands, was difficult for general-purpose IoT chips. Purpose-built silicon has changed that. Chips designed specifically for neural network inference can now run inside camera hardware at millisecond latency and at a price point that makes facility-scale deployment viable. Processing happens at the device, not in the cloud. This matters because every deployment increases customer-specific context. The longer a company operates inside a physical environment, the more deeply it understands that environment and the harder it becomes to displace.

Hardware ownership is not automatically an advantage. It can create inventory risk, working capital needs, and margin pressure. The advantage comes when hardware is used as a distribution and data-capture mechanism for high-retention recurring revenue. The best companies will not simply ship devices; they will use devices to secure data rights, workflow ownership and long-term customer relationships. Owning the device is not the only path. Integrating with hardware already installed in a facility can secure the same data rights and workflow ownership while sidestepping inventory and working capital risk.

Where the Moat Actually Forms

Not all physical security companies are equally positioned.

One durable pattern: make the hardware the contract. We believe Verkada is the market benchmark; hardware and software sold as a bundle, with the camera acting as the contract. Once a facility is wired with your devices, switching is a physical project not just a software decision. HALOS operates on a similar logic with law enforcement / private security, where body-worn cameras are deployed as part of subscription contracts that deepen with every hour of footage captured. The device becomes the relationship: it gives HALOS a physical foothold in the customer’s daily workflow, making distribution harder for competitors to replicate.

Customer stickiness can also come from data that accumulates in a specific place. A company that has mapped every corridor of a hospital campus or built a surveillance network across an entire city has created a data layer competitors cannot replicate by deploying elsewhere. Volt’s 3D campus mapping is a clear example. By layering its AI on the IP cameras already deployed across a school or hospital campus, Volt builds a proprietary spatial layer tied to that specific environment without a hardware rollout. Once a campus is mapped, that spatial intelligence is difficult to rip out. LOCH Technologies applies the same principle to a different sensor modality. Its platform reads the wireless spectrum of a facility. Once a company is continuously interpreting the Radio Frequency (RF) environment of a specific space, it has a view that is difficult for others to recreate. There is also a network effect: each new facility deployment can improve LOCH’s models across similar environments. More facilities mapped means faster, more accurate detection in the next one. The moat is in the accumulated understanding of the place.

Mission-critical workflows and regulatory requirements create another barrier. Hexmodal monitors fire suppression systems, emergency equipment, and safety sensors, generating a continuous record that regulated facilities are legally required to maintain. When a device is part of the data trail that keeps a building compliant with fire codes and safety standards, switching vendors is not just a procurement decision. It introduces operational risk around systems that cannot fail.

Compliance requirements create their own form of entrenchment. Law enforcement body-camera programs run under CJIS standards, while schools and hospitals operate under FERPA and HIPAA, respectively. Once companies like HALOS and Volt are embedded in those environments, vendor switching becomes a legal and operational undertaking, not just a search for marginally better hardware or software.

Security and Compliance are the Wedge. The Opportunity is Wider

Physical security and compliance are natural first applications: real budget, genuine urgency, and regulation that keeps buyers committed once they have chosen a vendor. The companies building here – HALOS in law enforcement, Volt in schools and hospitals, LOCH in wireless-dense facilities and Hexmodal in life safety compliance – are each accumulating a unique kind of irreplaceable data asset.

Security is also a wedge into larger commercial opportunities. The same infrastructure that detects theft, trespassing, or medical emergencies can analyze foot traffic, measure occupancy, support facilities planning and inform broader operational decisions. The physical data layer being built for security today has optionality well beyond security.

Where We’ve Invested and What We’re Watching

Sageview has backed hardware-enabled businesses across verticals, including past investments Theatro and GoPro and current investments Tive, Elemental Machines, Atmosphere, and Grocery TV. We have deep familiarity with how these models perform.

At the growth stage, the most compelling companies in physical security / compliance have repeatable deployment playbooks, reasonable hardware payback periods, expanding margins and low churn driven by physical and workflow switching costs.

We’re leveraging our past hardware experience alongside our growing security / compliance knowledge to find and support the next generation of leaders in physical security and compliance.

See more at our Substack 

Disclaimer: For informational and educational purposes only; not investment advice