Investors in software are chasing former SpaceX employees, but a defense tech veteran has an important warning: watch out for tourists and the infamous FOMO.
Van Espahbodi spent 25 years working in and around advanced technology for the aerospace and defense industry. He started his career as a congressional staffer before joining defense contractor Raytheon, where he worked in the CEO’s office handling foreign military sales. Later, he helped commercialize technology from a national laboratory in the United Kingdom.
A decade ago, Espahbodi co-founded the aerospace and defense startup accelerator Starburst Aerospace and moved back to the United States to scale it. On the recommendation of friends at Founders Fund, he opened an office in El Segundo, California, right next to SpaceX, just as more former employees from that company were leaving to launch their own next-generation hard-tech and defense startups, including Anduril Industries.
Over time, Espahbodi sold his stake in Starburst and launched Generational Partners, which invests in industrial infrastructure, manufacturing, energy, and water desalination companies. The firm has backed 14 companies since its first investment in January 2023.
He also advises federal agencies on how to work with non-traditional venture-backed companies. In an interview with Crunchbase News, he talks about how artificial intelligence is changing the economics of hardware, why software investors are diving into industrial tech, and what many of them, in his view, get wrong about the space. 🚀
This interview has been edited for clarity and length.
What Led to the Creation of Generational Partners
Crunchbase News: What made you leave Starburst and launch Generational Partners?
Espahbodi: About four years ago, I noticed that my friends from SpaceX were moving out of the space vertical and going horizontal across other physical industries. I hit an inflection point: I didn’t want to stay locked into the space sector. I wanted to follow my friends.
I sold my stake in the accelerator, and part of the investment team left with me to start Generational Partners. Over the last four years, we’ve invested in what you could call the SpaceX mafia and in hard-tech sectors — anything involving industrial infrastructure, manufacturing, energy, or water desalination.
We made our first investment in January 2023, in a drone company based in North Dakota. It was a baptism by fire and a chance to prove the thesis. Since then, we’ve invested in 14 companies.
How Artificial Intelligence Changed the Economics of Hardware
You were already investing in physical, safety-critical industries before the generative AI boom. Did AI actually change where you invest, or did it just reinforce your existing thesis?
Espahbodi: I tend to show up before everyone else. I embraced the idea that hardware doesn’t have to be capital-intensive. People often confuse hard tech with deep tech, but nomenclature aside, you don’t need to invest in science to win in these categories.
AI has really changed that narrative and encouraged more people to get into the game. I’m not looking to invest in science. I don’t necessarily see opportunities in quantum computing, nuclear fusion, or other technologies coming out of labs.
People who worked at companies like SpaceX, Tesla, and Rivian built the foundations of those companies in a digital-first way. AI has significantly improved that capability and performance, allowing these companies to attack traditional industries more aggressively and, more importantly, with new business models.
Another important piece of the AI equation is that frontier labs have become more expensive and capital-intensive than traditional hardware companies. The success of those labs, combined with the SpaceX IPO shaping up to be a massive wealth-creation event, creates a new environment. It raises questions about what’s really capital-intensive, what makes a product or its intellectual property defensible, and where companies are re-engineering products around different business models.
When Technical Defensibility Outweighs the Challenges
Hardware has historically been capital-intensive, slower to commercialize, and hard to scale. Under what conditions does technical defensibility outweigh those challenges?
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Espahbodi: At the end of the day, it all comes down to the business model. I look for creative software talent combined with commoditized hardware, significant customer demand, and a new business model.
One of our portfolio companies was founded by the team that built the factory for Starlink user terminals. When you buy a Starlink dish at retail, these are the people who set up and scaled the assembly line that produced those at high volume.
As they were installing those terminals around the world to provide internet access, they noticed that poverty was often linked to a lack of access to clean water. They asked themselves whether they could replicate that satellite-and-terminal architecture for point-of-use water desalination.
Instead of investing in billion-dollar national-scale infrastructure the way Gulf countries do, they wanted to mass-produce every component of a vertically integrated stack. The goal was to create a cooler-sized device that could clean water right where it was needed.
