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The Many Flavors of Venture Studios
Venture studios are becoming a popular way to build & launch startups. But how do they really work? (#28)
There are 720+ venture studios in the world.
That’s a lot of venture studios. And they come in all shapes and sizes.
I define a venture studio as an organization that builds and funds new startups.
If you build startups but don’t fund them, you’re more akin to a dev shop.
If you fund startups but don’t build them, you’re an investor.
There’s nothing wrong with either of those, but they’re not venture studios. A venture studio is a combination of the two.
As the popularity of venture studios (sometimes referred to as “startup studios”) rises, you’ll see more and more groups, companies, entities, etc. call themselves venture studios. They’re trying to hitch their wagon to the trend, without really understanding how hard it is to succeed. The more studios that emerge, the more complicated it gets for founders to figure out if a venture studio is the right fit .
The Success of the Venture Studio Model
Although the model is booming at the moment, venture studios have existed for awhile. And companies such as Overture, Hims & Hers, Twilio, Bitly, Aircall, Zylo and others have all emerged from different studios.
Idealab was perhaps the first (or at least one of the first) venture studios. They define themselves as an incubator (the term ‘venture studio’ didn’t really exist when Idealab started in 1996.) They’ve created over 150 companies with 45+ IPOs and acquisitions.
Rocket Internet could also be considered a venture studio, and they’ve launched 200+ startups with 36+ exits.
Finally, Betaworks is a successful venture studio. The company helped build Giphy, Dots, Bitly, Tweetdeck and Chartbeat. (There are plenty of other successful studios as well.)
The venture studio model works. It doesn’t automatically spit out winners. Studios often churn through a lot of ideas (if they’re ideating & building in-house) because of the nature of the approach. But the rigour of the model can increase the odds of at least getting to the next level.
Transparently, I am the co-founder of a venture studio, Highline Beta, which I started 7 years ago. We’ve helped build, launch & fund a bunch of startups (with a couple more in the hopper right now.) We’ve iterated our approach along the way (multiple times) and continue to learn.
My goal is to break down the key components of a venture studio, provide examples, and help founders understand this burgeoning landscape.
7 Key Elements of a Venture Studio
Whenever you’re looking at a venture studio, you need to take into consideration the following things:
Where they source ideas
Their overall thesis (including focus areas, verticals, etc.)
The resources they have for building & providing support while you’re in the venture studio
The capital they have to invest (and when they invest)
The equity they take
Their business model (i.e. how they make money)
The support they provide as you transition out of the venture studio (and beyond)
Let’s tackle each of these individually.
1. Idea Sourcing
Venture studios source ideas from several places.
Often, venture studios have an in-house team that’s coming up with ideas. They do the early exploration and validation work to determine if there’s a worthwhile startup to build. These venture studios tend to have a vertical or industry specific focus.
Some venture studios work with external partners, including other investors (i.e. downstream VCs that may provide follow on capital) and corporate partners, The studio leverages its relationship with partners to source ideas. More and more venture studios are trying to engage corporate partners, because there’s also the potential of building a business model (i.e. charging corporate partners for work that’s being done in the earliest ideation phases.)
Finally, some venture studios recruit founders with ideas. In this case the venture studio is relying on a founder’s know-how in a specific vertical or opportunity area. When a venture studio recruits a founder this early, they’re not doing as much work upfront to validate the idea, and instead they’re trusting the founder’s experience.
Ideas are everywhere, and many will say, “Ideas are cheap, it all comes down to execution,” but the idea source matters in the context of how a venture studio is structured. If a venture studio only develops its own ideas, there’s a good chance they take those ideas quite far—building an MVP, getting early traction, etc.—before recruiting a founder. When they bring a founder in, they’ve done a lot of the scrappy upfront work, and as a result the venture studio is going to take a lot more equity. It’s why some venture studios are taking 50%+ (more on this later), because they’re putting in a good amount of effort before the founder joins.
On the other hand, if the founder joins a venture studio with their own idea, and the founder is expected to do more of that early work, then the studio has to take a smaller chunk of equity. So the source of the idea can have a material impact on a venture studio’s deal terms.
2. Thesis Areas & Focus
As more venture studios emerge, you start to see them specializing in specific areas. This makes a lot of sense.
To some extent, a venture studio is a “platform” on top of which you’re trying to build a startup. That platform needs to have the right mix of assets for you to succeed. In some cases that means connectivity into specific industries through domain expertise, corporate partners, potential customers, etc.
