Scout networks are latest VC salvo in war for founders

Founders are extraordinarily busy, even for their own investors. A decade ago, they might have had relationships with a handful of VC partners as they scaled their businesses and raised additional rounds of capital.

Today, it is hardly rare to see as many as fifteen or twenty investment firms and angels listed on the cap table following a seed round. If you add up all the partners at those funds, a first-time founder can have investment connections to literally dozens of VCs in just the first year or two of the company. That number can easily approach three digits as a startup grows.

For VCs looking to build deeper partnerships with their portfolio, that’s an incredible battle for founder attention, and it is only getting more keen. All the while, founders today increasingly want to receive investments from other founders — people who have been in their shoes and can speak to the challenges that they are facing. VC firms are trying to quickly adapt to the changing terrain, and so we are seeing the rise of “working networks” that blur the lines between founder, investor, and advisor.

Networking may be the bread and butter of venture investing, but the “VC firm as network” seems to be hitting a zenith. The clearest example of this is Spearhead, a joint initiative of Accomplice and AngelList. The program, whose application is open until Monday, seeks founders who are interested in becoming part-time angel investors. Each participant will receive $200,000 and potentially up to $1 million on behalf of the two funds to invest in startups, all the while receiving training on how to think and make decisions like a venture capitalist.

Spearhead is hardly the only program engaging founders and advisors. Sequoia’s formally stealthy scout program has been rolled into the firm’s new $180 million seed fund announced earlier this month. The fund includes more than 100 scouts sourcing deals for the firm.

On top of that, First Round’s Dorm Room Fund and General Catalyst’s Rough Draft Ventures together have dozens of student partners who have sourced hundreds of deals on college campuses since their inceptions. First Round also has a network of product thinkers called Product Co-op which invests angel capital in a scout-like way. Village Global, founded by ProductHunt first employee Erik Tokenberg and others, is based on the adage that “Village is not a traditional VC. We’re a network.”

Why are these programs suddenly in vogue? It isn’t that VCs can’t keep up with the volume of new startups. Contrary to media excitement, the number of venture capital rounds has declined precipitously since a peak in 2014, particularly at the seed stage. Fully-staffed partnerships shouldn’t have an issue sourcing and processing startups for investment these days.

Instead, the motivating force here is competition for founder attention. Scout programs, advisor networks, and similar initiatives are designed to create a centripetal force for a venture firm, to keep your friends closer to the center lest they walk down the street to work with a competing venture firm.

Networks offer a way to stay engaged with founders, and they clearly love the attention. Spearhead, for instance, has already received around 750 applications as of yesterday. What’s even more interesting in their data though is that roughly half of the applications come from multi-time entrepreneurs. Even founders who have dozens of venture connections are interested in applying to become an angel investor with a set of firms whom they may have never met before.

That’s the power of these working networks — Accomplice and AngelList are not just building relationships with a dozen or two dozen engaged founders, they are also empowering a new group of angel investors who may well be sourcing deals and sharing them with their VC friends in a couple of years.

There are certainly benefits to the networked VC firm beyond winning the competition for attention. Diversifying the startup ecosystem and venture capital in particular is easier when the amounts of capital start at $200,000 rather than $20 million. Scout programs in particular can provide novice angel investors with an early track record that can make raising a VC fund easier, as well as offer peer support from other investors learning the trade.

In addition, as founders have increasingly wrested power away from VCs, they increasingly demand that the people on the other side of the table share their operational experience. Some firms have virtually mandated that all partners are operators, but others are taking advantage of networks to surround themselves with similar talent in the hopes of engaging with founders on a more even level.

Finally, and perhaps the secret to many of these programs, is that they can ameliorate some of the questions around succession planning that have increasingly been aired by LPs in recent years. VC is a weird business in which every trend seems to constantly change, but the people running the venture firms seem to be as stagnant as the Soviet politburo. Networks allow for more dynamism and fresh faces to surround a venture firm without knocking anyone out of their perch.

Now, networks can have their downsides. One concern that has been raised by several VCs I have spoken to about this subject over the past few weeks is what might be called the “multitask” concern. The thinking goes that founders and advisors are increasingly burdened with more and more of these sorts of side projects, and that they are potentially shirking their primary duties.

That logic though ignores just how important networks are for executives as well. Raising capital used to mean heading to Sand Hill and talking with a dozen venture firms. Now, the typical seed-stage founder I talk to who has successfully raised a venture round might have talked to a hundred venture capitalists or more before securing their round. The more connections, and the deeper those connections, the better it is for the future of their companies.

The other criticism, which is usually voiced by experienced venture capitalists, is that the rush to give a bunch of newcomers checkbooks is harming the quality of venture capital dealmaking. Grousing yes, but there is some truth to this as well. Building an investment track record too early may hinder a venture career rather than help it, and certainly some founders and advisors may lack the skill to make wise investments.

Ultimately though, these networks are here to stay. Every VC learned the trade at some point, and the sort of win-win-win situation that networks offer is extraordinarily valuable in the otherwise cutthroat venture industry. Founders have limited attention, and the firms that engage them early and repeatedly through networks are going to reap dividends as those founders source and invest into the next generation of companies.

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