🚨Venture Scouts Explained

A venture capital scout, often referred to as a "VC scout" or "startup scout," is an individual who helps venture capital firms identify and source potential investment opportunities. These scouts are typically not formal employees of the venture capital firm but are often independent. According to Village Global VC, scouts are People who are empowered to invest money in startups on behalf of a venture capital fund, sometimes with full decision making autonomy.

There are 2 main VC scout structures:

1. Those who have capital to deploy on behalf of a venture capital firm (may need sign off) and

2. Those that are rewarded for sourcing a deal for a VC firm

For #1 above, these are typically your $1B+ funds that have enough capital to allocate small amounts to their scout program. Some notable VC’s that have adopted this type of scout program include Sequoia, Andreessen Horowitz (a16z), Craft Ventures, Insight Partners, Greylock, Felicis, and Index Ventures. There are exceptions where smaller funds give scouts capital and full autonomy to manage but our understanding is that would be not be common to scouts.

I asked a friend of mine who runs the scout program at a tier 1 VC what makes a good scout? His response – “someone who is already angel investing and wants to do more/get more involved. Good scouts tend to meet interesting founders already in their day to day.”

Elad Gil on Pros & Cons of being a VC Scout (as a founder): 

“The positives of investing include giving back to others, broadening your network, information access (for example, what new distribution approaches are working for others), and the potential for financial return (although you should plan to lose any personal money you invest — so do not invest if you can not afford to lose the money).

The cons include investing can become a big distraction, can irritate your cofounders or employees if a lot of your time goes to it (and your startup is not working), and the potential to lose money.”  - Elad Gil

In this post, we’ll dive into:

• Venture Scout History

• The primary roles of scouts

• How to get started as a scout

• How SPV leads leverage scouts

• How VC’s leverage scouts

• Inspirational Scout Stories

Scout History (Focus on Sequoia)

Sequoia is frequently known as THE VC credited with inventing the scout program. Most notably, Jason Calacanis wrote a $25k Sequoia scout check into Ubers seed round (it worked out). Sequoia initially focused on their own portfolio founders and navigating which of them would be interested in scouting. This allowed Sequoia to keep tabs on emerging entrepreneurs that were not yet in their ecosystem. It also cemented the firm’s ties to the founders who were already in its family (as portfolio founders) which only grew their influence in Silicon Valley.

According to Jason Calacanis, (via Techcrunch) he told Sequoia about Zynga when its founder Mark Pincus was still figuring out the company in 2007. He also told Sequoia about his friend Ev Williams and what he was building which later became Twitter. BUT! Both times Sequoia passed on these very early intros.

Apparently, this is what led to the Scout model at Sequoia. From there, Sequoia’s Roellof Botha asked “What if we’d just given you some money to make those investments?” Later, they devised a way to give Calacanis money to invest and split some of the profits. They rolled it out and started doing this to other Sequoia-backed founders including Sam Altman who at the time was the founder of Loopt, Brian Chesky at Airbnb, and Arash Ferdowsi & Drew Houston at Dropbox.

While this provides an increased access pool to firms like Sequoia, the check sizes via scouts are not meaningful checks.

Sequoia invests the vast majority of its capital via its full-time GPs at Series A stage through IPO. Some of their investments at seed stage happen through these independent scouts who write $25k-$50k checks. While a great program to gain more access, in the grand scheme, it's a minor part of Sequoia’s reported $X Billions across their multiple funds, and now evergreen fund.

Like Sequoia, many other VC funds have grown significantly in size over the recent decade, and with these much larger funds they need to deploy, writing seed checks just don’t move the needle for funds this size. They need to be writing $10m+ checks and these are not typically happening at seed.

The way I see it, these Billion dollar plus funds can optimize for series A and later stage by doing 2 things:

1. Continue to invest at seed (which they do) despite the checks not being as meaningful as the $10M+ checks at series A & later stage. Leverage these checks to ideally get into series A deals and where needed, pre-empt the next round that leads to the $10m+ checks and ownership targets.

2. They can work with scouts to have a bunch of well-networked individuals deploy small amounts of capital early on, to bring these companies into their ecosystem, to track for series A/larger rounds. 

The Primary Roles of Scouts

Venture Capital typically leverages VC Scouts to support deal sourcing efforts. The scout model offers a way they can expand their early-stage founder reach beyond their personnel within the firm, allowing scouts to play a crucial role by broadening the range of potential companies for VC firms to invest in.

The primary roles of VC scouts include:

1. Sourcing startups/deals: Scouts actively search for startups that have the potential for high growth and align with the investment criteria of the VC firm. They may attend industry events, network with entrepreneurs, and keep an eye on emerging trends and opportunities. This part is not all that different from the role of a VC, this is just done in a PT environment or maybe a little more disguised than a traditional VC who does this job full time.

2. Due diligence: While scouts are typically not responsible for conducting in-depth due diligence, they may perform initial screenings of startups to ensure they meet basic criteria before presenting them to the investment team. It is important the scout can highlight what they learned about the founder and the business through some means of due diligence.

