As Software VCs Chase SpaceX Alumni, A Defense Tech Veteran Warns Of ‘Tourists And FOMO’

Van Espahbodi brings 25 years of experience in and around advanced aerospace and defense technology. His career started as a congressional staffer before he joined defense contractor Raytheon, working in the CEO’s office on foreign military sales. Later, he assisted in commercializing technology originating from a U.K. national laboratory.

A decade ago, Espahbodi co-founded Starburst Aerospace, an aerospace and defense startup accelerator, and returned to the U.S. to scale its operations. Following advice from contacts at Founders Fund, he established an office in El Segundo, California, close to SpaceX. This move coincided with an influx of SpaceX alumni departing to start their own hard-tech ventures, alongside the rise of next-generation defense startups like Anduril Industries.

Ultimately, Espahbodi sold his stake in Starburst to launch Generational Partners, a firm investing across industrial infrastructure, manufacturing, energy, and water desalination. Since completing its inaugural investment in January 2023, the firm has supported 14 companies.

Alongside his investment work, Espahbodi advises federal agencies regarding engagements with nontraditional, venture-backed businesses. In a discussion with Crunchbase News, he explores the impact of artificial intelligence on hardware economics, the influx of software investors moving into industrial tech, and common misperceptions about the sector.

This interview has been edited for length and clarity.

Crunchbase News: What led you to leave Starburst and launch Generational Partners?

Espahbodi: Roughly four years ago, I observed friends leaving the space vertical at SpaceX and expanding horizontally into other physical industries. I reached an inflection point where I preferred not to stay constrained within the space sector and wanted to follow my peers.

I sold my equity in the accelerator, and a segment of the investment team accompanied me to establish Generational Partners. Over the past four years, our investments have targeted the SpaceX-mafia and hard-tech domains, encompassing industrial infrastructure, manufacturing, energy, and water desalination.

In January 2023, we made our first investment in a North Dakota-based drone company, serving as a trial by fire and a proof of concept. We have since backed 14 companies.

You were already investing in physical, safety-critical industries before the generative AI boom. Has AI materially changed where you invest, or has it mainly reinforced your existing thesis?

Espahbodi: I tend to arrive earlier than others. I embraced the perspective that hardware does not inherently require heavy capital expenditures. People frequently conflate hard tech with deep tech, but nomenclature aside, winning in these categories does not require investing in core science.

AI has substantially shifted that narrative, encouraging broader participation. I am not looking to invest in basic science, nor do I actively pursue opportunities in quantum computing, nuclear fusion, or other laboratory spin-outs.

Alumni from companies like SpaceX, Tesla, and Rivian built their foundations digitally. AI has significantly enhanced that performance and augmentation, empowering these startups to challenge legacy industries more aggressively and, crucially, through new business models.

Additionally, frontier labs have become costlier and more capital-intensive than legacy hardware developers. The success of frontier AI labs, paired with the SpaceX IPO functioning as a massive wealth-creation event, generates a distinct market environment. It prompts questions regarding capital intensity, product and intellectual property defensibility, and how companies reengineer products around alternative business models.

Hardware has historically been capital-intensive, slower to commercialize and difficult to scale. Under what conditions does its technical defensibility compensate for those challenges?

Espahbodi: Fundamentally, it hinges on the business model. I look for creative software talent paired with commoditized hardware, strong customer demand, and innovative business frameworks.

One portfolio company was established by the team responsible for building the factory that produced Starlink user terminals at high volume. While deploying those antennas globally to deliver internet access, the founders noticed that poverty often stemmed from a lack of clean water.

They evaluated whether they could replicate the proliferated satellite-and-user-terminal architecture for edge water desalination. Rather than relying on multibillion-dollar, nation-state infrastructure similar to systems used in Gulf countries, they sought to mass-produce every element within a vertically integrated stack, aiming for a cooler-sized device capable of purifying water at the point of need.

Vital Lyfe utilized a software-driven approach to construct the bill of materials for mass manufacturing. While AI integrates into its business operations, the primary innovation rests on inverting and scaling the infrastructure model.

I assisted Vital Lyfe in securing initial customers within the Defense Health Agency and U.S. Special Operations Command, enabling field deployment rather than relying on air-freighted pallets of bottled water. That validation signaled opportunities for overseas partnerships and nonprofit humanitarian applications, demonstrating an alternative method for delivering clean water. These unique business models drive my enthusiasm.

What other companies founded by SpaceX alumni demonstrate how hardware businesses can overcome the traditional challenges of the sector? What can these founders build today that would have been difficult five years ago?

Espahbodi: Another instance involves the team SpaceX assembled to build autonomous drone ships capable of catching boosters in the open ocean, which included former Coast Guard personnel and oil-and-gas technicians.

At SpaceX, they utilized software and AI tools to automate station-keeping, allowing those vessels to autonomously navigate and position themselves. Upon spinning out, that team engaged former colleagues to transform commercial maritime shipping by retrofitting legacy harbor and waterway vessels.

