Yes, I believe that Sequoia's Scout program and othervariations on the theme are valuable; not "better" than having knownsources send you deals, but a distinct additional avenue for deal flow andbuilding a personal relationship between the VC firm and the early stage company.
Sequoia's Scout program puts actual dollars in the hands ofnon-Sequoia partners and associates. This is an excellent way for a VC firm todevelop "bench" strength for future additions to their firm. Byevaluating the caliber of deal sourced by the Scout and then evaluating boththe Scout's analytic ability and his/her personal fit with the firm, the VCfirm can create a good pool of future partners.
Scouts (both investing and on-investing)broaden the marketintelligence that the VC can gather. No matter how connected and how active a VCpartner is, having more eyes and ears involved in the community can only expandthe VC's awareness of who is doing what and what competitor VC firms arethinking about.
A non-direct investment option for "scouting" (rememberthe old AOL Greenhouse ??) gives this type of scout a level of validation whentalking with an early stage company and it also incentivizes the scout shouldthe VC firm actually invest in the early stage company presented by the scout (eitherthrough straight cash or a piece of the common stock).
Both the investing (Sequoia Scout) and non-investing (AOLGreenhouse) programs offer a more real and valid way to run an EIR program.Rather than have some man/woman sitting in a VC office interviewing early stagecompanies, these programs have hands-on EIRs who can develop a workingrelationship with the startup. One of the main concerns of an early stagecompany that takes VC money is that the VC will come in and start replacingfounders and CEOs. It would be a much more honest, transparent and efficientprocess if both the company and the Scout knew each other - and what each otherwas getting.
I have a serious problem with the way Sequoia runs its Scoutprogram - deception. There is the moral problem of not disclosing where themoney came from. But, I do not want to get into a discussion of morals, deceptionand venture capital firms. There is also the potential future funding problemsthat could occur if other investors and customers and partners really don'twant to do business with XYZ VC firm. There is the immediate problem of beingin the same round with XYZ VC and having your portfolio companies compete withsome of XYZ's portfolio companies. You definitely do not want XYZ VC to knowhow you and your portfolio is doing.
I just moved to Chapel Hill form Silicon Valley. It seemsthat a lot of folks think that Silicon Valley is some sort of Mecca thatdemands devotion somewhere between genuflecting and a full out hajj. It ain't.
It would behoove VC firms from the Triangle area, Boston/NewYork, the Silicon Valley . . . . . to establish non-investment scouting/sourcingrelationships with the Triangle for the reasons I mentioned above and a wholelot more.
It is hard to comment without knowing the secret parts of the deal. From the article I read, I made an assumption that Sequoia actually gives some discretionary amount of money to the scouts to make the first investments as angels. I may be by doing a 1:1 match .. for example if the scout wants to invest 25K, they can get 12.5K from Sequioa (with an annual cap), in return of first rights to introductions. If my assumption is true, then it aligns the incentives a tad bit better than the usual way of scouting good startups. There is an additional cost to sequoia but hopefully if they are good at scouting the scouts, the benefits outweigh the costs. It is definitely a better filter in my opinion.