Scouting vs Scoring - The evaluation of founders
Is there a right way to pick successful start-ups?
Depending on who you talk to in the venture capital world, investment decisions are either an art or science. This post will explain an aspect of that debate - Scouting vs Scoring.
How do we define these terms? Scouting is the traditional way of judging founders and companies - face to face pitch meetings and discussions with people around a start-up and industry. Scoring is an analytical methodology - compiling data about the start-up, its industry, etc and distilling that down to a decision.
Generally, VCs use scouting for earlier stage investments, where company data, industry data and comparables are tough to come by. Here’s a post that is a good rearview mirror reflection on an investment decision from 5 years earlier, that illustrates that gut decision. Scoring is seen more in later stage investing - where data is more readily available. Having said that, several VCs are now applying AI to the evaluation of seed stage investing.
Why is this debate important? Because when you’re a founder, you need to understand how family offices and VCs will evaluate you. Your business idea may be great, but people will judge the future success of that idea through their lens of understanding.
It’s also important for decision-makers at family offices and VCs to understand their own methodology and biases. Almost all decision-makers need some confirmation - whether it comes from other investors in that round or their AI output.
RCP tend towards a scouting methodology. That means we put a great deal of emphasis on founders and how they articulate their pitch. And then we talk to people like advisors and other VCs around the start-up, to get a multi-dimensional picture of the founding team. When a start-up is conducting a fundraise, they should ensure they can articulate the problem, solution and roadmap clearly.
What are the key points to take away from this?
To answer the question at the top, there is no right way to select successful start-ups.
The person making capital allocation decisions needs to find their own best methodology.
As a founder, you need to plan for how you will be evaluated and act accordingly.
RCP is a family office in London. We invest in a wide variety of sectors, across diverse stages of development. Get in touch to discuss what you’re building.