They applied a digital-first framework to automate controls on tugboats and barges—a capability previously absent due to communication limitations. Starlink changed operations by allowing software to govern physical devices on board and route sensor data globally, transforming how legacy vessels navigate U.S. harbors and waterways by applying methodologies learned at SpaceX.

You’ve said AI is eroding traditional software moats. What evidence are you seeing that investors are responding by moving into hardware and industrial technology?

Espahbodi: I encounter numerous software investors who feel excluded from hardware without possessing a firm grasp of it. I have met beauty investors who now identify as defense-tech investors.

Los Angeles serves as a hub for firms historically focused on software, media, or consumer packaged goods. However, people frequently overlook that Southern California—particularly El Segundo—stands as the aerospace capital of the world, housing a massive concentration of mechanical-engineering talent.

Across the region, from China Lake to San Diego, technical and vocational talent intersects with democratized software and AI tools. Many local venture capitalists have historically overlooked nearby hardware talent, leaving them disoriented.

Ironically, Bay Area venture capitalists have leaned aggressively into the space, alongside broader national activity. For instance, in Washington, D.C., Lavrock Ventures served as an early investor in hypersonic missile developer Castelion before Andreessen Horowitz entered.

Los Angeles investors recognize the ongoing talent war and the departure of established workers to launch new ventures, yet they struggle to underwrite these deals, often unable to differentiate robust opportunities from fear of missing out or surface-level trends.

So investors’ lack of experience in the space isn’t deterring them from writing checks or competing for deals?

Espahbodi: The motivation traces back to limited partners. Sophisticated allocators, including endowments, foundations, and pension funds, alongside FOMO-driven family offices and high-net-worth individuals, observe SpaceX, Palantir, and Anduril alumni launching new enterprises and raising substantial rounds.

Many of these companies no longer raise capital solely for intellectual property development; they build war chests for acquisitions. The boundaries between private equity and venture capital are blurring, with venture-backed entities executing buyouts while venture rounds incorporate private equity funds.

Consequently, limited partners demand exposure. The success of frontier AI labs also feeds a perceived “SaaS apocalypse.” This dynamic triggers venture tourism and FOMO, with investors questioning why their managers lack exposure and seeking ways to participate. That mechanism explains how uninitiated investors enter the market.

Some prominent Silicon Valley firms missed this wave of dynamism and are now aggressively entering, occasionally accepting inflated valuations for pre-revenue companies.

If more venture funding continues to flow into defense, aerospace and industrial technology, what prevents hardware from developing the same problems software experienced, including too many competing companies?

Espahbodi: Bring it on — hard and fast, and as much as possible.

Venture capital originally centered on hardware. I would argue that the SaaS era, spanning the dot-com boom to the present, was a minor deviation from venture’s foundational purpose.

Rather than distinguishing between hardware and software, the key inquiry focuses on business model reengineering. Unlocking customer value through a combined software and hardware architecture remains the priority.

How important is geography for these startups? Does locating near a major government customer help a company win contracts, and how do startups navigate procurement if they aren’t based near Washington, D.C.?

Espahbodi: A common misconception points to Washington as the epicenter of capital. The Los Angeles Air Force Base houses Space Systems Command, managing the Space Force budget and purchasing decisions for the military’s fastest-growing sector.

While Washington requires engagement—and venture capital maintains unprecedented influence over the current administration—portfolio companies backed by influential investors routinely secure government contracts reaching up to $1 billion.

Geographically, startups must position themselves near talent as well as customers. Government customers signal requirements, but companies should maintain a commercial focus rather than organizing entirely around government entities.

My motto is to remain commercially focused yet mission-aware, letting the government signal priorities while businesses drive commercial value. The talent pool for hardware-digital convergence centers in Southern California, serving as a model for expansion into regions like Ohio and Louisiana, as demonstrated by Anduril.

We invested in a company founded by veterans of SpaceX and K2 Space that relocated to Austin to establish a smart factory for raw-material processing. They aim to automate the processing of cotton into yarn and textiles locally at prices competitive with outsourcing hubs like China and Vietnam.

Proving this model in textiles allows application to copper, and subsequently pharmaceuticals. If you can build the model there, it can expand infinitely.

Do startups located near Space Systems Command have an advantage?

Espahbodi: Not strictly for proximity reasons. The benefit derives from ecosystem integration—sharing social spaces, schools, and witnessing market velocity firsthand.

Space Force faces rising demand to protect orbital assets, making it a fast-growing segment of the Pentagon budget. Startups should base themselves in these regions to access talent required for building, rather than just proximity to the customer.

Related Crunchbase queries:

• Global Defense Tech Venture Funding In 2026
• Space And Satellite Tech Startup Funding

Related reading:

• Sector Snapshot: Space Tech Startup Funding Orbits New Highs
• Sector Snapshot: Defense Startup Funding Hits An All-Time Record As VCs Begin To Eye Exits

Illustration: Dom Guzman