As I’ve described in prior articles, I find the venture capital industry to be a really fascinating field that greatly influences what technologies get built. Investors pour money and resources into a good idea in hope that something good will come out of it.
However, with everything there is to love about VC, the lack of diversity and inclusion is not one of them. Because this topic has been written about at great length, I’ll spare you the obvious points. Just know that it’s a field that is extremely homogenous and often-times perceived as an old boys club.
In an effort to be solution-oriented, I wanted to discuss a few non-traditional avenues that people use to get into the industry. For Part I, we’ll focus on scout programs.
A scout program is an initiative ran by VC firms that allow individuals to invest money in technology startup companies on behalf of the venture firm. The individual, called a scout, is someone who is not an employee of the firm but does represent the firm’s interest when they are trying to identify investment opportunities.
Why would a VC firm let some random person invest the company’s money into a risky company?
First, scout programs enable firms that usually focus on later-stage deals (Series B-E) to keep an eye on younger and riskier companies. For example, if a VC fund is structured in a way where it needs to deploy capital at an average check size of $20 million per investment, it would be difficult for their team to focus on and prioritize a $500,000 check size to founders who just have a prototype or idea.
In that case, the firm can use scouts to make these small investments while also being able to keep an eye on up-and-coming companies. When that same investment goes from being a small company to one with massive potential, the VC firm already has some relationships (via the scout’s investment) and can seize on it in a later stage deal.
This model was popularized by VC powerhouse Sequoia Capital, but now can be found in firms around the world. Personally, I’m excited about the scout programs being launched by Chapter One and Lightspeed Venture Partners.
Another reason why more and more firms are exploring the idea is that this program structure can open the door to more people from underrepresented backgrounds, including folks who previously lacked the network or traditional experience. This is where I think the real value is.
Can anyone become a scout?
Technically, yes. VC firms typically look for someone that has proven that they can effectively pick companies that will go on to be successful. This expertise can be demonstrated in multiple ways: through prior investments as an angel investor, having worked at a high-growth startup before, or simply as someone who has publicly written about companies early on and made correct predictions.
One venture capitalist rightly pointed out that the now-famed Shark Tank investor Chris Sacca invested in breakout companies like Uber and Twitter well before he ever became a formal investor. While he wasn’t formally a scout, he was able to build a portfolio and credibility before having credentials. You probably won’t find the next Twitter, but who’s to say you couldn’t find the next big entrepreneur to come out of your home town or university?
Do scouts make money?
Absolutely. The vast majority of VC firms with a scout program offer upside value to the scout if their investment ends up being a good pick. This upside, called a ‘carry,’ could mean a small-to-modest percent of the investment in the event of an exit.
If a scout was fortunate enough to pick a game-changing company, this payoff could be huge. More likely is a modest financial outcome or none at all. It’s often mentioned in the industry that scouts, like some angels, participate in the process more for the love of investing rather than for the pure economics of it. Still, I’m sure the money makes it even more fun.
If any of this is interesting to you, let me know. I would be happy to share more resources.