Over the last few months, lots of people are writing about, talking about and working to diversify who receives venture capital. You'd be forgiven for thinking that all venture capitalists — with their now vocal stance on diversity — have become altruistic free money givers. Let's be clear, VC is not a charitable act. There is a lot of lip service to diversity, pointless panel discussions, and a lack of meaningful, well thought-out action. VC world diversity initiatives are often just a knee jerk response to being called out for having a very white, male, middle-class, Oxbridge-educated (or equivalent) investment team and portfolio. These initiatives can also, more worryingly, exploit the underrepresented groups they’re purportedly trying to help.
VC world diversity initiatives are often just a knee jerk response to being called out.
Scout networks are one of these initiatives. VCs are aware that they have extremely limited networks, and by using scouts from underrepresented groups they are able to “infiltrate” a more diverse side of the ecosystem. London-based investor Backed VC told Sifted scouts “provided a different angle on things” and helped with due diligence on hires. Usually, they are compensated once a company is invested in by receiving a fixed fee, or a percentage of the investment. (See Backed VC’s scout job description here.)
Here’s the thing, funds lack underrepresented people, especially people of colour; just look at the team page on any VC fund’s website. Within scout programmes, though, they are overrepresented.
VCs use scouts’ knowledge of an industry, the networks that they have spent time and money cultivating, and their time. Scouts usually find startups and then summarise what the company does, its team, its funding so far and funding goals, its positives and negatives, for VCs — without compensation, unless the VC invests, at which point a fee is paid. Funds say the introductions scouts make are a byproduct of the everyday jobs that they do. Scouts allow VCs to keep an eye on new deal flow, be presented with new ideas and markets, and find new hires (some funds pay commission on this too).
Profiting from the labour of underrepresented people is one of the worst trends in venture capital right now.
Yet, scouts are not paid a basic salary nor are they given carry, which is the share of the profits once an exit happens. It may happen that the VC firm never invests in any of the companies a scout introduces and, therefore, the scout never sees a return. Imagine if a VC firm told an associate or a partner that they weren’t going to be paid this year as their deal flow hadn’t brought about any investments.
Profiting from the labour of underrepresented people is one of the worst trends in venture capital right now and I expect to see more funds announce scout networks as the year goes on.
I spoke to a scout who preferred to remain anonymous who told me he does it to “push the culture forward”. In other words, to use his position to give those who wouldn’t normally be seen, at least, an opportunity to be at the table. Another scout told me that this was their way of getting into venture as the fund they worked with provided investment education which feels very much like the “exposure” or “experience” offered by speaking at events (for free) or taking unpaid internships.
I also spoke to one scout’s employer, again anonymously out of respect to the employee, who told me that he found it infuriating that he was paying the scout’s salary while the fund she works with was reaping the rewards. He said: “When those scouts are already employed by other companies to source investments this seems wrong; [it’s] exploiting the good will of the other company on whose time these investments are probably being found.”
He also said: “When someone sets up a diversity fund that uses scouts to find investments, but doesn’t actually employ those scouts and only pays a flat fee on success (which is quite unlikely when you look at the numbers, and doesn’t reward for any future carry) this feels ethically wrong, and exploitative of those scouts.”
There are brilliant people building communities, big and small, and if VCs want to engage with them, the narrative that VCs are providing scouts (and their networks) with opportunity needs to shift to the more accurate narrative that these “scouts” and their communities are helping VCs and bringing them more opportunities. Therefore, they should be compensated accordingly.
Raising a fund with a diversity thesis, or trying to diversify a current fund, but not changing the diversity of the investment team is not ethical.
