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VC Scout Programs: Tapping Into the Crowd for Deal Flow

For venture capital firms, finding the next big startup investment opportunity is a never-ending pursuit. With thousands of startups being founded every year, it's impossible for VC firms to comprehensively track and evaluate every potential deal themselves. This has led many leading venture firms to implement "VC scout" programs to crowdsource deal flow and leverage external networks to surface promising startups.

What are VC Scout Programs?

A VC scout program enlists individuals - often founders, operators, investors or subject matter experts themselves - to refer startups they come across to the VC firm in exchange for a slice of the potential investment profits. These scouts act as an extension of the VC's deal sourcing efforts, helping expand their reach and tap into pockets of emerging startups they may otherwise miss. Scouts are typically not full-time employees of the VC firm. Instead, they operate independently, keeping an eye out for exciting companies in their areas of expertise or geographies as part of their day-to-day work. When they identify a promising opportunity, they can pass those deals along to the partnering VC fund. If the VC ends up investing in a company a scout referred, the scout earns a referral fee or "carry" stake in that particular investment. This incentivizes scouts to diligently seek out great startups and refer only their highest-conviction opportunities to the fund.

Benefits for VCs

VC scout programs offer funds a way to greatly expand their sourcing capabilities without significantly growing their internal team:

  • Localized Expertise: Scouts often have relevant industry, technical or regional expertise that allows them to identify great startups within their specific domains

  • Trusted Networks: As respected operators and experts themselves, scouts can tap into networks and scenes the VC may not have visibility into

  • Cost Effective: Paying scouts on a deal-by-deal basis is more cost-effective than hiring a larger investment team

  • Deal Velocity: With more pipeline, funds can evaluate more startups to find winners faster

Benefits for Scouts

For scouts, referring quality startups that get funded is a lucrative side income stream. The most active and successful scouts can earn millions in carry over time. But income isn't the only motivator - scouts get an inside look into VC dealflow and can make valuable connections, learn about emerging technologies, and stay tapped into the startup ecosystem. Many treat it as an informal way to gain VC experience.

How to Become a Scout

Most scout programs are not publicly open for application. VCs tend to tap their networks and portfolio companies to bring scouts on board. Having an excellent reputation, relevant expertise and a strong deal referral track record are key to getting noticed.

Evaluating Scout Programs

As an investor, not all scout programs are created equal. It's important to evaluate the quality of a VC fund's scout network when considering backing that fund. Key factors to assess include:

  • Scout Expertise: Look at the backgrounds and track records of the scouts themselves. Do they truly have domain expertise and operational/investing experience in relevant areas? Or are they more generalist scouts without specialization?

  • Scout Incentives: Understand how scouts are compensated. Lower carry percentages may not sufficiently incentivize top deal referrals. But overly rich economics could motivate liberal referrals just to collect fees.

  • Managing Conflicts: How does the fund ensure scouts aren't biased toward referring companies they have other financial interests in? Robust conflict policies are important.

  • Program Scale: While quality is most critical, a program's overall scale can demonstrate its established position in the market. Funds should aim to have hundreds of activated scouts to maximize coverage.

Startup Perspective

On the other side of the equation, scout programs can greatly benefit startups as well by expanding their exposure to potential investors. By impressing the right scout, they could get quickly referred to the perfect VC firm for their company. The scout model presents another path for startups to get funded - but referrals alone aren't enough as scouts prioritize their highest conviction picks.

For investors looking for smart, diligent scouts, VC scout programs offer a chance to access vetted deal flow while incentivizing high-quality sourcing from subject matter experts and startup insiders. While not a silver bullet, these programs can be a powerful tool to supplement a fund's internal efforts.

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