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| Sidney Scott Shuts Down Fintech and Deep Tech VC Fund Amid Rising Competition and Market Shifts Image credit: Driving Forces LinkedIn handle |
Sidney Scott, the solo general partner of Driving Forces, has decided to exit the venture capital scene and humorously auction off his vests with a starting bid of $500,000. Scott announced on LinkedIn this week that he is closing his $5 million fintech and deep tech VC fund, which he started in 2020, describing the past four years as “a wild ride.”
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| Driving Forces auction off his vests with a starting bid of $500,000 Image credit: Driving Forces LinkedIn handle |
Despite a healthy performance with his first small fund, Scott realized the increasing competition for a limited number of hard tech and deep tech deals would make it challenging for smaller funds like his. He expressed that closing the fund was not an easy decision but the right choice for the current market.
Scott thanked supporters, including entrepreneur Julian Shapiro, neuroscientist Milad Alucozai, Intel Capital’s Aravind Bharadwaj, 500 Global’s Iris Sun, and UpdateAI CEO Josh Schachter. He was also involved in building the first AI and deep tech investor network with Handwave, collaborating with investors from Nvidia, M12, Intel Capital, and First Round Capital.
Over the course of his fund’s operation, Scott made about two dozen investments in companies such as SpaceX, Rain AI, xAI, and Atomic Semi. The total portfolio yielded over a 30% net internal rate of return (IRR), surpassing the average deep tech IRR of around 26% according to Boston Consulting Group.
Five years ago, Scott’s thesis for the fund was unconventional as most investors favored software-as-a-service (SaaS) and fintech over hard tech and deep tech. These areas were seen as requiring extensive capital, longer development cycles, and specialized expertise, which deterred many VCs. However, Scott noted that these reasons are ironically now driving significant investment into deep tech.
He observed a shift, with fintech investors who previously turned him down now raising large funds specifically targeting deep tech. Notable VCs in this space include Alumni Ventures, Lux Capital, Playground Global, and Two Sigma Ventures, all of which have raised substantial funds for deep tech investments in recent years.
Deep tech now represents about 20% of all venture capital funding, a significant increase from 10% a decade ago. According to a recent Boston Consulting Group report, it has become a mainstream destination for corporate, venture capital, sovereign wealth, and private equity funds over the past five years.
Scott believes the rush into deep tech investing is happening too quickly, predicting a “massive eye-opener within three years” for many newcomers to the area. He warned that the influx of money into a limited number of deals could lead to a typical VC inflation cycle, driving up valuations and making the area more expensive, particularly for solo funds like his.
Despite the current limited big exits for startups due to a closed IPO market and waning interest in SPACs, deep tech has seen successes in areas like robotics and quantum computing. Scott is not bearish on venture capital or hard tech companies but expects a “bullwhip effect” in deep tech investing, where early-stage investors and VCs rush to repeat prior successes, creating unrealistic expectations and significant pressure on startups.
Scott predicts that as more capital attracts more investors, including those with less expertise, it will lead to a surge in deep tech startups. However, this could create a negative feedback loop, with inflated valuations, funding struggles, slower development, and potential shutdowns, ultimately dampening investor confidence.
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