SA国际传媒

has spent 25 years working in and around advanced technology for the aerospace and defense industry. He began his career as a congressional staffer before joining defense contractor , where he worked in the CEO鈥檚 office on foreign military sales. He later helped commercialize technology from a national laboratory in the U.K.

A decade ago, Espahbodi co-founded aerospace and defense startup accelerator and moved back to the U.S. to expand it. On the advice of friends at , he opened an office in El Segundo, California, near , just as more alumni of that company were leaving to launch hard-tech startups of their own and next-generation defense startups including were emerging.

Espahbodi eventually sold his stake in Starburst and launched , which invests in companies spanning industrial infrastructure, manufacturing, energy and water desalination. The firm has backed 14 companies since making its first investment in January 2023.

He also advises federal agencies on working with nontraditional, venture-backed companies. In an interview with SA国际传媒 News, he discusses how AI is changing hardware economics, why software investors are rushing into industrial technology, and what he believes many of them misunderstand about the sector.

This interview has been edited for length and clarity.

SA国际传媒 News: What led you to leave Starburst and launch Generational Partners?

Espahbodi: About four years ago, I noticed that my friends from SpaceX were leaving the space vertical and moving horizontally across physical industries. I reached an inflection point: I didn鈥檛 want to remain locked into the space sector. I wanted to follow my friends.

I sold my equity in the accelerator, and part of the investment team left with me to start Generational Partners. For the past four years, we鈥檝e invested in what you might call the SpaceX-mafia and hard-tech sectors 鈥� anything involving industrial infrastructure, manufacturing, energy or water desalination.

We made our first investment in January 2023, in a North Dakota-based drone company. It was a trial by fire and an opportunity to prove the thesis. We鈥檝e invested in 14 companies since then.

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 idea that hardware does not have to be capital-intensive. People often confuse hard tech with deep tech, but nomenclature aside, you don鈥檛 need to invest in science to win in these categories.

AI has dramatically changed that narrative and encouraged more people to get on board. I鈥檓 not looking to invest in science. I don鈥檛 necessarily see opportunities in quantum computing, nuclear fusion or other technologies being spun out of laboratories.

People who worked at companies such as SpaceX, and laid their companies鈥� foundations digitally. AI has significantly improved that augmentation and performance, enabling these companies to tackle legacy industries more aggressively and, more importantly, with new business models.

Another major component of the AI question is that frontier labs have become more expensive and capital-intensive than traditional hardware companies. The success of frontier AI labs, combined with the SpaceX IPO becoming an enormous wealth-creation event, creates a new environment. It raises questions about what is truly capital-intensive, what makes a product or its intellectual property defensible, and where companies are reengineering products around different 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 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 user terminals. When you buy a retail Starlink antenna, these people built and scaled the assembly line that produced it at high volume.

While deploying those terminals globally to provide internet access, they observed that poverty often stemmed from a lack of access to clean water. They asked whether they could replicate the proliferated satellite-and-user-terminal architecture for edge water desalination.

Rather than investing in multibillion-dollar, nation-state infrastructure like that used by Gulf countries, they wanted to mass-produce every component in a vertically integrated stack. Their goal was to produce a cooler-sized device that could clean water at the point of need.

used a digital, software-based approach to build the bill of materials needed for mass manufacturing. AI is part of its business and operations, but the company鈥檚 real innovation was inverting the infrastructure model and scaling it.

I helped Vital Lyfe win its first customers within the and . Those organizations can use its devices in the field rather than shipping pallets of bottled water by air freight. That created a signal for overseas partnerships and nonprofit humanitarian-aid applications. It showed that there could be a different way to provide clean water.

Those are the kinds of unique business models that excite me.

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 example is the team SpaceX recruited to build the autonomous drone ships that catch boosters in the middle of the ocean. The team included former Coast Guard personnel and oil-and-gas technicians.

At SpaceX, they had the freedom to use software and AI tools to automate station-keeping 鈥� the ability of those drone ships to position and navigate themselves and reach the right location.

That team spun out and brought in many former colleagues to change commercial maritime shipping. They retrofit legacy boats operating in harbors and waterways and move supply-chain goods.

They brought a digital-first foundation to automating the controls on tugboats and barges. That had never existed before because the communications link to those ships didn鈥檛 exist. Starlink changed the concept of operations. The company can use its software expertise to change how physical devices operate aboard these boats and allow their sensors to send signals anywhere in the world.

That makes it possible to retrofit and overhaul how legacy shipping vessels navigate harbors and waterways in the U.S. It鈥檚 another example of SpaceX alumni applying the playbook and technologies they learned at SpaceX to a much broader commercial industry.

You鈥檝e 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 meet many software investors who feel they鈥檙e missing out on hardware but don鈥檛 necessarily understand it. I鈥檝e met beauty investors who now say they鈥檙e defense-tech investors.