As a founder, you’ll need to decide if you want to join a venture studio with a vertical or more horizontal focus. Most are not super broad. Like VCs they should have a thesis of some kind, and areas of expertise that lend themselves to building certain types of startups. For example, there are B2B-focused venture studios; they’re industry agnostic but only do B2B. There are others that will be exclusively focused on consumer solutions.
Make sure you dig into a venture studio’s thesis: Why are they pursuing specific opportunity areas? What assets does the studio have that are useful? Etc.
3. Venture Studio Resources
Venture studios have to be capable of helping with the actual building of a startup.
The degree to which they do this varies. Some will build a complete MVP and launch before recruiting a founder. Others will have product, design & dev teams available to founders from the get-go. The resources and services provided by a venture studio have a big impact on the deal terms and whether a specific studio is a good fit for you.
There are a few areas that venture studios may cover, including:
Incorporation & basic legal work
Financial management & operations (i.e. setting up payroll, expense management, etc.)—think “fractional CFO/COO on demand”
Product building, including product management, design (brand) and development
Go-to-market, including marketing, user/customer acquisition, sales, PR, etc.
Fundraising support (a venture studio needs to be an investor, but they should also help you fundraise through their network)
A venture studio’s job is to get something from 0 to 1 as quickly and successfully as possible. That means having an MVP in-market with early traction, and sufficient potential to raise follow on capital. (Note: While not all venture studios are looking to build venture-scalable startups, almost all startups coming out of a studio will need some amount of follow on capital.)
The more active work / support that a venture studio puts in, the more equity they’ll likely take. In addition, the resources they provide tie very importantly into the investment dollars they offer and their business model. For example, some venture studios use a “kick-back” model to pay the bills; i.e. they invest $100 but require that you pay them $50 for services.
Finally, take a close look at who runs and works at the studio. I’m biased, but I think it’s important that venture studios are run by experienced entrepreneurs. Why? Because experienced entrepreneurs know how to build companies—and that’s the job of a venture studio. If the people running the studio aren’t builders, interested in getting dirt under their fingernails, you should question the value they can bring.
The team allocated to work with you in the studio matters as well. Some venture studios are operated by very senior and experienced leaders, but then only provide junior teams to work with. That may be what you need, but if you need more senior, strategic support on a day to day basis, you may want to find a venture studio with fewer but more senior members.
Some venture studios position themselves as co-founders; others look more like service providers. The difference may be subtle, but it matters.
4. Investment dollars
Venture studios have to invest. If they’re not investing, I don’t consider them a venture studio. And venture studios have to invest before anyone else, because they’re literally incorporating new companies and setting up the bank accounts.
It’s important that you understand:
How much a venture studio will invest on Day 1?
Does this require co-investment from others?
How much will they invest in follow-on?
What milestones have to be hit to unlock that follow-on capital?
Does this require co-investment?
The terms of the investment; i.e. what’s the instrument being used (i.e. SAFE, priced round, convertible note, etc.), valuation, etc.
Any other terms that come with the investment, including board seat, approvals, potential restrictions, etc.
Venture studios are technically earning equity for the amount they invest and the work they contribute (sweat equity.) It’s not always easy to understand what you’re giving up for the money and effort independently. For example, let’s say there’s a venture studio that provides $250k and takes 30%. Does that mean your startup is worth $833k, or perhaps the valuation is higher, but a portion of that 30% is earned as sweat equity before the investment goes into the company.
Ideally a venture studio can be your primary investor for at least 6-12 months. Some provide capital for a longer period of time. I know of several venture studios that are comfortable being your single source of funding up to the Series A. But most are only funding the incubation phase to get you to launch.
Valuations will probably be lower than if you start a company and go to the open market, but that’s part of the venture studio design. A venture studio needs an “outsized” amount of equity for the capital it invests, because it’s earning a portion of that equity through the work it does. To make the math work, valuations at incorporation may be on the lower end, but they can quickly get to “market levels” in subsequent financing rounds (even at the Seed stage.)
These deals can be a bit complicated. So if you’re joining a venture studio, you need to understand the terms, and hopefully they’re simple, clear and fair.
5. Deal structure (equity)
This is where a lot of people get caught up. Venture studios vary significantly in terms of the equity they take, from ~15% all the way to 80%.
