VC Scouts: The Bridge Between Early-Stage Startups And Capital

Early-stage startups seeking capital and guidance leverage venture capital, with VC scouts serving as the bridge between them. Remember that VCs also look for promising startups to support. They require help identifying the right founders to reach out to.

If you’ve been watching this space, you’ve likely learned about investor angels and investor operators. These professionals assist upcoming startups with the crucial guidance they need, starting when they develop disruptive ideas.

VC scouts are yet another link in the chain connecting investors with early-stage startups that can use support. These individuals have also become integral to the startup ecosystem in the last 10 to 15 years. Think of them as valuable agents you can tap to connect with investors.

Let’s dive in to understand in detail what VC scouts are and how you can leverage their support. You’ll also get a quick overview of how they facilitate deal flows between startups and their investors.

Understanding VC Scouts and Their Role in the Startup Ecosystem

VC scouts, or startup scouts and venture scouts, as they are often called, are essentially the talent agents of the startup landscape. They work as recruits in the programs organized by large venture capital firms. Some firms may openly advertise the programs and invite applications from recruits.

The recruit’s job is to assist VC firms in identifying new founders and startups with ground-breaking ideas. These agents look for companies that have the potential to yield attractive returns for their investors. They research for in-depth information, including the founding team and the target market.

Other details they gather include IP assets the startup has developed, competing companies, and any other data that indicates viability. With this information, the agents create a deal memo and dispatch it to the VC firm–in person or online.

Thus, the firm has the opportunity to be one of the first investors to offer capital before others catch on. They get the upper hand by getting better terms and conditions and investing at lower dilution. They often set aside designated funds and write checks to the scouts to make that happen.

VC scouts may work with the VC firm as full-time employees or in exchange for preset incentives. Some startup scouts may also team up with venture capital funds to gain invaluable experience and learn about managing them. Their objective is to eventually set up VC funds themselves.

VC scouts connect with founder networks and identify opportunities according to their firm’s criteria. For instance, the venture capitalist may want to target startups at a specific growth stage, sector, or geographical location. Or a type of investment, such as preferred shares, SAFEs, or convertible notes.

Internal and External VC Scouts

Internal VC scouts are full-time employees on the VC firm payroll and are responsible for securing the best deal flows. Their role includes connecting with multiple networks of founders with the objective of transforming opportunities into deals.

External VC scouts are professionals participating in the scout program. They may be students, founders currently running companies, or individuals who have previously exited their businesses.

These scouts often have extensive networks and possess industry-specific expertise, making them valuable assets in the venture capital landscape. They are interested in leveraging their knowledge and skills to act as connectors and assist aspiring founders.

In exchange for the deal flows they execute, they receive cash, equity, or the opportunity to participate in micro funds.

Internal or external–startup scouts get access to a capital allotment or seed fund that the venture capital firm sets up. VC scouts have a free rein to receive pitches from interested entrepreneurs and present them to the firm’s advisor.

Top-tier venture capital firms like Sequoia Capital, Lightspeed, and Accel are known to have startup scouts working for them.

How the Venture Scout Program Operates

The venture capital firm sets aside a designated scout fund with a capital allocation of around $100K to $200K. This fund is specific to each firm; for instance, Lightspeed reportedly has a fund of $250K while Accel has $200K.

Once the VC scout has evaluated the startup for viability, they write a memo to their partner at the firm. This memo can be formal or informal and includes information about why the investment is lucrative. The final decision rests with the partner at the VC firm.

If the venture scout gets the go-ahead, they receive a “carry” on that investment. This carry varies from deal to deal and depends on the VC firm’s internal policies. For instance, at Accel, the carry is added to a pool common for the specific scout class and is equally shared.

On the other hand, at Lightspeed, each scout receives a percentage of the deal they facilitate. The VC firm keeps a percentage of the profits earned on the investment. This arrangement is beneficial for all the stakeholders in the program.

VC firms get the opportunity to invest in lucrative early-stage startups that the venture scouts have pre-vetted. VC scouts benefit from the experience of learning about startups and venture capital while making money as investors.

However, not all VC scout programs are public knowledge. Many firms with in-house scout teams and programs may prefer to be more secretive. They use the programs to add diversity and inclusion to their culture and portfolio while identifying disruptive ideas with unicorn potential. Backing underrepresented founders is also an objective.

Approving Lucrative Investment Opportunities

Approval criteria can depend on the VC firm’s internal operating policies. For instance, some firms may require the VC scout to identify viable startups and perform due diligence. Next, the scout connects them with the venture capital firm.

Other VC firms may require a memo summarizing the opportunity and its profitability. Due diligence follows only if the firm is interested in backing the startup. After the investment decision, VC scouts continue working as a connector between the firm and the investment throughout its lifetime.