Los Angeles is a hotbed of firms that historically invested in software, media or consumer packaged goods. But people forget that Southern California, particularly El Segundo, is the aerospace capital of the world and has the largest concentration of mechanical-engineering talent.

Across the region 鈥� from China Lake to San Diego 鈥� technicians, builders and vocational talent are intersecting with the democratization of software and access to AI tools. Many local VCs have never taken advantage of the hardware talent located around them, so they鈥檙e being thrown for a loop.

Ironically, Bay Area VCs have been among those leaning most heavily into this. But it鈥檚 happening everywhere. I鈥檓 in Washington, D.C., now, and one of the first investors in , the hypersonic missile company, was in Virginia 鈥� before and others became involved.

Los Angeles VCs in particular know there is a talent war underway and that many people are leaving established companies to launch new businesses in these categories. But they struggle to underwrite those deals. They don鈥檛 know how to distinguish a strong opportunity from fear of missing out or something merely cosmetic.

So investors鈥� lack of experience in the space isn鈥檛 deterring them from writing checks or competing for deals?

Espahbodi: You have to ask why. The answer is their limited partners.

Sophisticated allocators, such as endowments, foundations and pension funds, along with more FOMO-driven family offices and high-net-worth investors, are watching this wave of SpaceX, and Anduril alumni create new companies and raise extraordinary rounds.

Many of those companies are no longer raising solely to pursue intellectual property. They鈥檙e building war chests to acquire other companies. The lines between private equity and venture capital are blurring. VC-backed companies are doing private equity-style buyouts, while venture deals are bringing in private equity checks.

That leaves LPs pushing for more. The success of the frontier AI labs has also perpetuated a fear of a 鈥淪aaS apocalypse,鈥� which I don鈥檛 think is real 鈥� although I sometimes question 鈥檚 1聽stock price for fun.

It creates what venture does best: tourists and FOMO. LPs ask why their managers aren鈥檛 investing in the same companies and how they can participate, raise more money and show that they aren鈥檛 missing out. That鈥檚 how I鈥檝e seen investors unfamiliar with these sectors enter the market.

Some of the largest Silicon Valley firms … missed this dynamism wave. Now they鈥檙e leaning in hard, sometimes at ridiculous valuations for companies that have yet to produce anything.

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 鈥� hard and fast, and as much as possible.

Venture as a category exists because it was always about hardware. I would argue that the SaaS era, from the dot-com boom until now, was a blip compared with what venture was originally intended to underwrite.

I would move away from the hardware-vs.-software distinction and ask who is reframing the business model. Is there a way to reengineer a combination of software and hardware to unlock customer value? That鈥檚 the more important question.

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鈥檛 based near Washington, D.C.?

Espahbodi: It鈥檚 a common misconception that Washington is where the money is. The Los Angeles Air Force Base houses , which is another way of saying it holds 鈥檚 wallet. El Segundo makes the purchasing decisions for the fastest-growing portion of the military budget.

Washington is a place of considerable activity that needs to be influenced. Venture has never had this degree of influence on an administration and its executive orders. We鈥檙e also seeing portfolio companies backed by influential investors win government contracts worth as much as $1 billion at a time. That鈥檚 extraordinary.

Geographically, companies need to be where the talent is as much as where the customers are. Government customers should signal what matters, but companies shouldn鈥檛 organize themselves entirely around the government.

My catchphrase is that I want everyone to be commercially focused but mission-aware. I don鈥檛 want them to be mission-focused on the government. I want government to signal what it cares about while companies remain commercially focused.

The talent war for this convergence of hardware and digital technology is centered in Southern California. If you aren鈥檛 building and recruiting there, you鈥檙e falling behind. I like that the Bay Area is trying to attract more hardware talent and capitalize on the automotive and humanoid-robotics markets.

But I think the talent base for the factory of the future starts in Southern California and can then be used as a model for expansion into other places, as companies such as Anduril have done in Ohio and Louisiana.

We invested in a company founded by people from SpaceX and . They immediately moved to Austin to build a smart factory for raw-material processing. They wanted to automate the process at its source.

The largest concentration of cotton farming is around Lubbock in the Texas Panhandle. The company is building automated factories from the ground up to mill cotton into yarn and then complete the digital, vertically integrated stack by producing textiles at prices that beat outsourcing to China, Vietnam and other countries.

It sounds crazy, but the founder is determined to do it. If you can prove the model in textiles, you can apply it to copper. If you can do it with copper, you can do it in pharmaceuticals. From there, it could go in any direction.

Do startups located near Space Systems Command have an advantage?

Espahbodi: Not for that reason alone. The advantage is that they鈥檙e part of the ecosystem and geography. They鈥檙e spending time in the same bars and restaurants, and their children attend the same schools. They鈥檙e witnessing the same velocity.

Space Force itself is facing greater demand than ever to protect assets in space. Whatever happens with funding for individual programs, it remains the fastest-growing portion of the Pentagon budget.

I don鈥檛 think startups should locate there solely to be close to the customer. They should be there for the talent they need to build.

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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

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