Software venture capitalists are pouring into defense and industrial technology, drawn by a wave of SpaceX alumni launching hard-tech startups. But a veteran of two decades in the sector warns that many of these investors are tourists chasing hype rather than building sustainable businesses.

What You Need to Know

Van Espahbodi, general partner at Generational Partners, spent 25 years in advanced technology for aerospace and defense, including co-founding the Starburst accelerator near SpaceX in El Segundo. He now warns that software venture capitalists entering physical industries often misunderstand the capital intensity, business models and regulatory realities of hard tech. The January 2023 investment in a North Dakota drone company marked the first of 14 deals for Generational Partners.

Why This Matters

The flood of software VCs into defense and industrial sectors risks misallocating capital to ventures that cannot scale or deliver real military capability. If FOMO-driven funding cycles produce failures, it could sour the broader appetite for hard-tech innovation just as the U.S. needs it most. Espahbodi argues that the winners will be those who understand that hardware defensibility comes from business model innovation, not just scientific breakthroughs.

The Rise of the 'SpaceX Mafia'

Over the past decade, alumni from Elon Musk's SpaceX have left to start their own companies, creating a dense network of hard-tech founders around El Segundo. Espahbodi followed that movement when he co-founded Starburst, an aerospace and defense accelerator, and later launched Generational Partners to invest in what he calls the SpaceX-mafia. The firm backs companies across industrial infrastructure, manufacturing, energy and water desalination.

Espahbodi notes that the generative AI boom has accelerated interest in these sectors, but he cautions against conflating hard tech with deep tech. Many software investors assume that hardware companies must be capital-intensive or require funding exotic science. That, he says, is a mistake.

What Software VCs Miss About Hard Tech

Espahbodi identifies three common misunderstandings among software investors entering physical industries:

  • Business model first: The best hard-tech companies combine creative software talent with commoditized hardware and a fresh business model, not scientific breakthroughs.
  • Capital intensity is not a given: Hardware can be capital-light when founders apply digital-first approaches, as former SpaceX and Tesla teams have done with factories and user terminals.
  • Frontier AI is more capital-intensive: Frontier AI labs now require more funding than traditional hardware startups, shifting the risk calculus and making hardware investments comparatively lean.

Espahbodi warns that tourists jumping into defense tech without understanding these dynamics will lose money and damage the sector’s reputation. He sees the SpaceX IPO as a massive wealth event that will attract even more capital, but cautions that returns will concentrate among investors with real domain expertise.

A Veteran’s Perspective

Espahbodi began his career as a congressional staffer before joining Raytheon, where he worked in the CEO’s office on foreign military sales. He later helped commercialize technology from a national laboratory in the U.K. before returning to the U.S. to expand Starburst. His advice to software VCs: respect the pace and complexity of physical industries, and focus on the business model rather than the technology alone.