Scout Thought Experiment
--
Startup vs. Scout incentives — (there are no right answers)
Assumptions:
1. You are an undergraduate student who is also a scout for University Seed Capital (“UniCap”).
- UniCap is a seed-stage venture capital firm that focuses on investing in founders currently enrolled in or recently graduated from top universities. They source potential investment opportunities through a network of student scouts like you at top universities.
2. In your agreement with UniCap 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 UniCap there’s nothing that legally prohibits you from telling companies you find about other fundraising options besides UniCap they should consider.
4. If you successfully source a company for UniCap you will automatically receive a desirable post-graduation job offer.
5. You recently discovered an exciting new company founded at your school by a couple of fellow undergraduate students (“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 UniCap was the only fundraising option in the world they would only know about UniCap. If you only told them about UniCap and Sequoia they would only know about UniCap and Sequoia. If you only told them about UniCap, Sequoia, and one reputable Angel investor they would only know about UniCap, 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 UniCap they will only receive a term sheet from UniCap. If they pitch UniCap and Sequoia they will receive term sheets from UniCap and Sequoia. If they pitch UniCap, Sequoia, and one reputable Angel investor they will receive term sheets from UniCap, Sequoia, and one reputable Angel investor.
10. CompA doesn’t know it, but the more term sheets CompA receives the better the term sheets will be because the investors will compete with each other and match each other’s offers:
For example — If CompA only pitches UniCap they will only receive a term sheet from UniCap with acceptable terms. If they pitch Sequoia as well they will receive a slightly better term sheet from Sequoia, but UniCap 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 UniCap will match the new more favorable terms immediately. Relatively — CompA will receive the worst terms if they only pitch UniCap. CompA will receive the best terms if they pitch UniCap, Sequoia, and the reputable Angel investor.
11. CompA has an equal likelihood to pick each of the 3 investors (UniCap, 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 UniCap there is a 100% chance they choose UniCap. If CompA has term sheets from UniCap and Sequoia there is a 50% chance they choose UniCap and a 50% chance they choose Sequoia. If CompA has term sheets from UniCap, Sequoia, and a reputable Angel investor there is a 33% chance they choose UniCap, a 33% chance they choose Sequoia, and a 33% chance they choose the reputable Angel investor.
Scenarios:
Scenario A
- UniCap’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:
1. Only tell them about UniCap
or
2. Tell them about UniCap and Sequoia
or
3. Tell them about UniCap, Sequoia, and the reputable Angel Investor
Scenario B
- After CompA has completed their fundraising, UniCap’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:
1. Only tell them about UniCap
or
2. Tell them about UniCap and Sequoia
or
3. Tell them about UniCap, Sequoia, and the reputable Angel Investor
Scenario C
- UniCap’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:
1. Only tell them about UniCap
or
2. Tell them about UniCap and Sequoia
or
3. Tell them about UniCap, Sequoia, and the reputable Angel Investor
Scenario D
- After CompA has completed their fundraising, UniCap’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 10fc) that they were not
Which of the options below would you choose? You can only choose one:
1. Only tell them about UniCap
or
2. Tell them about UniCap and Sequoia
or
3. Tell them about UniCap, Sequoia, and the reputable Angel Investor
If you have any questions, have feedback, want to support our mission somehow, or just want to say hi. We’d love to hear from you! Here’s a link to a contact page that looks like a dead-end, but will make it to my inbox — I promise.
