The article below originally appeared in The Wall Street Journal on July 18, 2017. In May 2017 Bain Capital Ventures launched a scout program, using AngelList as its platform, as a tool to gain greater visibility into and invest in great early-stage companies.

By Tomio Geron, reporter, The Wall Street Journal

Sequoia Capital has become well known in Silicon Valley for building an extensive network of scouts that help the firm get a crack at startups at their earliest stages.

Now at least nine other venture firms have followed suit in some form or another with their own kinds of scout programs, though few firms openly talk about them.

Indeed firms often keep the existence of their programs a closely guarded secret, but many of them acknowledged working with scouts when asked by The Wall Street Journal. That cloak of secrecy, say some entrepreneurs and investors, poses potential problems that founders must navigate when seeking early capital.

One hazard is a conflict of interest for scouts who are tied to just one venture firm, because the scout could put the venture firm’s interests before those of the startup. Unlike typical angel investors, scouts are affiliated with a venture firm and receive pay or a cut of the profits on investments. Many scouts double as founders of portfolio companies of those firms.

“Entrepreneurs don’t know exactly whose side the scouts are on when scouts invest in their companies and later advise the companies on when to raise a venture round and which venture capitalists to meet with,” said Salil Deshpande, managing director at Bain Capital Ventures.

Among venture firms using such programs are Accel Partners, CRV, Founders Fund, Index Ventures, Lightspeed Venture Partners, Social Capital and Spark Capital, according to people familiar with the matter. Flybridge Capital and First Round Capital just announced public versions of such programs. Meanwhile some firms have tried other approaches to be transparent.

“It’s to get companies on our radar early because there’s only so many companies we can see, so having more companies helps widen our aperture,” said Lightspeed partner Jeremy Liew.

AngelList, a popular site for angel investing, recently weighed in with an alternative offering. Its Angel Funds program aims to make it easier for angels to raise a fund and for passive investors to get into AngelList deals.

Instead of getting their own scouts, venture firms like Accomplice, Bain Capital Ventures and Crosslink Capital have backed AngelList’s funds in nonexclusive arrangements.

Mr. Deshpande says Bain is able to gain access to early-stage opportunities through AngelList, which he says makes clear which firms are putting money behind a particular scout or angel.

Some critics cite the risk that angels might invest their own money in the best deals and then steer their less attractive deals into funds controlled by a venture firm.

In many venture-firm relationships, scouts often have to split profits from their successful startups with other scouts. AngelList says its program allows them to keep their own profits as individuals.

“It’s the scouts who really benefit the most from angel funds, as they get multiple LPs and get to be transparent and eat what they kill instead of getting carry out of a big pool,” said AngelList Chief Executive Naval Ravikant. “So I expect that over time there will be some adverse selection against traditional, secretive, one-LP scout programs.”

Parker Thompson, a partner at AngelList, says venture firms should be directly involved with a startup, rather than relying on an exclusive scout to get a deal.

“You win these (Series A) deals by supporting them and being there early, not just by being the only one who saw it,” Mr. Parker said.

Sequoia Capital, for its part, has guidelines to ensure founders’ interests have primacy, said Matt Huang, partner at Sequoia. The firm asks scouts to inform founders proactively of their Sequoia ties, Mr. Huang said, and some of them even list their affiliation on their LinkedIn profiles.

Sequoia has no special rights to invest before other firms, or information rights, in scout deals, Mr. Huang said.

“We think about it as a service to the community and to founders,” Mr. Huang said.

Scout-originated deals have resulted in Sequoia follow-on investments in well known companies including Stripe, which was last valued at more than $9 billion, and Thumbtack, valued at more than $1.3 billion, according to Mr. Huang.

Scout programs can be preferable to AngelList investing if a CEO has never thought about or tried being an investor, said Saar Gur, general partner at CRV. In that case the venture firm can proactively bring them in. He said such programs create a community that benefits both the scout and the firm.

“Now that these programs are more widespread and common, most scouts are upfront with founders they’re investing in,” Mr. Gur said.

With venture firms sporting ever-larger fund sizes, more of them need help to keep up with seed-stage opportunities.

“They’re focused on deals that put capital to work in Series A, B, C stages,” said Ramtin Naimi, founder of Abstract Ventures, who has been a scout for three venture firms. “Spending time chasing seeds with $1 million checks isn’t worth their time and resources, because they’re not putting enough money to work.”

Another factor behind the proliferation of scouts: More associates at venture firms who used to source early-stage deals are now working at top startups instead, said Semil Shah, founding partner at venture firm Haystack.

“Larger VC firms are constantly focused on monitoring talent and collecting information,” Mr. Shah said. “It’s like the Red Sox or Yankees: They want to know who’s coming up through the ranks. In this context, scouts need a totally different skill.”

Originally published at www.wsj.com.