Last year, the number of seed deals in Europe reached 2,329—an increase of nearly 22% from 2020—with capital raised more than doubling to roughly $7 billion, according to PitchBook data. With more startups founded each year, investors can struggle to sort the wheat from the chaff.
Enter scout networks.
A relatively new feature of the European startup ecosystem, scout networks are made up of startup operators that work with VCs to create more deal flow opportunities. They have become a popular way for investors to discover new startups and source deals. Scouts can provide VCs with insights into unfamiliar industries and geographies and, if a deal is picked up, they are compensated with either a referral fee or a percentage of the carry.
Last year, VCs including Accel and Hedosophia launched their own programs, following in the footsteps of firms such as Sequoia, Atomico and Ada Ventures whose networks have been in operation for a couple of years.
“We see [scout networks] really as a tool to help the European ecosystem flourish,” Accel partner Luca Bocchio said. “Of course, fostering stronger links with founders will indirectly provide us with additional sourcing opportunities. But it’s more about building a community and empowering the next generation of founders by providing access to experienced entrepreneurs and having a positive impact on the ecosystem.”
While some scouts’ roles are limited to making introductions, more investors are giving scouts capital to invest in startups directly. There are downsides to this. Scouts aren’t investing their own money, so they don’t bear the same level of risk. Also, the amount of cash a startup would receive from a scout is likely to be smaller than what they would get from a firm, and they miss out on the name of a well-known VC on their cap table.
According to Bocchio, by setting up its scout program, Accel was hoping to give operators the chance to build an investment track record and become angels themselves.
“When we launched the program [in Europe], we could see that there was a lack of a very vibrant angel community across different smaller hubs,” Bocchio said. “The combination of VC and angels is very powerful. If I look at our activity across the board, in every single cap table that we’re involved in, there are some angels. Founders are really happy to have an individual that has been on a startup journey themselves with strong expertise in specific areas.”
While more scout network programs are appearing in Europe, they take a lot of time and capital to build. As such, they are only really available to bigger or more established VCs. Joe Perkins, founder of VC review platform Landscape, is hoping to change that by launching a marketplace to democratize scouting.
“I think scouts can start feeling a little disillusioned when they’re working for just one fund,” Perkins said. “If you think a VC fund does 10 deals a year, the chances of one of the companies that you’ve scouted being part of that is pretty slim.”
Through Landscape’s network, scouts share investment pitches with a wide range of VCs instead of just one. Firms can subscribe to follow scouts based on their profile and deal flow which then gives them access to proposed deals. Currently, only referral fees are available on the platform and not a percentage of the carry.
Perkins adds that in traditional scout programs there are fewer introductions and the dealmaking processes are slower-paced. By opening the process up to a wider marketplace, scouts can build a track record quicker and support more founders as they have a higher chance of a deal being picked up.
“The absolute dream would be if we can take some of the deal sourcing off the hands of the VCs, perhaps freeing up more time for them to support portfolio companies and the ecosystem,” Perkins said. “But like any scout program, it depends on the caliber of the startups and scouts themselves, but, if [our marketplace] works the way we want it to, I’m hopeful.”
Not everyone is convinced of this democratized model. For his part, Bocchio notes that in a traditional program, scouts have already built relationships with VCs as portfolio founders or startup operators, establishing more trust in their ability to make sound investment decisions or proposals.
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