Sidney Scott has decided to quit the venture capital rat race and is now jokingly auctioning off his best pieces, with prices starting at $500,000.
Driving Forces' sole general partner announced on LinkedIn this week that he was closing the $5 million fintech and deep tech VC fund he launched in 2020, calling the past four years “eventful.”
But the healthy performance of his first small fund wasn't enough: He told TechCrunch he recognized that increased competition for what are essentially a handful of hard tech and deep tech deals would be a challenge for a small fund like his.
“This wasn't an easy thing to do, but it's the right thing to do in the current market,” he said.
Scott also thanked the people who supported him, including entrepreneur Julian Shapiro, neuroscientist Milad Alkozai, Intel Capital's Aravind Bharadwaj, 500 Global's Iris Sun and UpdateAI CEO Josh Schacter.
During that time, he also helped build Handwave's first AI and deep tech investor network, working with investors from companies such as Nvidia, M12, Microsoft's venture fund, Intel Capital, and First Round Capital.
The investments included about two dozen in companies like SpaceX, Rain AI, xAI and Atomic Semi. The portfolio as a whole had a net internal rate of return of more than 30%, a metric that measures the annual growth rate an investment or fund generates, Scott told TechCrunch. Thirty percent of such seed funds is considered a solid IRR performance, and it beats the average IRR across deep tech, which is about 26%, according to the Boston Consulting Group.
The world was different five years ago when Scott was conceiving the fund, when most investors were shying away from hard tech and deep tech in favor of software-as-a-service and fintech, he says.
The reasons are varied. VCs can have a follow-the-crowd mentality, and SaaS was seen as a surefire way to make money at the time. But VCs avoided deep tech because investors assumed (and probably rightly so) that it required lots of capital, longer development cycles, and specialized knowledge. Deep tech often involves new hardware, but it always involves building technology products based on scientific advances.
“Surprisingly, a lot of companies are investing directly in deep tech for exactly the same reason. It's very ironic, but it makes sense,” Scott says. “Everyone was investing in scaling, launching, and going to market. They were investing in the really smart people who will one day turn science projects into real businesses.”
He now sees fintech investors who would have shied away from deals a year ago raising hundreds of millions of dollars in deep tech-focused funding.
While he did not mention any names, some VCs focusing on deep tech include Alumni Ventures, which closed its fourth deep tech-only fund in 2023, Lux Capital, which raised a $1.15 billion deep tech fund in 2023, Playground Global, which raised more than $400 million for deep tech in 2023, and Two Sigma Ventures, which raised $400 million for deep tech in 2022 (and is raising an additional $500 million in 2024, according to SEC records).
Deep tech now accounts for about 20% of all venture capital funding, up from about 10% a decade ago, and a recent report from the Boston Consulting Group said that over the past five years in particular, deep tech has “become a mainstream investment destination for corporations, venture capitalists, sovereign wealth funds, and private equity funds.”
Scott also believes that many of the new entrants in the space will be “hugely disrupted within three years,” and that there has been too much rush into deep tech investing.
As money flows into a limited number of deals, a classic venture capital inflation cycle begins, inflating the prices VCs are willing to pay for equity, driving up valuations and making the area expensive for everyone — even prohibitively so — for a solo fund like his.
Even at a time when big exits for startups are limited with the IPO market shutting down and interest in SPACs disappearing, deep tech is still finding success in areas like robotics and quantum computing.
Scott said that while he isn't pessimistic about venture capital in general or hard tech companies, he expects there to be a “bullwhip effect” in deep tech investing, as early-stage investors and venture capitalists rush to repeat past breakthroughs or high-profile successes.
As always in venture capital, he predicts that more capital will attract more investors, including those with less expertise, which will lead to a surge in deep tech startups. But that could create unrealistic expectations and put a lot of pressure on startups, he said. He also believes that venture capital often goes through cycles, so investor sentiment can quickly turn negative if market conditions change.
“Given the extremely scarce pool of experts and developers, and the capital-intensive nature of hard tech, this could hasten the valuation inflation stage, causing startup valuations to skyrocket,” Scott said. “This could have an impact across the ecosystem, causing funding difficulties, development delays, and potential closures, further eroding investor confidence and creating a negative feedback loop.”