Jan 1, 2024

More about Venture Builder model

Enhance Ventures reported in its report that there were about 560 startup studios in the world in 2020, which means that the venture studio market has grown by over 625% in the last 7 years. The first startup studio was Idealab, which has created over 100 companies in the last 20 years and has demonstrated its operational effectiveness (success rate - 70%, of which 35% of companies have gone public or were acquired by a large external player, 5% of which became unicorns). However, even the average results of startup studios confirm the effectiveness of this business model: 84% of startups coming out of studios attract a seed round, of which 72% reach the A round (for comparison, usually only 42% of startups that received seed funding reach the A round).

As a result, 60% of all companies created within studios reach the A round. The approach to managing a startup studio allows for achieving results that are 30% better than the indicators of traditional startups. Such efficiency is achieved through the establishment of repeatable processes, a focus on specific specialization, controlling the created company's internal processes as one of the co-founders, and providing financial resources.

Examples of companies created within startup studios include Dollar Shave Club, Roman, Hims, Answers, Liquid Death, JetClosing, Zylo, Aircall, RESY, Safetrax, Snowflake, Bitly, Giphy.

Types of Builders:

Venture Builders (Idealab, Human Ventures, Pioneer Square Labs): focus on creating companies from scratch, investing to test ideas, and funding comes from the studio's balance sheet. On average, around $250,000 in seed capital is invested per portfolio company before raising a seed round.
Agency Builders (Colab): are full-service digital agencies that use their own agency resources to test their own ideas, leveraging their knowledge of market trends and unmet consumer needs. They typically have significant expertise in advertising and software development.
Venture Capital Labs (Primary VC): affiliated with a larger venture capital firm. The management fee typically covers the operation of the studio and can serve as a source of capital for portfolio companies.
Accelerator Studios (500Labs): a hybrid of a classic accelerator and a venture studio. They have longer-term commitments and higher funding than a simple studio and attract external early-stage companies.
Corporate Studios (Coplex, BCG Digital Ventures, McKinsey Digital, Polymath Ventures, Shipyard, Sparkling Partners, Horizon Two Labs, Hashed Health, Rule 1 Ventures, Futuresight, Hatzimemos-Libby, Mach49, PreHype): support innovation within large corporations, and funding typically comes from a separate corporation (but may also involve sharing costs with the studio).
Racer Studios (Rocket Internet): search for good startups and replicate them in other regions.
Unstructured Studios (Bam Ventures): such studios consist of a scattered group of entrepreneurs who come together to develop new companies (they bring together their partners and teams in an informal environment, but do so regularly).
Hybrids (Prehype, 10.10.10): unstructured studios.

PRINCIPLES OF OPERATION OF A VENTURE STUDIO The model of a venture studio is based on the idea that funding alone will not help a startup build a large business, and that experience in organizing processes is much more valuable than capital itself. The operational knowledge of the venture studio is combined and passed on to portfolio companies, allowing them to develop faster and more efficiently than when capital is sourced from traditional sources. Venture studios create startups in parallel, generating new ideas and allocating team members to work on them and test initial hypotheses. Once the ideas have been tested and validated, the studio supports them with its resources (capital, development, etc.) to create an MVP. If the market potential of the idea is confirmed, the studio focuses on scaling the new company with the subsequent intention of making a profitable exit. Most of the tasks described above are understandable and repeatable, so the goal of a startup studio is to simplify them, taking on some or all of these tasks and freeing up founders to focus on innovation, leadership, and scaling.

One of the most important aspects of the process is the methodology for decision-making about how and when to allocate/reallocate talent, capital, and support among different projects. The main stages of a venture studio's work with a new project are as follows:

Stage 1 - Market analysis: During this stage, the venture studio conducts a search for ideas, formulates key advantages of the project, and defines its value proposition (by the end of this stage, there should be a clear understanding of how to convince potential customers why the service/product is more valuable than what is already available on the market). Goals of this stage include formulating the value proposition, analyzing competitors, and formulating key hypotheses and assumptions to be tested.
Stage 2 - Idea validation: After defining the value proposition and initial consumer segments, the venture studio begins to test the market potential of the idea (during this stage, the main focus is on creating preliminary product specifications that need to be tested and confirmed). Goals of this stage include researching consumers, creating user stories, drafting product specifications, and assessing the necessary expenses to implement the project.
Stage 3 - Minimum Viable Product (MVP) creation: Creating an MVP allows for the testing of all previous assumptions and hypotheses of the project. Goals of this stage include developing an MVP, refining it based on initial hypothesis testing, creating a product development plan, and updating and refining the core business plan.
Stage 4 - Portfolio company creation: Upon successfully completing all previous stages, a new portfolio company is created, and the venture studio begins to work on scaling the project. Goals of this stage include creating the company and adding it to the current portfolio of the venture studio.
Stage 5 - Scaling: During this stage, the venture studio focuses on increasing the growth of the new company, exploring new market opportunities, building management systems and middle management, as well as developing new products (this is the final stage before a successful exit).

Funding for a new project typically occurs in stages, depending on whether the project has been able to achieve the goals of that stage or not.

ADVANTAGES OF THE VENTURE STUDIO MODEL The main advantage of this model is that it reduces the time it takes to create a startup, significantly lowering the risk of failure for entrepreneurs while also attracting more talent to develop new business cases.

In addition, a venture studio takes on operational issues such as legal support, accounting, and HR, making it easier to achieve product-market fit due to its experience, partners, and connections. It provides a development team, financing, industry expertise, and knowledge of best practices in building internal processes.

Startups founded by venture studios scale faster and generate more profits for investors. On average, these startups have an internal rate of return (IRR) of 53% (the average for traditional startups is 21%). Of the startups that raised seed funding, 72% reached Series A (only 42% of traditional startups that raised seed funding make it to Series A).

The traditional approach to early-stage startup investment is for investors to invest significant funds in several companies in the hope of covering the portfolio expenses through several very successful portfolio companies. All of these models (VC, accelerator, incubator) use the same approach: make as many investments as possible in the hope of getting a few successful companies (home runs) in their portfolio.

The venture studio model changes the rules of the game: as an institutional co-founder, the studio achieves the results it wants by using a wide range of resources. Focusing 100% of its attention on identifying a small number of key problems, allocating the necessary resources (human and financial) among these ideas at the earliest stage, allows studios to build a "production line" for building companies and scaling them quickly.

Repeating processes, working only on the most important problems, and adhering to strict procedures at the stages of idea development, testing, company creation, fundraising, and scaling the company's life cycle allow studios to achieve success.

Time is a key factor in the success of a venture studio. A startup created within a studio can scale faster from the moment of its launch because the studio's operational resources allow the founder to focus primarily on building and scaling the business. The average time it takes to pass through various stages of project development is:

Studio startups move to the seed round in 10.7 months and from the seed round to Series A in 14.5 months.
A traditional startup takes about 56 months to secure Series A funding, while a studio startup achieves the same goal in 25 months.
Across industries, it takes about 6.6 years from the time of investment to exit for traditional investments, whereas startups created in studios have shown that the average age of the company at the time of exit is 3.85 years.

More about a venture builder model: