Sidney Scott decided to take himself out of the venture capital rat race and is now jokingly auctioning off his vests — starting at $500,000.
The Driving Forces solo general partner announced on LinkedIn this week that he was shutting down his $5 million fintech and deep tech VC fund that he started in 2020, calling the past four years “a wild ride.”
A healthy performance of his first, small fund wasn’t enough. He told TechCrunch that with increasing competition for what is, essentially, still a small number of hard tech and deep tech deals, he realized it would be a challenge for smaller funds like his.
“This wasn’t easy, but it’s the right choice for the current market,” he said.
Scott also thanked people, like entrepreneur Julian Shapiro, neuroscientist Milad Alucozai, Intel Capital’s Aravind Bharadwaj, 500 Global’s Iris Sun and UpdateAI CEO Josh Schachter, who stood by him.
During that time, he was also involved in building the first AI and deep tech investor network with Handwave, collaborating with investors at companies such as Nvidia, M12, Microsoft’s Venture Fund, Intel Capital and First Round Capital.
That ride included about two dozen investments into companies like SpaceX, Rain AI, xAI and Atomic Semi. The total portfolio yielded over 30% net internal rate of return, a metric measuring the annual rate of growth an investment or fund will generate, Scott told TechCrunch. Thirty percent for a seed fund like this is considered solid IRR performance and it outpaces total average deep tech IRR, which is about 26%, according to Boston Consulting Group.
Five years ago, when Scott had the thesis for the fund, it was a different world. Back then most investors avoided hard tech and deep tech in favor of software-as-a-service and fintech, he said.
That was for various reasons. VCs can have a follow-the-crowd mentality and SaaS was considered more of a moneymaking sure bet at the time. But VCs also avoided deep tech because investors believed — perhaps rightly so — that it required extensive capital, longer development cycles and specialized expertise. Deep tech often involves new hardware but always involves building tech products around scientific advances.
“Shockingly enough, those same reasons are the exact reasons why a lot of companies are now directly investing into deep tech, which is very ironic, but it comes with the territory,” Scott said. “Everyone was investing in scale-fast, launch-fast and get-into-the-market. They were going to invest in these extremely smart people who would eventually turn the science project into an operating business one day.”
He is now seeing fintech investors, who previously would turn him down on deals a year ago, raising hundreds of millions of dollars in funds specifically targeting deep tech.
While he didn’t name names, a few VCs that are big into deep tech include Alumni Ventures, which closed its fourth deep tech dedicated fund in 2023; Lux Capital, which raised a $1.15 billion deep tech fund in 2023; Playground Global, which raised over $400 million for deep tech in 2023; and Two Sigma Ventures, which raised $400 million for deep tech in 2022.
Deep tech now accounts for about 20% of all venture capital funding these days, up from about 10% a decade ago. And over the past five years specifically, it has “become a mainstream destination for corporate, venture capital, sovereign wealth, and private equity funds,” according to a recent Boston Consulting Group report.
Scott also believes that many of these newcomers to the area are setting themselves up for “a massive eye-opener within three years” and the rush into deep tech investing was too fast.
When money pours into a limited number of deals, a typical VC inflation cycle begins, where VCs bid up the prices they are willing to pay for stakes, sending valuations higher and making the area more expensive for everyone — prohibitively so for a solo fund like his.
In a time when big exits for startups have been limited — thanks to the closed IPO market and the death of interest in SPACs — deep tech has still had its successes in areas like robotics or quantum computing.
He said he isn’t bearish on venture capital, in general, or hard tech companies but does expect there to be a “bullwhip effect” in deep tech investing where early-stage investors and VCs will rush to repeat prior breakthroughs or high-profile successes, Scott said.
As is the way with venture, he predicts that more capital will attract more investors, including those with less expertise, and he said that will then lead to a surge in deep tech startups. However, that could then create unrealistic expectations and significant pressure on startups to perform, he said. And since cycles happen often in venture capital, he believes investor sentiment could quickly turn negative should market conditions shift.
“Given the ultra-small pool of experts and builders, along with the capital-intensive nature of hard tech, the phase of valuation inflation can be sped up, driving up startup valuations rapidly,” Scott said. “This impacts the entire ecosystem, causing funding struggles, slower development, and potential shutdowns, which can further dampen investor confidence and create a negative feedback loop.”
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