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

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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 portfolio and culture 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.

We serve as VC scouts also with a mix of upfront fees and success fees or simply upfront fees. Fees structure and service offered varies in both cases. Get in touch with us at ifundindia@gmail.com