-
- Short Description. A scout makes small investments on behalf of a VC fund without requiring much involvement from the rest of the team. The check size is smaller and the companies are at an earlier stage than the main fund. The goal is that the scout investments will grow to become investments for the main fund. And the hope is that the GP will have an inside track on leading that investment.
- Benefits:
- Tracking Companies: By investing earlier in companies, the GP has more time to learn about the team and the market. The extra information can be helpful in evaluating the company.
- Heads Up on Rounds: Existing investors can know before others that a company is ready to raise more money. The earlier information enables a GP to act before other firms.
- Access Other Networks: Scouts may be already members of networks that may be hard for the GP to access. For example, some GPs have use scouts for college campuses.
- Access Other Expertise: Scouts may add expertise in particular geographies, markets, or technologies.
- Delegate Smaller Deals: GPs can delegate the smaller and earlier stage deals without the temptation to work on them.
- Trade-offs:
- Signaling. When a scout invests in a company but the main fund does not follow-on, does that hurt the company? It can be harmful if taken as a signal that the GP knows something bad about the company. Although this is more of a risk for the company, some GPs worry this could have a negative impact on their reputation. Or this signaling risk might scare off quality founders from participating.
- Takes Time: The setup and maintenance of a scout program can take time.
- Scout’s Lack of Investment Experience: GPs train to pick good investments. That is not the same skill as picking investors who will be good at picking investments. The scouts may make mistakes and hurt fund performance. Or they may not result in good leads for the main fund.
- Examples:
- Sequoia scout program
- Dorm Room Fund (from First Round)
- Rough Draft Ventures (from General Catalyst)
