Why deep tech VC Driving Forces is closing

Why deep tech VC Driving Forces is closing

Sidney Scott has decided to retire from the enterprise capital rat race and is now jokingly auctioning off his vests, with prices starting at $500,000.

This Driving forces lone general partner announced on LinkedIn this week said it was closing its $5 million fintech and deep tech VC fund that it launched in 2020, calling the past 4 years a “wild ride.”

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But the strong performance of his first, small fund wasn’t enough. He told TechCrunch that as competition for what are still essentially a small variety of hard tech and deep tech deals grew, he realized it could be a challenge for smaller funds like his.

“It wasn’t easy, but it’s the right choice in the current market,” he said.

Scott also thanked people like entrepreneur Julian Shapiro, neuroscientist Milad Alucozai, Aravind Bharadwaj of Intel Capital, Iris Sun of 500 Global and UpdateAI CEO Josh Schachter who supported him.

During this time, he also participated in building the first network of investors in the field of artificial intelligence and deep technologies. Hand waveworking with investors from firms similar to Nvidia, M12, Microsoft Venture Fund, Intel Capital and First Round Capital.

That ride included about two dozen investments in firms like SpaceX, Rain AI, xAI and Atomic Semi. The total portfolio returned greater than a 30% net internal rate of return, a measure that measures the annual growth rate an investment or fund will generate, Scott told TechCrunch. Thirty percent for a seed fund like this is considered a solid IRR and exceeds the average total internal rate of return on deep tech investments, which is about 26% in response to Boston Consulting Group.

Five years ago, when Scott had his thesis for the fund, it was a different world. Back then, most investors shunned hard tech and deep tech in favor of software-as-a-service and fintech, he said.

This happened for a number of reasons. VCs may have a follow-the-crowd mentality, and SaaS was considered a simple task to make money at the time. But VCs also shunned deep tech because investors believed—perhaps rightly—that it required a lot of capital, longer development cycles, and specialized knowledge. Deep tech often involves latest hardware, but it at all times involves building technology products around scientific advances.

“Shockingly, those same reasons are the exact same reasons that a lot of companies are now investing directly in deep tech, which is very ironic, but it’s inherent in the field,” Scott said. “Everybody was investing in fast scaling, fast time to market, fast go to market. They were going to invest in these incredibly smart people who are going to eventually turn a science project into a working business one day.”

Now he sees financial technology investors who would have rejected his pitches a 12 months ago raising a whole bunch of tens of millions of dollars in funds specifically focused on deep tech.

Although he didn’t name names, several VC firms that deal with deep tech include Alumni Ventures, which has closed its operations fourth deep technology dedicated fund in 2023; Lux Capital, which $1.15 billion raised deep tech fund in 2023; Playground Global, which raised over $400 million in deep tech in 2023; and Two Sigma Ventures, which raised $400 million in deep tech in 2022 (and SEC records show one other USD 500 million was raised in 2024).

Deep tech now accounts for about 20% of all enterprise capital funding, up from about 10% a decade ago. And over the past five years, it has “become a major target for corporate funds, venture capital, sovereign wealth, and private equity,” in response to a recent report Boston Consulting Group Report.

Scott also believes many of those newcomers to the space are preparing for a “huge eye-opener in three years” and that the rush to speculate in deep tech has been too quick.

When money flows into a limited variety of deals, it starts a typical VC inflation cycle, where VCs drive up the prices they’re willing to pay for shares, which drives up valuations and makes the space costlier for everyone — something that’s prohibitively expensive for a solo fund like his.

At a time when big startup exits were limited — because of a closed IPO market and a decline in SPACs — deep tech continued to thrive areas similar to robotics or quantum computing.

He said he is not skeptical of enterprise capital in general or high-tech firms, but he expects a “whiplash effect” in deep tech investing, with early-stage investors and VC firms rushing to duplicate previous breakthroughs or notable successes, Scott said.

As is often the case in enterprise capital, he predicts that more capital will attract more investors, including those with less experience, and he said that can result in an increase in the variety of deep tech startups. But that may then create unrealistic expectations and significant pressure on startups to perform, he said. And because enterprise capital often goes through cycles, he thinks investor sentiment could quickly turn negative if market conditions change.

“Given the extremely small pool of experts and builders, as well as the capital-intensive nature of hard tech, the valuation inflation phase can be accelerated by skyrocketing startup valuations,” Scott said. “This has implications for the entire ecosystem, causing funding problems, slower growth, and potential shutdowns, which can further erode investor confidence and create a negative feedback loop.”

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