Like scouts for football or basketball clubs, investment funds and large companies use a figure with the same purpose. They are the ‘scouts’ or startup scouts. Their mission: to find promising companies when they have not yet been discovered, to be the first or among the first to invest or collaborate with them. In silver, arrive before anyone else.
“These ‘scout’ programs become popular during approximately 2021-2022, in the midst of valuation hysteria for technology companies. It is a time of prosperity for the funds, which begin to see that the companies’ income multiples begin to grow very quickly,” says Kintxo Cortés, referring to the fact that the investment enthusiasm resulted in the companies’ income having to be multiplied each time by a higher number (x4, then x6, then x11…) to arrive at your assessment.
For reference, the current 5 trillion dollars of capitalization of Nvidia are equivalent to multiplying its annual income by 20. In the case of Alphabet, Google’s parent company, the figure would come from multiplying turnover by 11 and in that of Apple, by 10.
“In venture capital what is happening is that money is a commodity. There are very good funds, so it is not only a race to see who finds the company that grows the best but also who enters a promising company the earliest,” explains Cortés, who has been a scout for four years. He currently collaborates with the Accel and Samaipata funds, in addition to working at the connectivity company Gigs. “Now there is money everywhere and if you are an entrepreneur and have a quality company, you will have a lot of funds that will want to put money into you.”
In an environment like the one Cortés draws, investment funds can only be differentiated in two ways. One of them is with its team of professionals, capable of adequately supporting the startup. The other is with speed. Whoever gets to the entrepreneur first has an advantage when it comes to investing. So the funds have diversified their search for projects with potential. The objective is to enter capital very soon, even with a small position.
And this is where the scouting activity unfolds. They are specialists and know the entrepreneurship ecosystem inside out in certain areas or niches. They allow the funds to gain capillarity that they do not have with their staff alone. This way they have access to a greater number of companies and can glimpse promising teams operating in interesting sectors as soon as possible.
Although this scout profile is not the only one that scans the landscape in search of attractive startups. Gema García González, director of Open Innovation and Coporte Venturing at Repsol, is in charge of a team of ten people dedicated to reinforcing the company’s technological development with external resources. “We try to be flexible, we work with other research centers, with other corporations and, of course, with startups. The entrepreneurial ecosystem has many pieces, it has grown a lot in recent years and can contribute a lot to us in developments that we want to accelerate,” he explains.
In this case the scouts are on staff. Thus, the company has invested in more than 35 startups and today works with 21 companies, detected by its analyst service. “We do not invest in what any investment fund can invest in, we invest in something that can be strategic for the company, in startups with which we want to collaborate,” says García González.
Repsol scouts, working within the framework of its R&D center, Tech Lab, comb the entrepreneurial ecosystem in search of circular economy, energy optimization or renewable hydrogen projects.
“My team has to dedicate part of its time to being very connected to the ecosystem. It needs to have a good network of contacts with other corporations, with other investment funds, go to conferences and startup events and see which platforms are the best to launch technological challenges,” explains García González. He clarifies that one of the formulas for finding interesting projects is the launch of contests and challenges that reward the best solutions to a given problem.
Don’t let the next ‘PayPal Mafia’ escape
The connection with the entrepreneurial world is essential. In the technology sector, a trend that has been seen for a few years has been accentuated. “There are companies that are doing very well in technology and have many employees who begin to set up other companies because they have access to liquidity, either because the company goes public or they can move shares in the secondary market,” says Cortés. “They find themselves with a lot of money and the desire to continue building things.”
The phenomenon is not new and is reminiscent of the success of ‘PayPal Mafia’a symbol of that diaspora that sometimes occurs in technology companies. Many talented employees and deep pockets who decide to undertake can emerge from them.
From the early days of PayPal came Elon Musk, the founder of LinkedIn Reid Hoffman and the investor Peter Thiel. And other employees started projects such as YouTube, Yelp or the social application Slide, acquired by Google. More recently, the brain drain at OpenAI also illustrates how talent within one startup ends up spawning other startups. That’s where the Amodei brothers came from.which they founded Anthropicformer chief scientist Ilya Sutskever (Safe Superintelligence) or former CTO Mira Murati (Thinking Machines Lab).