Keep in mind that storytelling is everything in fundraising. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

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Compensation for Venture Scouts

VC scouts receive compensation for their time and effort in several ways, depending on the VC firm. This incentive could be cash, equity, or a combination. For instance:

• Cash incentives are paid out once the deal is finalized. This cash could be equivalent to the total investment amount, but also varies according to the conditions of the scout program.
• Alternatively, the VC firm could pay cash to introduce the startup if it matches its internal criteria. The venture scout completes the due diligence and finalizes the deal.
• Incentives can be equity-based, ranging from 2.4% to 10% of the funds’ carry pool. The scout receives an equity stake in the startup.
• Some VC programs allot micro funds to their scouts, who receive a portion of the allocated amount. The VC scouts can autonomously invest small checks from $10K to $50K. They earn interest on the investment along with a performance bonus if the startup performs well and turns in profits.
• VC firms may also work with independent third-party venture scouts and negotiate a finder’s fee for successful deals. This strategy allows the firm to avoid incurring the costs of having an in-house scout unit. On their part, the venture scouts earn incentives while building credibility in the market as deal flow agents.

How VC Scouts Bridge Early-Stage Startups and Investors

Sequoia Capital developed the idea of venture scouts sometime in 2009. The fund leaders actively encouraged entrepreneurs to support founders within their network who had exciting and innovative projects and ideas. The entrepreneurs became the first talent headhunters of the startup ecosystem.

VC scouts bring several advantages to the table, which is why VC firms have started programs and dedicated funds. Here’s what you need to know:

• Venture scouts are typically veteran founders with extensive expertise in their sector. They are aware of the risks and challenges startups face, and have the experience to assess their ideas. As a result, they are better positioned to evaluate the startup as an investment option. They understand what works and what doesn’t, and are open to backing seemingly risky ideas.
• Some VC scouts are angel investors interested in a more hands-on approach with lucrative projects. They work with startups and VC firms, facilitating deals and empowering founders with capital and additional assistance.
• The VC firm can participate in further funding rounds once the startup starts to scale and demonstrates growth and profitability. In this way, scouts not only facilitate deal flows but also help in building long-term relationships between startups and investors. The extended partnership is great for the startup since it gains credibility with other investors, customers, and tactical stakeholders.
• VC firms can expand their reach through the scout networks to approach promising startups they might otherwise miss. Many VCs require scouting recruits to have and maintain a strong professional network as a prerequisite for working with them.
• Since external venture scouts work independently, they can approach multiple VC firms to back a particular startup. If the project is not a good fit for a specific VC, the scout will reach out to others, ensuring successful fundraising.

Partnering with VC scouts is an excellent fundraising strategy. But if you need more information about how to build a target list of investors the scout can help you approach, you’ve come to the right place. Check out this video in which I have explained how it’s done.

VC Scouts Create Opportunities

Statistics suggest that securing venture capital is extremely tough for a fledgling company. Just 1% of startups successfully approach investors and get the funding they need. They must resort to alternative sources such as family and friends, crowdfunding, lines of credit, and loans.

The lack of adequate capital is a huge barrier to lucrative ideas that can overturn their industries. Venture scouts have leveled the playing field by giving these ideas the visibility they need.

The small checks founders receive can make the ultimate difference in transforming an idea into an MVP. Or, to build advertising and distribution channels. Ultimately, startup scouts create opportunities for founders by assisting them with capital, expertise, and know-how.

They also create investment opportunities for VC firms. Traditionally, large VCs prefer to invest in later-stage startups needing funding ranging from $1M to $50M. Typical investment criteria include a robust business model and accelerated growth potential.

Smaller startups are not there yet so they don’t make the cut. They need smaller amounts of capital, which VCs are now open to offering thanks to their partnerships with venture scouts. As the company continues to scale, scouts ensure long-term stability by providing access to their networks.

This factor opens doors for further funding rounds and strategic vertical and horizontal partnerships.

Where Startup Scouts Fall Short

Although VC scouts have transformed fundraising techniques, understanding the potential downsides of working with them is also crucial. The underlying principle behind such scouts is that they see potential that larger VC firms may miss.

On the flip side, their expertise is not always infallible. They could end up backing projects that fall through despite the initial seed funding they receive. The company may not be able to deliver on its promises.

In the current business landscape, fundraising is not just about securing capital. It is also about gaining strategic partners who bring much more to the table, including networks, mentoring, and guidance.

Startups relying on VC scouts should explore their skills and track records before signing up for the partnership. Larger VC firms may be better equipped to support the startup thanks to their superior expertise and board presence.

Although collaborating with the VC firm through the venture scout brings credibility to the startup, the reverse is also true. If the firm chooses not to participate in further funding rounds, that could raise questions about the startup’s stability. Other investors might hesitate to offer capital.

In Conclusion

Approaching top venture capital firms for funding is, undoubtedly, challenging for an early-stage startup. Navigating their screening processes can be an uphill task, particularly when you have an innovative idea that still needs to be fleshed out.

Instead of approaching VC firms directly, you could consider reaching out to VC scouts instead. Pitch your ideas to these agents, and you might just be able to secure the small checks you need.

If you deliver on your initial promise, you’ll get your foot in the door and open opportunities for a long-term partnership. A successful pitch and due diligence from a startup scout could be your first step in the right direction.

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