3. Networking: Establishing and maintaining a broad network in the startup ecosystem is essential for a scout and one of the most important pieces to the venture fund. They should have many strong founder relationships, fellow investors relationships, and industry experts to access a wider  pipeline of potential investments.

Ways to Get Started as a Scout 

There are many different ways to get started as a scout and prove your value to a venture capital firm. It’s important to figure out which is the best route knowing your background, interests, network etc.

Those who are founders are in a great place to start, especially if you are backed by venture. This shows you have some understanding of venture capital and also have existing relationships by having raised money from VC’s. Also, you would ideally have access to founder peers who are or will be looking to raise capital. Highlighting your unique founder access as a founder is a great way to land a VC scout role.

As we know, this role is really about deal flow and founder relationships. If you can prove this to a venture firm, it could land you a VC scout role. The problem is that everyone thinks they have good access here, so it needs to be differentiated. 

Ideally, you can highlight specific companies or founders that you have personally invested in or have helped out as an advisor/facilitated intros to investors or know because of the current role you are in. It doesn’t exactly matter how you have the access, but that you do, and that you are in a position to see these deals very early on and often.

It’s kind of like a track record but it doesn’t have to be as an investor here. You will need to prove with a small amount of capital that 1) you can be an investor in these companies and 2) these are companies that have high growth potential and are led by amazing founders.

Having a niche is a nice way to differentiate and target a hyper-relevant VC to scout for. If you are only focused on healthcare or consumer tech or whatever it may be it allows you to focus more on that vertical which might be attractive to funds who focus there too.

In this scenario, similar to above, you need to show why you have a robust network in the vertical and access to founders/deals at the earliest stages. I would then identify the VC’s who are most active in the category and connect with them to highlight your deal flow value prop to explore VC scout options.

It is important to remain persistent here - My guess is that many funds will meet you and not initially be sold on making you a scout. This is an opportunity for you to start sourcing deals their way to highlight your deal flow and ability to be a meaningful scout to the fund. You want the job as a VC scout? Do it for free and prove you’ve got unique deal flow, that’s probably the best way to prove it.

How SPV Leads Leverage Scouts

I’m biased, but I think SPV leads are some of the best people to scout for. Zach and I personally work with a bunch of different scouts or folks who have unique access to deal flow and will always provide carry on a deal by deal basis for diligence & sourcing.

This feels quite common amongst syndicate leads.

Why?

Syndicate leads are structured and many times set up to invest in more companies than a traditional venture fund. In order to consistently bring LPs high quality deals, it makes sense to partner with folks in your network who have strong deal flow. Most times the carry split from syndicates will be more generous than that of a traditional venture fund.

Syndicates do not necessarily have a certain number of portfolio companies they can invest in, meaning as long as they are getting access to quality deals that LPs want to participate in on a consistent basis, then they will:

1. Be more likely to say yes and run the SPV into that investment and 

2. Be more willing to provide a higher carry split, especially if you as a scout show you can repeat this with more future access

In summary, if you are going to scout for venture funds, you might as well explore doing so with syndicates and capitalize on deal by deal carry.

How VC’s Leverage Scouts

The way in which VC’s leverage scouts is not too dissimilar to the ways Syndicates leverage scouts. VC’s are always trying to improve their network to access the best founders at the earliest stages. They want to find those founders, angels or operators that have unique access to early-stage founders and are interested in representing the firm by ether:

1. Sourcing deals for them or

2. Investing small sums of capital on their behalf

Some VC’s are really looking for deals that match their thesis/criteria and want to either lead a given round or participate. This is typically an example where the fund would not allocate capital to the scout but rather reward them with some sort of carry upside for providing the access & diligence. 

Other VC’s (typically those with larger funds over $1B) might want to allocate capital to the scout to invest super early and track to explore if this investment can grow into a better fit for the fund in the subsequent round of funding.

Ex-Scouts Turned VC’s & Sequoia Scout Portfolio Today

Other former scouts who have joined the world of venture capital full-time include Lee Linden of Quiet Capital, David Ulevitch of Andreessen Horowitz, Jana Messerschmidt of Lightspeed Venture Partners, Cat Lee of Maveron, and Deep Nishar of SoftBank Investment Advisors.

Three other former scouts have landed inside of Sequoia itself: Mike Vernal, who before joining Sequoia spent more than eight years at Facebook, including as a vice president of engineering and product; Jess Lee, who previously co founded the shopping site Polyvore and oversaw its sale to Yahoo; and Alfred Lin, the former COO and chairman of Zappos.

As of June 2019 More than 230 companies that have received checks written by Sequoia scouts have gone on to raise more than $6 billion in follow-on financing, excluding Uber. Many of these have received further funding from Sequoia itself, including Faire, GenEdit, Guardant Health, Stripe, Notion, Clever, Thumbtack, and Vector.

Stay tuned to see how the venture scout model evolves over the next 10 years!

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✍️ Written by Zachary and Alex