Studios that do more of the work before recruiting a founder will expect more equity. Those that collaborate with founders earlier should be willing to give more equity to founders.
It’s hard to compare a venture studio to other models, including accelerators (which often take 3-6%) or pre-seed investors (that likely target 10-15% initially.) Venture studios will almost always take more equity than these alternatives, but they should be providing a lot more value as well. I don’t think you can compare a 3-month accelerator program (with a cohort of 10-50 startups) to a venture studio that’s working with a few companies at a time. (Note: It’s difficult to scale the venture studio model because it’s resource intensive; so generally a venture studio is only creating 3-10 startups per year.)
The most common challenge I hear to the venture studio model is the equity being taken. And I get it. For some, it’s a deal breaker and makes no sense. For others, their startups wouldn’t exist without the studio’s involvement.
You’ll often hear that downstream investors (those that fund a startup in subsequent rounds) won’t touch a venture studio startup because of the cap table. There are some that definitely won’t, they simply do not believe the model makes sense. They’re stuck on the idea that a successful startup is founded by two young white guys wearing hoodies in Silicon Valley. But more and more investors recognize there are lots of ways to build a successful startup, and they remain open to investing in venture studio deals.
I do think when a venture studio takes 40%+ in a deal, upfront, it gets problematic. Even the most open-minded investors will have concerns over the cap table, specifically that the founder is not incentivized enough to really build a winner. These types of deals do get done, but the pool of future investors is smaller.
A couple additional thoughts on equity structures:
If a venture studio takes 40%+ it hopefully provides much more capital. For example, if a venture studio can self-fund a startup up until its Series A, and at that point the studio owns 40-50%+ that’s not bad at all. Although it might be rare to have only one investor on the cap table by Series A, the equity split at that point isn’t unreasonable.
When a venture studio takes 40%+ it may be positioning the startups it creates for early exits. If a studio can build a company quickly and inexpensively, own a big piece of it, and then help sell the startup within a few years, it can do well financially. The venture studio model starts to test the “power law VC return” approach (i.e. where 1 startup wins big, paying for all the other mistakes or mediocre returns.) As a founder, if you’re in a studio that operates this way, make sure you’re aligned on whether the goal is an early exit or not (because that also changes how you raise subsequent capital, or if you even have to.)
6. Venture Studio Business Model
Businesses need to make money.
Venture studios are businesses.
Therefore venture studios have to make money.
This is one of the biggest challenges for venture studios. They need a way to pay the bills. I expect we’ll see a lot of venture studios disappear because they can’t figure out a sustainable business model (let alone a scalable one.)
As a founder, it’s important that you understand how a venture studio makes money. It’s going to directly impact the services they provide, and may impact the deal structure as well.
For venture studios there are a few options:
Raise lots of capital: A number of venture studios take this approach; they raise capital to fund operations. This tends to look more like a VC fund (whose main source of “revenue” is from LPs investing.) While a venture studio would have to use a lot more of the capital it raises for operations (compared to a VC fund), the argument is that the studio will generate significant returns (in a de-risked way) to its investors.
Take “kick-backs” from startups: Quite a few studios invest money in startups but then charge a fee for the “program” and/or the services they provide. They need to invest more capital to earn equity, but then get some of that back to pay for operations. I completely understand why venture studios use this model, but I’ve always found it a bit uncomfortable.
Generate revenue in some other way: Some venture studios build revenue-generating businesses, which allows them to fund operations. These businesses could be thought of as “side hustles” or they might be strategically connected to the core value proposition of the venture studio. For example, a venture studio may generate revenue working with corporate partners, and then leverage those relationships to support the startups it creates.
Scaling a venture studio is very hard.
Imagine the resources required to build 20 startups per year. That’s going to cost millions of dollars in people alone, especially if the studio provides a lot of the hands-on building support (i.e. product, dev, design, etc.) Launching a venture studio is easy; building a successful, stable one is much harder.
7. Transition Support
Most venture studios provide ~3-12 months of support. If they’re taking on most of the early validation and build before a founder joins, the time you have with the studio might be shorter. If you join a venture studio earlier, pre-validation, then the studio needs to support you for a longer period of time.
One of the key things to understand is how they support you when you “graduate” out of the venture studio. Most venture studios work with solo founders (because they need more help), but you can’t exit the studio flying alone. So there are a few things to consider:
Does the venture studio help me recruit people, including potential co-founders?