The great value of Kintxo Cortés for the funds with which he collaborates is his network of contacts with employees and former employees of the companies where he has worked, especially Airbnb, Shopify and Trade Republic. That connection is key for investing entities, which do not have the structure on their own to delve into the ins and outs of the projects formed by former employees of the technology companies. Even fewer are able to discern which employees they should pay attention to, whether because they are the sharpest, most talented, or best positioned.
A corporation like Repsol must also be clear about which startups to pay attention to and which to leave aside. To fine-tune the shot they have a procedure divided into several stages. The first sieve It is made up of profiles with business experience and, above all, a home-based approach. “They are our professionals because above all it is very important that they understand the challenges that we have. Some have experience in investment businesses, but it is very important that they are internal people who interact with our scientists, who are the ones who give us technical criteria,” emphasizes García González.
“When we find a startup that we think may be interesting, the first thing we do is get in touch, have a first conversation,” comments the director of Open Innovation and Coporte Venturing at Repsol. “We try to understand what it develops and, later, if we want to go deeper, we usually arrange a meeting with one of our scientists, an expert who helps us tell if the technology is interesting and if it responds to one of our challenges.”
The process is supported by a cast of technical profileswho works at the Tech Lab R&D center. There are more than 230 scientists from different disciplines. There are biologists, biotechnologists, chemical engineers, research engineers, physicists or mathematicians. After technical approval, we work with the selected startup on concept tests. The company has more than 20 laboratories and more than 30 pilot plants that allow replicating industrial facilities to validate the proposal.
The task of startup scouts
Cortés’ career as a startup scout dates back to the moments immediately after the pandemic. He was working at Shopify when some investment funds approached him to work at one of their invested companies, the neobank Trade Republic, which he would later join.
It was Cortés, an expert in startup scouting programs, who asked them to participate in one of these initiatives. One of the funds accepted. It was Accel (formerly Accel Partners), one of the most established venture capital entities in Silicon Valley. Then came Samaipata, the fund of José del Barrio, co-founder of La Nevera Roja.
As a scout, Cortés works individually but is also connected with other scouts in the background. To all of them, the entity offers an amount to invest in the companies they consider. “You can make tickets (investment of a certain amount) of the size you want. You have to justify to the fund why you are making the investment and, when you send the documentation with the reasons, the fund gives you approval and it is the fund that invests directly,” he points out.
Their role is to connect the fund with the startup and, in between, do seduction work. “I convince the entrepreneur to invest in him,” emphasizes the scout. “And I put you in contact with the fund’s legalization team so they can do the paperwork.”
This role of mediator differs from the processes at Tech Lab, where they analyze more than 1,000 startups a year. All with attention paid to industrial transformation technologies, which is what Repsol is interested in. Thus, they have invested in projects such as the Spanish Trovant, specialized in biogas purification projects, or the Estonian Stargate Hydrogen, focused on green hydrogen.
García González emphasizes that his goal is not investment, although there are nuances: “Our objective is to bring that innovation, that external talent to work with us. But if we see that to continue along the path together it is necessary for startups to have capital so that they can develop something that is specific to our activity, then we invest in the company.”
Invested or not, the startups chosen by TechLab have a accompanimentto help them in their management and when finding investors and clients. For García González, the work of scouting startups is methodical. Highlight the importance of properly storing all the companies you see in your database. “You have to have an open mind, a very clear memory and everything recorded in our CRM,” he says.
The search model, the pace, the incentives are very different in a large company than with scouts who work for funds. “I get opportunities from colleagues who are setting up things just because they are an Accel scout,” says Cortés. “They also come to me from the visibility I have in the market.” And the third tributary: it was already very well connected before. That’s why he gets opportunities to invest from people he knows, from former colleagues, who warn him, who present projects to him. Word of mouth works.
As for remuneration, it is an aspect that varies. “The compensation structure in these scout programs depends on each fund,” says Cortés. One of the formulas that is usually used in the sector is that the scout receives a part of the profit obtained from the investment. An amount that would be completed with an extra contribution if the fund later decides to carry out a formal round in the company. They are more than enough incentives to keep these scouts active and alert.
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