A VC scout is someone who helps venture capital firms or syndicates source likely targets for investment. Simply put, a scout will connect businesses needing funding to scale and grow with individuals who can provide the cash. VC firms will task VC scouts to hunt for particular opportunities, such as a company’s geographical business location, funding stage or industry sector.
Some VC scouts are direct employees of VC firms, while others may work through a VC scout program. They may be students, former founders or emerging investors looking to get a foothold in the industry.
What is the VC Scout’s Role?
A venture capital scout will typically spend their time networking, attending industry events and monitoring developments in the start-up and emerging company ecosystem. While they don’t do full due diligence on potential targets, they do screen companies to make sure they’re a good fit for the VC.
A VC scout will usually sign a scout agreement that describes the types of deals the firm is interested in pursuing. If a scout spots a potential target, they must normally pass this on to the investors, giving them a ‘right of first opportunity’ to invest.
Once the scout has a target in mind, they pre-qualify the company and prepare a summary of the deal for investors. If the pitch is successful, the scout will be rewarded. Their compensation will vary from firm to firm, and deal to deal.
The VC scout may also assist investors during the lifecycle of a particular investment.
Why are VC Scouts Important in the Venture Capital Ecosystem?
VC firms compete to secure the most promising investments. They need to be on top of their game and act quickly to secure a chance to invest. Hence the need for VC scouting. VC scouts can devote their time to prospecting for opportunities, leaving the VC free to monitor their existing investments.
How Did VC Scouts Originate?
Who Invented the VC Scout Concept?
Sequoia Capital is credited with inventing the VC scout program, 1 initially using entrepreneurs from their portfolio businesses to scout for potential new targets. This helped Sequoia to expand its network of emerging businesses and nurture their relationships with portfolio founders.
How Have VC Scouts Evolved Over Time?
The first VC scouts were themselves founders. Now scouts come from a variety of backgrounds. What they have in common is a desire to enter the world of angel investing. Scouts are becoming more diverse and better rewarded, not just financially but also in terms of access to the VC world on privileged terms.
What’s the Profile of a Typical VC Scout?
What Skills and Qualifications Do VC Scouts Have?
Principally, VC scouts are required to have an in-depth and up-to-date knowledge of the start-up landscape, as well as excellent connections within that ecosystem.
They need to have an analytical mind and understand market economics, with an eye for trends, potential for growth and relative competitive advantage.
A grasp of what makes a company viable is essential. They must be able to assess a business’s capacity to grow, scale and generate revenue for investors.
VC scouts should also be creative and curious, able to unlock innovative ideas and identify companies that align with the VC firm’s profile. They should be good communicators and be able to deliver a convincing and accurate pitch to investors once they have determined a likely target.
What Are VC Scouts’ Professional Backgrounds?
They will generally have experience in a similar role, be a founder or former founder, or have come from an investment banking or private equity background. They’ll be good at analyzing data and have some knowledge of the law as it relates to the VC industry.
Examples of Famous VC Scouts and Their Investments
Jason Calacanis and Uber with Sequoia Capital
Jason Calacanis is one of the most notable VC scouts. He invested $25K into Uber’s seed round of funding on behalf of Sequoia. This deal is now worth around $100,000,000.
Other Renowned VC Scouts and Their Significant Deals
Some well-known entrepreneurs were VC scouts in their early days, such as Airbnb’s Brian Chesky and Dropbox founders Arash Ferdowsi and Drew Houston.
Other renowned scouts 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. Notable scout-originated deals include Stripe, Guardant Health, GenEdit, Notion, Clever and Vector. 2
In France, Alexandre Berriche and Roxanne Varza are notorious for being Sequoia scouts on top of their day to day jobs.
Major Venture Capital Firms Offering Scout Programs
Which Firms Have Scout Programs?
Major venture capital firms offering scout programs include Hedosophia, Sequoia, or Atomico.
Objectives and Operation of These Programs Within Firms
The main purpose of these programs is to nurture the scouts and enable them to offer support to venture capital investors in discovering and financing the next big business on the market.
How the program operates differs from firm to firm. Some ask the scouts to pre-qualify potential targets, while others simply ask scouts to pass on prospective leads. At times, scouts will write up a deal memo outlining the basics of the opportunity before carrying out due diligence on behalf of the firm. Some scouts are given money to invest on the firm’s behalf.
What are the Motivations to Become a VC Scout?
What are the Advantages and Opportunities Offered by the VC Scout Role?
Compensation is an important part of the scout’s package. A scout will often receive ‘carried interest’ or an equity stake in the future profits of the company. This will be triggered by an ‘exit event’, such as an IPO or a company sale. A scout may also receive profits interest as a percentage of the VC firm’s profit interest.
Other scouts may be offered cash on successful completion of a deal, or compensation upon making a successful introduction. In some cases, the scout gets funding from the firm to invest directly in the target. They may also get a performance bonus.
How Would Becoming a VC Scout Help My Career in Venture Capital and Entrepreneurship?
Here’s how being a VC scout can help your VC or entrepreneurial career:
- You’ll gain industry knowledge, build your contact book and get a track record in the sector
- You can benefit personally from great opportunities you come across while scouting
- You can go on to become a VC investor in your own right
Conclusion
VC scouting has become an integral part of the VC landscape. Not only do VC programs free up investors’ time, but scouts provide investors with a funnel of potential deals and can be the first ones to spot the next unicorn due to their presence on the ground.
From the scout’s perspective, they get to enrich their network of contacts, fine-tune their business expertise and contribute to the success of a VC fund to their financial benefit.
References
[1] https://lastmoneyin.co/p/venture-scouts-explained
[2] https://lastmoneyin.co/p/venture-scouts-explained
[3] https://www.vcstack.io/blog/scout-programs
[4]https://www.goingvc.com/post/rise-of-scout-programs-across-venture-capital
[5] https://www.goingvc.com/post/rise-of-scout-programs-across-venture-capital
[6] https://tech.eu/2023/09/24/venture-capital-scouting-traits-tools-and-pitfalls/
[7] https://lastmoneyin.co/p/venture-scouts-explained
[8] Venturecapitalcareers.com: https://tinyurl.com/5sma57m2
[9] Techcrunch.com: A peek inside sequoia capital’s low-flying wide-reaching scout program:
[10] https://tinyurl.com/32pyfaxx
[11] https://pitchbook.com/news/articles/vc-scout-networks-startup-sourcing-europe
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