Vital Lyfe used a digital-first, software-driven approach to put together the bill of materials needed for mass manufacturing. AI is part of the business and operations, but the real innovation was flipping the infrastructure model and scaling it.
I helped Vital Lyfe land its first customers at the Defense Health Agency and U.S. Special Operations Command. Those organizations can use the devices in the field instead of airlifting pallets of bottled water. That created a signal for overseas partnerships and nonprofit humanitarian applications. It showed there could be a different way to deliver clean water. These are the kinds of unique business models that get me excited. 💧
How SpaceX Founders Are Reinventing Industries
What other companies founded by former SpaceX employees show how hardware businesses can overcome the traditional challenges of the sector?
Espahbodi: Another example is the team that SpaceX recruited to build the autonomous vessels that catch boosters in the middle of the ocean. The team included former Coast Guard members and technicians from the oil and gas industry.
At SpaceX, they had the freedom to use software and AI tools to automate station-keeping — the ability of those vessels to position themselves and navigate on their own to exactly the right spot.
That team left and brought a lot of former colleagues with them to transform commercial maritime shipping. They retrofit older vessels that operate in ports and waterways and move supply chain goods.
They brought a digital-first foundation to automate the controls of tugboats and barges. This had never existed before because the communications link to those ships simply wasn’t there. Starlink changed the concept of operations. The company can use its software expertise to change how physical devices operate aboard those boats and allow their sensors to send signals anywhere in the world.
That makes it possible to retrofit and completely overhaul how older vessels navigate ports and waterways across the United States. It’s another example of former SpaceX employees applying the playbook and technologies they learned there to a much broader commercial industry. 🚢
Software Investors Racing Into Hardware
You said AI is eroding the traditional moats of software. What evidence do you see that investors are responding by migrating to hardware and industrial tech?
Espahbodi: I meet a lot of software investors who feel like they’re missing the hardware wave but don’t necessarily understand the sector. I’ve met beauty investors who now call themselves defense tech investors.
Los Angeles is a hotbed of firms that have historically invested in software, media, or consumer goods. But people forget that Southern California, especially El Segundo, is the aerospace capital of the world and has the highest concentration of mechanical engineering talent.
Across the region — from China Lake to San Diego — technicians, builders, and vocational talent are intersecting with the democratization of software and access to AI tools. Many local VCs never tapped into the hardware talent around them, so now they’re kind of lost.
Ironically, Bay Area VCs were some of the earliest to lean into this. But it’s happening everywhere. I’m in Washington, D.C., right now, and one of the first investors in Castelion, the hypersonic missile company, was Lavrock Ventures in Virginia — before Andreessen Horowitz and others got in.
LA-based VCs in particular know there’s a talent war underway and that a lot of people are leaving established companies to start new businesses in these categories. But they struggle to evaluate those businesses. They can’t tell the difference between a real opportunity and plain fear of missing out, or something that’s just cosmetic.
Why Investors Without Experience Still Jump In
So the lack of sector experience doesn’t stop investors from writing checks or competing for deals?
Espahbodi: You have to ask why. The answer is the limited partners.
Sophisticated allocators like university endowments, foundations, and pension funds, along with family offices and high-net-worth investors driven more by FOMO, are watching this wave of former SpaceX, Palantir, and Anduril employees start new companies and raise extraordinary rounds.
Many of these companies are no longer raising just to develop intellectual property. They’re building war chests to acquire other companies. The lines between private equity and venture capital are blurring. VC-backed companies are making private-equity-style acquisitions, while venture deals are getting private equity checks.
That’s putting pressure on LPs to push for more. The success of frontier AI labs has also fueled a fear of a SaaS apocalypse, which I don’t think is real — although sometimes I question the Salesforce stock price just for fun.
This creates what venture does best: tourists and FOMO. LPs are asking why their managers aren’t investing in the same companies and how they can participate, raise more, and show they’re not being left behind. That’s how I see investors without familiarity in these sectors entering the market.
