The easiest way to work with and for VC funds is to become a scout, getting compensated for sourcing investments. But how do you do that?
We’ve been studying VC scout programs, not just to improve our deal sourcing, but for four broader reasons:
1. To help our founders in transition
Versatile VC runs a no-cost community for founders in transition, “Founders’ Next Move.” We have collected a wide range of resources for founders who may be considering launching a new company; angel investing/becoming a VC; buying a company; joining boards; consulting; serving as an interim executive; or just getting a job. Our goal is to invest in, co-invest with and/or recruit founders in transition.
2. Monetizing our deal flow
All VCs, including us, regularly see investment opportunities that don’t fit our mandate. We may as well get compensated for referring them to others. There are a number of VC funds that share the carry earned in their co-investment to the referring party. Another option is our becoming a formal scout for other VCs through programs like those we list below.
3. We’re launching our own scout program and want to benchmark compensation and structure against our peers
We already have a senior team of venture partners who help us in origination and diligence. They may also consult with companies directly or serve on boards, in which case we’ll expedite their being compensated directly by the relevant company. Scouts are intended to be a lighter-touch relationship, focused only on sourcing. We envision we can have an unlimited number of scouts, but only a small number of Venture Partners.
4. Scouts help promote diversity in VC
This is true both on the investor side and also among portfolio company management.
What really matters is scout-fund fit. You’re not going to earn any money if the sort of investments you source are not a fit for the VC you’re scouting for.
We’ve identified a number of VCs besides us that have publicly discussed their scout programs, and in some cases publicly shared their economics. We found these by looking through firms’ websites, social media, blog posts, etc. We list all of them below.
In addition to formal scout programs, note that many VCs will structure one-off arrangements with “friends of the firm” to compensate them for sourcing. You can’t normally “apply” for those relationships unless you have a pre-existing relationship with the VC.
How much can you earn?
Scouts are typically paid a percentage of carry-on investments they source. So excluding any upfront cash, your cash compensation, which is normally paid out when that startup exits (typically three to 12 years from the present) equals:
# companies you source
* (% of companies the VC invests in)
* (average VC check size)
* (average multiple generated, minus 1)
* (your percentage of the carry pool, typically 2.5%-10% of the fund’s carry pool on a given investment, i.e., of the typical 20% that the fund earns)
If you’re paid on a per-deal basis, your contract may have adjustments for netting of carry. For example, if the overall fund is a 0.9X multiple, you may get paid zero even if you source a winning investment for that particular fund.)
Certain late-stage VCs have invested in some of my past funds, partly to motivate us to refer future investment opportunities to them. A few firms also or instead pay a cash bounty to scouts, typically 1% of the amount invested into the company. Alternatively, some firms pay a fixed percentage of total fund carry per deal sourced, i.e., if you source one company out of a planned 30 companies in a fund, you might get 10%*(1/30) = 0.333% of the carry pool. This structure has the advantage of simpler accounting and it motivates the scout to be a resource for the entire portfolio, not just the one company she sourced.
A few funds (e.g., Accel, Sequoia) give the scout a small pool of capital. Effectively, the scout is then managing a tiny pocket of that VC fund. Typically, the backing VC will have some ability to veto the scout’s investments in this structure.
That said, a generous carry percentage is irrelevant if the fund’s metrics for the other components of the formula above are low. What really matters is scout-fund fit. You’re not going to earn any money if the sort of investments you source are not a fit for the VC you’re scouting for, because they just won’t put money to work.
Some scouts also have the opportunity (or expectation) to help raise money for the fund by seeking fund commitments from potential LPs. Typical incentive payments for fundraising from VC limited partners is 0.5%-2% of cash raised, with larger percentages for smaller funds. Check with counsel to make sure that these compensation structures are compliant.
Other investors that pay sourcing fees
Our focus here is venture capital, but the private equity industry employs origination-focused team members also. These are primarily full-time team members, but PE funds also employ investment banks as well as freelance “finders.”
Including bonuses, the ballpark salary for a new business development associate with a private equity firm is around $100,000. Some PE funds publicly advertise rewards for anyone who refers them to an investment, while independent sponsors can earn a 20% fee for facilitating deals.
Similarly, certain revenue-based finance investors also have open-access scouting programs.
“Given the instant nature of RBF, the payout is immediate: a successful affiliation typically generates up to 1% of the amount raised to the finder,” OpenVC CEO Stephane Nasser noted. “If you have access to post-revenue SaaS or e-commerce companies, you can easily make $1,000 to $10,000 per company within a few days.”
Most scouts get paid only on a success basis, without a retainer. If your responsibility is just forwarding emails and making an occasional intro, it’s less common to get a retainer. You can make an argument for a retainer (or an investment in your fund, if you’re a VC yourself) if some combination of the following applies:
- You’re going to spend significant time marketing, sourcing and filtering investments, beyond your normal business activities. If you’re going to work for an hour a week, most people are comfortable knowing they may not get paid, if at all, until a decade from now. But if you’re doing more than an hour a week, ask for more certainty of cash and/or equity compensation. I suggest getting clarity on the number of hours/week you’re expected to work, and multiply it by what you consider a reasonable hourly rate.
- You’re involved in other aspects of the firm’s activities: due diligence, portfolio acceleration, board service, etc.
- You’re prominent enough that your affiliation with the firm generates brand value.
How to find a scout job
Scouts are typically hired because they are well-networked and credible in an industry, geography and/or community that a VC is focusing on. Joel Palathinkal, CEO of Sutton Capital, observes that scouts usually fall into one of three categories: