In 2010, Sequoia gave a serial founder named Jason Calacanis a small pot of money and a fairly loose mandate: find the teams that the firm itself would miss. He put part of it into a company virtually nobody had heard of at the time, Uber Cab, and when Roelof Botha insisted that every scout write an investment memo, Calacanis submitted just two words in protest: “Cabs suck.”
Five years later, that investment was worth around 110 million dollars and marked the moment the rest of the industry established scout programs as a standard deal-flow channel. Today, virtually every fund of relevant size runs some variation of it, including Sequoia, Andreessen Horowitz, General Catalyst, Atomico, and Hedosophia. In recent years, the model has firmly arrived in Germany as well, which is why names like “Explorer Fund” or “Scout Fund” are appearing on more and more cap tables.
Relative to its increased popularity, the model has remained surprisingly opaque, especially for founders in their first round. It is therefore worth breaking it down cleanly, starting with the obvious question:
What is a VC scout?
A scout is an individual who invests in startups using capital from a venture fund. Usually an operator or founder, sometimes simply someone with an exceptionally strong network in a particular corner of the market. They receive a budget and a great deal of freedom in how they deploy it. The money and the mandate come without a salary, management fee, or title at the fund.
The logic is closely tied to the first principles of early-stage investing: the earlier you get in, the less there is to evaluate besides the team itself. This is precisely the level scouts exist for. Calacanis had no market analysis on urban mobility and no thesis worthy of the name (“Cabs suck”), but he knew the founders and had seen them work long before they were founders. Information (the information “Uber Cab exists” along with the verdict of an experienced entrepreneur that “The team is world-class”) that wasn’t publicly available and was therefore extremely valuable to VC funds. This is how Sequoia became aware of the team six months before everyone else and was ultimately able to invest.
What’s in it for the fund?
Those six months are the actual product of scout funds, not necessarily the return on the money invested by the scouts themselves. The checks are far too small to move the needle for a fund of meaningful size. What is being bought is access and information asymmetry as arguably the most valuable assets in early-stage investing.
The mechanism is quite straightforward: as an investor, your job is to find exceptional people as early as possible and own a stake in what they build before the price reflects it. And exceptional people spend their time almost exclusively with other exceptional people. So you place a scout in every talent pool that interests you, give them a reason to invest in precisely the peers they believe in as soon as they launch something, and every submitted deal provides the fund with information about the founding team, a brief description of the idea, and, above all, warm access through the scout.
The following figures are illustrative and ignore dilution and follow-on rounds, but they demonstrate the order of magnitude: Suppose a fund allocates ten million dollars for 50 scouts, meaning 200,000 dollars per scout, and each scout writes eight checks of 25,000 dollars each. This allows the fund to see 400 companies at the earliest possible stage. If one percent of them eventually reach a one-billion valuation, that’s four companies. Let’s assume that without a scout, the fund only enters in Series A or B. With a scout, it enters one round earlier, say with 10 million at a 100 million post-money valuation, or 10 percent of the company. If that company is later worth one billion, the position is worth around 100 million. That makes roughly 90 million in profit per company, purely from the earlier entry, and four times over. With 20 percent carry, the general partners make roughly 72 million from a program that cost ten million. Importantly: this return is an indirect result of access and not the return on the scout check itself. The latter is primarily relevant for the scout.
What’s in it for the scout?
Scouts are usually compensated via carry, meaning a share of profits rather than a commission per deal. The amount varies depending on the program and is often in the ballpark of the usual 20 percent. Crucially, carry only kicks in once the invested capital has been returned. In addition, many programs share a portion of the carry across the entire scout cohort—a small design detail with a major impact on behavior: scouts no longer compete with one another, but instead pass deals to each other. In past cohorts, these shared carry pools alone have sometimes yielded six-figure returns per scout, because early checks were placed in AI companies that were acquired or went public in recent years.
The calculation from the scout’s perspective, again without dilution: eight checks of 25,000 dollars each, meaning 200,000 invested, at an average entry valuation of five million post-money. Each check buys approximately 0.5 percent. Let’s assume seven go to zero and one reaches one billion. That single position is then worth around five million. First, the invested capital is returned, leaving roughly 4.8 million in profit, and 20 percent of that is roughly one million for the scout (part of which goes into the mentioned carry pool).
Attractive for scouts: the scout has none of their own money on the line and therefore no downside, while their entire upside lies in the tail.
What’s in it for founders?
So why take a scout check instead of just regular angel money? In my experience, it comes down to trust and speed, roughly in that order.
It is usually very early on, and the scout is typically someone the founders already know anyway—a former colleague or a friend. An initial check is then the natural way to formalize an existing relationship and give this person an enduring reason to stay involved. Furthermore, the programs are deliberately lean, often requiring little more than a short form and a few hundred characters of justification, and scouts are usually flexible when it comes to terms. This is reflected in the timelines: for my own scout checks, the average time between the first conversation with a team about a check and the receipt of funds is less than seven days.
In addition, there are strategic arguments. First: a scout check puts you on the radar of larger investors because people they trust have invested in you. There is some truth to that, but it shouldn’t be overestimated: a scout can facilitate an introduction to a VC partner, but a scout check is a long way from an invitation to the investment committee. Second is network access, and here the cohorts are indeed densely populated with strong operators from all the top tech companies. Indirect access to a large part of the ecosystem can be a valuable multiplier. Ultimately, though, whether any of that delivers value depends on the individual.
Robert Richarz is an investor and founder. He has built two companies and worked as an investor at UVC Partners before switching back to the operator side and taking on a scout role for Andreessen Horowitz.
As a scout, he invests early five-figure tickets in outstanding teams, mostly at the intersection of AI and the physical world.
What you should consider before taking a scout check
1. Don’t take it for the brand. Instead, you should trust the scout and genuinely believe that they can offer you sound advice. The fund’s name does not appear on your cap table, nor should it be in your deck.
2. There is such a thing as too many scouts. A good angel round should be weighted toward smart money—meaning subject matter experts, strong operators, and people who understand your market. A round that consists of 50 percent scout checks can quickly send the wrong signal.
3. A German GmbH entails additional effort that should be planned for. Scout funds are US entities, which means every priced round requires a power of attorney that is notarized in the US with an apostille and then sent in hard copy to your German notary. For the funds, this is standard procedure, but it takes time and runs much more smoothly with a notary who has done it before. It is also one of the minor arguments in favor of a US setup, should you already be considering one.
4. Don’t worry about information rights. Venture capital is a trust-based economy. As a founder, you report exclusively to the scout. No established fund will ever pressure a scout or a founder to share confidential information against their will. Doing so would immediately kill the scout program, as founders would no longer take part.
In short
Done right, a scout check is one of those rare constellations where all three sides win. The fund buys early access and information it wouldn’t otherwise get. The scout gains real financial upside without risking their own capital. And the founders get an experienced angel with a strong network, quick capital, and flexible terms.
