The rush to build the next generation of military technology has drawn startups, Silicon Valley investors and former employees of companies such as SpaceX into the defense industry. One longtime investor says some newcomers are entering a field they barely understand.
Van Espahbodi, a former Raytheon employee who was a co-founder of Starburst Aerospace, a startup, told Crunchbase News that investors who were backing software and consumer businesses now want to head into the defense technology sector. He has also talked to those in the beauty industry that are also defense-tech investors.
“It creates what venture does best: tourists and FOMO,” Espahbodi said, referring to the fear of missing out. He warned that some firms are receiving high valuations before they have produced anything.
While this is just a warning about private investors, there is no specific proof that the Pentagon has wasted or spent taxpayer money in a fraudulent way. While the military looks to commercial companies for drones, software and other defense capabilities, it raises a question for the public: how does the Defense Department distinguish a useful product from a persuasive pitch?
Private Hype vs Public Contracts
Venture capital pays for much of a startup’s early development. Taxpayer money can enter the picture when a military organization pays to test a prototype or buys the resulting product. Those steps are different.
A startup’s valuation does not establish that its technology works for service members, and an experimental award does not mean the military has committed to buying it at scale.
The Pentagon has reasons to look beyond the traditional contractors. Firms can bring technology for their military needs, while a smaller company could perhaps struggle to navigate conventional federal procurement.
The Defense Innovation Unit was created to help the organization find and adopt commercial technology. Something that allows them to do this is called another transaction agreement, which gives the department more flexibility to work with companies on prototypes.
If a prototype is successful and the initial award is met, the military can follow on with the production award. This approach allows an idea to become a product quicker.
How Does This Reach Service Members?
There is some evidence that some of these projects are not just simple demonstrations. DIU reported that just 51% of their prototypes and moved on to production. While that measure is counted as a production or service award, it does not tell the whole story about its performance in military operations. The Government Accountability Office has called for clearer performance measures to assess DIU’s progress.
GAO has also found gaps in the Pentagon’s data on other transaction agreements. In a 2025 report, the watchdog said more flexible agreements could reduce oversight of contractor costs and recommended better tracking of certain follow-on production awards. Without complete information, officials have a harder time assessing how effectively the agreements are being used.
Neither of these findings is evidence that defense startups are using taxpayers’ money fraudulently or even overspending it. What they do, though, is point to a practical test: the public needs to be made aware of whether a funded prototype led to a working production in the field and how the military paid to obtain it.
An Insider Warning
Espahbodi is not arguing that the Pentagon should avoid startups. His firm, Generational Partners, backs companies in manufacturing and other physical industries.
He told Crunchbase News that he helped one portfolio company find its first customers within the Defense Health Agency and U.S. Special Operations Command for a device intended to produce clean water in the field. That account describes a potential military use, though it does not independently establish the device’s performance or savings.
The main concern plaguing him is really whether investors understand the business they are backing. This is not the same as the software market or the beauty market. Being able to tell if an opportunity is rock solid is a hard thing to do, especially in this industry.
One point he made was that some venture-backed companies supported by influential investors are gaining access to large government contracts. This is no evidence of misdeeds or fraud and are simply observations made by Espahbodi.
For troops, the distinction is concrete. A drone, communications system or field device must work under the conditions it was bought for. For taxpayers, the question is whether the Pentagon can show what a project delivered before paying to expand it.
This boom happening in the defense-tech industry could give the military access to companies and allow for creativity to flow like a river. Espahbodi’s warning to these “tourists” is simply that: a warning. Enthusiasm alone is a poor reason to invest in the defense industry. Doing homework, understanding the prototype processes, and carefully investing is the proper way to avoid blowback.
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