Some of the biggest Silicon Valley firms missed this wave of dynamism. Now they’re diving in headfirst, sometimes at absurd valuations for companies that haven’t produced anything yet. ⚠️
What Keeps Hardware From Repeating Software’s Mistakes
If more and more venture capital flows into defense, aerospace, and industrial tech, what keeps hardware from developing the same problems software had, like too many companies competing?
Espahbodi: Bring it on — fast, hard, and as much as possible.
Venture as a category exists because it was always about hardware. I’d argue that the SaaS era, from the dot-com boom to now, has been a blip compared to what venture was originally designed to fund.
I’d move away from the hardware versus software distinction and ask who’s rethinking the business model. Is there a way to re-engineer a combination of software and hardware to unlock value for the customer? That’s the more important question.
Why Geography Matters for Startups
How important is geography for these startups? Does being close to a major government customer help land contracts?
Espahbodi: It’s a common misconception that Washington is where the money is. Los Angeles Air Force Base houses the Space Systems Command, which is another way of saying it holds the Space Force wallet. It’s El Segundo that makes the purchasing decisions for the fastest-growing part of the military budget.
Washington is a busy place that needs to be influenced. Venture has never had this level of influence over an administration and its executive orders. We’re also seeing portfolio companies backed by influential investors winning government contracts worth up to 1 billion dollars at a time. That’s extraordinary.
Geographically, companies need to be where the talent is just as much as where the customers are. Government customers should signal what matters, but companies shouldn’t organize entirely around the government.
My tagline is that I want everyone to be commercially focused but mission-aware. I don’t want them to be government-mission focused. I want the government to signal what matters while companies stay commercially focused.
The talent war for this convergence of hardware and digital technology is centered in Southern California. If you’re not building and recruiting there, you’re falling behind. I like that the Bay Area is trying to attract more hardware talent and tap into the automotive and humanoid robotics markets.
The Factory of the Future Starts Where the Talent Is
But I think the talent base for the factory of the future starts in Southern California and can then serve as a blueprint for expanding to other locations, the way companies like Anduril have done in Ohio and Louisiana.
We invested in a company founded by people from SpaceX and K2 Space. They moved to Austin right away to build a smart raw-material processing factory. They wanted to automate the process at the source.
The largest concentration of cotton farming is around Lubbock, in the Texas Panhandle. The company is building automated factories from scratch to turn cotton into yarn and then complete the entire digital, vertically integrated stack, producing textiles at prices that beat outsourcing to China, Vietnam, and other countries.
It sounds crazy, but the founder is determined to make it happen. If you can prove the model in textiles, you can apply it to copper. If you can do copper, you can do pharmaceuticals. From there, you can go in any direction. 🎯
Do startups located near Space Systems Command have any advantage?
Espahbodi: Not for that reason alone. The advantage is that they’re part of the ecosystem and the geography. They’re going to the same bars and restaurants, and their kids are in the same schools. They’re witnessing the same speed.
The Space Force itself is facing more demand than ever to protect assets in space. Whatever happens with funding for individual programs, it remains the fastest-growing part of the Pentagon budget.
I don’t think startups should locate there just to be close to the customer. They should be there for the talent they need to build. 💡
The Takeaway From This Movement
Van Espahbodi’s message is clear: the defense and hard-tech sector is experiencing an unprecedented surge of energy, driven by a generation of founders who learned to execute at extremely high standards. Artificial intelligence is accelerating that transformation, enabling companies to attack traditional industries with new business models and a speed that was unthinkable just a few years ago.
At the same time, the warning about tourists and FOMO deserves attention. Not all capital flowing into the sector comes with the technical knowledge needed to evaluate risks that are very different from those in software. The smartest investments, in his view, will be made by those who truly understand the full cycle — from engineering to government contracts — and can tell genuine innovation apart from a well-packaged narrative. Those with that clarity will capture the opportunities that the opportunists will let slip by.
