Skip to page content

VC: Delegate to a Scout

    1. Description
      1. A scout fund or network is when an established VC fund delegates most or all decisions on identifying and selecting investments to a loosely affiliated party.  Often the scout is investing 1 to 10% of the amount the main fund would normally invest. The scout is sometimes a founder or other professional in the ecosystem that has an interesting network or particular expertise.
    2. Benefits
      1. Access – A firm can increase access to invest in an increased number of companies with more people identifying and deciding on more deals. Also, scouts may be selected for access to networks that the GPs have trouble getting into.  For example, some firms have college students as scouts to monitor and identify the best companies being formed on campus.
      2. Variety – A well-chosen scout network will have expertise and interests that are different than the GPs of the core firm.  This variety in scouts can lead to a variety of different kinds of companies by sector, business model, or other attributes.
      3. Delegate Small Deals – For VC firms, a smaller check that is a fraction of the normal check size may not be worth spending a partner’s or team’s time on.  By delegating the decision, the VC firm can have the benefits of investing in many more companies without the cost of the decision and relationship overhead on the core team.
      4. Speed – If the decision-making is nearly or fully delegated to the scout, the speed from meeting to a decision can be increased compared to a more team-based or complete decision-making process run by some GPs.
      5. More Information – We a network of scouts working independently across different sectors and geographies, the GP can generate more information about what is working, who is working on what, and what trends founders are seeing.
      6. Farm Team – A scout network can be a way to identify and get experience with possible future GP team members. 
    3. Trade-offs
      1. Quality Risk – The scout program by its nature recruits less experienced people to be making investment decisions. There is a risk that the lack of experience will result in an increased frequency in lower-quality investments.
      2. Less Focus – While you can get variety and access with a scout program, one trade-off is that with more people involved it can be harder to maintain a narrow focus by sector or other attributes.
      3. Lack of Meaningful Return – Some worry that even if a few scouts invest in successful companies, the absolute ownership, and return amounts will not be meaningful compared to the size of the main fund.  In order to make money, the argument is that the scout checks have to convert into follow-on investments by the main fund buying more ownership of the best companies.
      4. Missing Follow-Ons – In order to use the scout program to convert into investments by the main fund at later rounds, the GPs need a system for identifying and winning that next round.  If the scouts are loosely affiliated and not well managed, it is possible to miss those opportunities. It is also possible to be an existing small investor and miss those opportunities through a lack of brand or relationship with the main fund team members.
    4. Examples
      1. Sequoia
      2. Village Global
      3. Lightspeed
      4. First Round’s Dorm Room Fund
      5. General Catalyst’s Rough Draft Ventures
Discuss on Twitter View Discussion