How to Build a Venture Studio: The Checklist
Introducing the Venture Studio Checklist, a comprehensive guide to design, build & launch your own venture studio. (#53)
There’s no question about the emergence of venture studios. While there’s lots of noise (good & bad), this new(ish) asset class is here to stay. Defining it as an asset class is important, because it helps differentiate from other models (such as VC). Although most studios will rely on venture capital for follow-on, studios should differentiate as an asset class to draw more attention, LPs (limited partners)/investors and talent.
This means being more prescriptive about how venture studios work. The market hype around studios creates confusion. I don’t believe in building a cookie-cutter venture studio model and snubbing everything else. In fact, the level of innovation happening within the venture studio model should excite people including VCs, LPs & institutional investors, angels, big companies, founders and everyone else participating in the startup ecosystem. We need innovation in terms of how startups are built and funded—venture studios provide that.
For more on how different venture studios work, check out: The Many Flavors of Venture Studios
Over time through the efforts of industry leaders, case studies & lots of iteration/learning, more clarity & consistency will emerge around venture studios: what they are, how they work, how they’re funded, what they do, the results they generate, etc.
In the spirit of pushing the industry forward, here’s the Venture Studio Checklist. 🎉
It’s a comprehensive form/spreadsheet listing 60+ variables and questions you need to consider in order to design, build & launch a venture studio.
Venture studios are complex. If you go in blind or overly enthusiastic without thinking through the details, you’ll be in trouble.
The Venture Studio Checklist is divided into 4 major sections:
Internal Company Structure and Methodology: This covers how you’ll structure your studio, how you’ll work (including the framework/playbook/process you’ll use for validating startups) and the makeup of your team.
The Founders: Next, you deep dive into the founders you’ll recruit: who they are, how you find them, compensation, etc.
Startup Structures: This section focuses on how you’ll structure new startups emerging from your venture studio. This is a complicated section because it focuses on investment and equity, two hot button topics.
Venture Studio Business Model: The final section covers the studio’s finances and business model, with different options for raising capital into the studio entity or a fund (or both). This is also complicated because studios don’t survive on management fees alone (or at all).
If you go through the Venture Studio Checklist it should help you think through most of the building blocks you’ll need. You should be able to create a plan and budget, and really dig into key questions.
Here’s a screenshot for the first section on internal company structure and methodology:
There’s room for you to put your responses (if you copy the sheet).
Each variable / question has several options. In some cases you’ll pick between options. In other cases you can mix & match, because the options aren’t mutually exclusive.
I haven’t provided an exhaustive list of options for every variable / question; by all means add your own or change one of mine.
Critics of the venture studio model suggest that it doesn’t attract high quality founders. Nonsense. But the best venture studios will need to crack the nut on high-quality founder recruiting. Founders are not a super plentiful resource and the success of venture studio startups is largely dependent on the founder(s) despite all of the early validation and de-risking done by the studios. I know great founders will be (and are) attracted to the venture studio model, but recruiting is still a huge challenge.
In the Venture Studio Checklist, here’s the list of variables / questions I’ve included (so far) related to founders:
Founder recruitment stage: At what stage will you recruit the founder(s)?
Founder type: What type of founder are you looking for? Domain expert? Experienced entrepreneur?
# of Founders: Will you work with solo founders or look for founding teams?
Co-Founder recruitment: If you work with solo founders will you help them find a co-founder? Is finding a co-founder mandatory?
Founder sourcing: Where and how will you find founders?
Founder recruiting approach: Will you have an open call for founders to apply?
Founder location: Where will founders be located?
Founder compensation: What are you paying founders? Do you recruit and compensate them before the startup is incorporated?
Founder equity: How much equity do founders get? What are you targeting the cap table to look like at Series A?
Founder investment: Are founders expected to invest in the startup they’re co-creating with your studio?
To learn more about the right founders for venture studios, read: The Ideal Founder Profile for Venture Studios
Venture Studio Business Models
The short answer on venture studio business models: it’s complicated. And that’s unfortunate because it makes it more difficult for investors & LPs, founders and others to understand the venture studio model and compare apples to apples (between studios and between different asset classes).
Read more on this topic: Understanding Venture Studio Math.
In the Venture Studio Checklist, I’ve tried to break down all the variables, but there’s a lot to cover. My approach on studio fundraising (into a company and/or VC fund) isn’t complete. There are simply too many elements to map out in the checklist. I’ve tried highlighting the key ones to think through as a starting point.
Figure out the venture studio’s annual budget: This will be dependent on the team size (people will be one of your biggest expenses), services you provide and if you invest in startups off the balance sheet.
Then figure out how you’ll cover those costs: Self-funded, raise capital, chargebacks from startups, generate revenue (from services or products), government/other grants, or other sources of capital.
If you decide to raise capital for the studio (operating company) itself, here are some considerations:
% of capital going to pay for operations (team, expenses, etc.) versus % of capital going into startup investments. How investors will think about this if they’re comparing to a traditional VC model? (Note: Typically VC funds take a ~2% annual management fee to cover expenses.)
Investment structure: SAFE, convertible note, priced round (and in each case there are other variables to consider, such as: cap / price, discount, etc.)
Investor rights. For example, they might want a right of first refusal on investing in any startups coming out of the studio. Or they might want their pro-rata (based on what they’ve invested in you, or what you own of the startup).
Liquidity is a big one. How will investors get liquidity from your studio (operating company / holding company)? You might be issuing dividends based on returns from startups (i.e. you have X% equity in a startup that exits; they provide distributions to the studio; studio issues dividends). Do you provide a hurdle rate, so the investors get their money out, or a bigger portion of it out, before you do? Or perhaps you find a way to offer early liquidity through share buybacks or secondaries (i.e. new investors coming in buying old investors out). Exiting a venture studio is possible, but not terribly common (yet) and there’s no precedent set on return multiples, valuations, etc.
Future funding of the studio. When will you need to raise again? And how much? Under what terms? Valuing a studio is tricky because it’s not a “typical tech startup,” but if you take money in for equity, you’ve gotta assign a value at some point. When you raise your second round of financing into the studio company, what does the cap table look like? What does your dilution look like? What are the economics on dividends or exits from the portfolio? I don’t have the specific answers for you, but hopefully by asking these questions you can start to piece it together for yourself.
I’m going to keep working on the Venture Studio Checklist. I want to add more detail and granularity. I consider it a “living, breathing” document. (Today: Version 1.0 😀)
I hope the checklist provides value as is and give you a head start to design your own venture studio!
I welcome any and all questions & feedback. Get in touch…
Thanks for reading Focused Chaos! I cover venture studios and more, including product management, entrepreneurship, etc.
(Also, which image did you prefer, the Midjourney or DALL-E one? Each got the same basic prompt!)
Venture Studio Resources Worth Following
I’m excited that there’s more great content emerging around venture studios. Here’s three resources you should check out:
Max Pog’s Youtube Channel: Max has gone very deep into the venture studio ecosystem. He’s run two virtual conferences (you can watch the videos) and interviews studio leaders regularly. Tons of great content & insight.