Below you’ll find a “Scout Thought Experiment” that’s designed to help the reader explore the different incentives structures at play in the Venture Capital sourcing process. There are no right answers. This post simply tries to break down some of the underlying dynamics that VCs, scouts, and founders face as a part of competitive financing processes in order to better understand how to navigate them.

Scouts, as portrayed below, are typically well networked individuals working in the startup/tech space with a strong connection to a single Venture Capital firm. In some cases, scouts are actually empowered to write small checks to founders, but in our experience they typically just focus on introducing founders to the firm.

Here at OnePager, we also run a scout program: Open Scout is the world’s largest non-exclusive scout organization. This means that rather than reporting back to a single firm we actually help founders get exposure to over 1,000 of the world’s top investors (all for free).

If you’re a founder looking to get more exposure: Sign up for OnePager here
If you’re an investor looking to meet more great founders: Apply to join our Investor Day audience here
If you want to help founders in your network get more exposure: Apply to become a scout here

The Scout Thought Experiment

Assumptions:

1. You are a professional who is also a scout for SeedCap.

SeedCap is an industry agnostic seed-stage venture capital firm that focuses on investing in promising founders from all over the world. They source potential investment opportunities through their own connections as well as a network of venture scouts like you all over the world.

2. In your agreement with SeedCap there's nothing that legally prohibits you from sharing company information that you source with whoever you want – this includes other firms.

3. In your agreement with SeedCap there's nothing that legally prohibits you from telling companies you find about other fundraising options besides SeedCap they should consider.

4. If you successfully source a company for SeedCap you will automatically receive rights to a small percentage of the investment upside.

5. You recently discovered an exciting new company in your network ("CompA").

6. You will be the only person in the world that knows about CompA until you tell someone about it.

7. CompA is completely reliant on you for fundraising advice:

For example - If you told them SeedCap was the only fundraising option in the world they would only know about SeedCap. If you only told them about SeedCap and Sequoia they would only know about SeedCap and Sequoia. If you only told them about SeedCap, Sequoia, and one reputable Angel investor they would only know about SeedCap, Sequoia, and one reputable Angel investor.

8. CompA will pitch whoever they know about. Therefore, they'll only pitch the fundraising options you present to them.

9. CompA doesn't know it, but they are so great that they will receive a term sheet from whoever they pitch:

For example - If they only pitch SeedCap they will only receive a term sheet from SeedCap. If they pitch SeedCap and Sequoia they will receive term sheets from SeedCap and Sequoia. If they pitch SeedCap, Sequoia, and one reputable Angel investor they will receive term sheets from SeedCap, Sequoia, and one reputable Angel investor.

10. CompA doesn't know it, but the more term sheets they receive the better the term sheets will be because the investors will always match each other's offers:

For example - If CompA only pitches SeedCap they will only receive a term sheet from SeedCap with acceptable terms. If they pitch Sequoia as well they will receive a slightly better term sheet from Sequoia, but SeedCap will match the new more favorable terms immediately. If they pitch the reputable Angel Investor as well they will receive a slightly better term sheet from the reputable Angel investor, but Sequoia and SeedCap will match the new more favorable terms immediately. Relatively - CompA will receive the worst terms if they only pitch SeedCap. CompA will receive the best terms if they pitch SeedCap, Sequoia, and the reputable Angel investor.

11. CompA is equally likely to pick each of the 3 investors (SeedCap, Sequoia, and the reputable Angel investor) and you will not be able to sway CompA's decision. CompA will decide for themselves, based on their own interests, which investor is the best option for them:

For example - If CompA only has a term sheet from SeedCap there is a 100% chance they choose SeedCap. If CompA has term sheets from SeedCap and Sequoia there is a 50% chance they choose SeedCap and a 50% chance they choose Sequoia. If CompA has term sheets from SeedCap, Sequoia, and a reputable Angel investor there is a 33% chance they choose SeedCap, a 33% chance they choose Sequoia, and a 33% chance they choose the reputable Angel investor.

Scenarios:

Scenario A

The conditions of this scenario:

• SeedCap's management will never become aware of the fundraising options you did or didn't tell CompA about.

• CompA's founders will never become aware of the fundraising options you didn't tell them about or of the other points about their fundraising ability that you were aware of (assumptions 9 and 10) that they were not.

Which of the options below would you choose? You can only choose one:

• Only tell them about SeedCap

• Tell them about SeedCap and Sequoia

• Tell them about SeedCap, Sequoia, and the reputable Angel Investor

Scenario B

The conditions of this scenario:

• After CompA has completed their fundraising, SeedCap's management will become aware of what fundraising options you did or didn't share with CompA.

• CompA's founders will never become aware of the fundraising options you didn't tell them about or of the other points about their fundraising ability that you were aware of (assumptions 9 and 10) that they were not.

Which of the options below would you choose? You can only choose one:

• Only tell them about SeedCap

• Tell them about SeedCap and Sequoia

• Tell them about SeedCap, Sequoia, and the reputable Angel Investor

Scenario C

The conditions of this scenario:

• SeedCap's management will never become aware of what fundraising options you did or didn't share with CompA

• After CompA has completed their fundraising, CompA's founders will become aware of what fundraising options you didn't tell them about and of the previously outlined assumptions about their fundraising ability that you were aware of (assumptions 9 and 10) that they were not

Which of the options below would you choose? You can only choose one:

• Only tell them about SeedCap

• Tell them about SeedCap and Sequoia

• Tell them about SeedCap, Sequoia, and the reputable Angel Investor

Scenario D

The conditions of this scenario:

• After CompA has completed their fundraising, SeedCap's management will become aware of what fundraising options you did or didn't share with CompA

• After CompA has completed their fundraising, CompA will become aware of what fundraising options you didn't tell them about and of the previously outlined assumptions about their fundraising ability that you were aware of (9 and 10) that they were not

Which of the options below would you choose? You can only choose one:

• Only tell them about SeedCap

• Tell them about SeedCap and Sequoia

• Tell them about SeedCap, Sequoia, and the reputable Angel Investor

Discussion:

As stated earlier, there are no right or wrong answers here. Rather, this is meant to help you think about the different incentive structures that are at play in a startup fundraising process.

Here are a few questions I would encourage you to ask yourself after having gone through the scenarios above:

• What would you do if you were only looking to optimize your personal outcome? Does the answer change if you focus on the short-term compared to the long-term?

• If you were the founder in this scenario, what would you hope for the scout to choose? Would you be understanding if that choice wasn’t completely in line with your ideal outcome?

• If you were a part of SeedCap management, what would you hope for the scout to choose? Which scout choice puts the firm in the optimal position?

Open Scout was founded to align incentives between founders, scouts, and investors. There are tradeoffs in the typical sourcing process that we think slow down the financing process for founders everywhere. If you’re interested in learning more or applying to become a scout with us click here.