Does the venture studio help me find co-investors (if necessary) so that I have sufficient runway?
Does the venture studio require a board seat?
What other services/support will the venture studio provide once I’ve technically left? Can I still leverage people for advisory help, doing work, etc. (and is there any cost to doing so)?
Most startups leave a venture studio at the Seed stage. The Seed stage is broadly defined, but what I commonly see is startups needing $500k-$2M in funding out of the venture studio; they have a product in-market with early traction, and a small team (beyond the founder.) There’s a very good chance the startup is still going to pivot—no one leaves a venture studio in a position to simply “operate the startup using a playbook.” They’re not that mature or validated (even if the venture studio did a bunch of work before recruiting a founder.) In my opinion, any venture studio startup is still a bet on the founder and the team that’s recruited in. The problem/solution may be validated, but there’s still a lot more to learn and figure out.
Bottomline: Startups leave venture studios and they’re still at an early stage, so understanding what support you’re going to get from the venture studio is important.
A Bit About Highline Beta
This is not a sales pitch for Highline Beta, but now that I’ve gone through the key criteria for evaluating a venture studio, I thought it would be helpful to answer some of the above questions.
1. Highline Beta sources ideas from 3 places:
Founders (bringing us ideas)
Corporate partners (exploring opportunity areas with big companies)
Ourselves (doing our own validation work)
The two most common sources of ideas (and therefore potential startups) are founders and corporate partners. Unlike other venture studios that are more restrictive in terms of where they source ideas, we’re more open. I certainly do not believe I have a monopoly on good ideas, and in fact, I prefer when we source & validate ideas from external sources (as opposed to falling in love with our own stuff.)
2. We are more horizontally focused than vertical. We don’t build startups in one specific industry, although we’ve done a fair bit in insurance and financial services. We have two broad thematic areas (Financial Wellbeing for All & Creating Sustainable & Resilient Operations) which cover a lot of ground. We’re not deep experts in any specific industry ourselves, and so we more opportunistically explore different areas at all times.
3. We provide a lot of resources to help build startups, but we’re not a dev shop. Our venture studio team is led by entrepreneurial veterans with tech, design, product and marketing experience. These folks play a strategic and tactical role. We’ll help a founder think through the roadmap, while we’re designing and launching a landing page test.
I think of us as temporary co-founders, which means we’ll do whatever it takes to help a founder get their startup built. But we’re not a dev or service shop that simply takes orders and executes work. In some cases we’ll also partner with others (i.e. contractors, other companies) to help build out an MVP.
We also tend not to build a great deal before recruiting the founder. In some cases we’ve validated ideas ourselves and then brought someone in, but we like to recruit the founder pre-MVP.
4. We invest up to $1M (possibly more) per startup over a few rounds. Historically, our first check ranged quite a bit (~$50-$150k), but going forward we’re standardizing on $200k at incorporation and then $200k at launch (typically 3-6 months later.) Ideally that second $200k is invested alongside co-investors, but the first check doesn’t need any others on board. And we’ll invest up to $1M (possibly more) per startup, which means we can probably invest in at least one or two more rounds after the initial $400k.
5. We target 18% equity for our time + initial capital. We believe it’s critical for the founder to own the bulk of the company—at the end of the day it’s their company. This equity usually comes to us as common/founder shares + through an investment (often via a SAFE, so it doesn’t convert immediately.) We’re at the same level as the founder (since we see ourselves as co-founders) and we’re investors.
6. Our venture studio has multiple business models. Highline Beta has raised capital (and will continue to do so), but we also run a corporate innovation services business that works with corporate partners to help them identify and validate new growth opportunities. This corporate innovation services business does lead to spinning out startups (i.e. we spun out Relay Platform with American Family, and Relay was subsequently acquired by At-Bay.) We don’t have a kick-back model from the startups we create and invest in.
Sidebar: The emergence of corporate venture studios
We’re seeing a growing trend amongst big companies to build internal, corporate venture studios that are designed to help them develop new ventures. These are often focused on H2 or H3 innovation (versus incremental, H1 innovation) and remain somewhat separate from the core business.
Most of these new ventures “spin-in” —i.e. they don’t become independent companies or investable by us (or others), but they’re often operated fairly independently by the business. In some cases, these new ventures are spun-out, founders are recruited and external investors brought in to share the financing risk.
We work with a lot of corporate venture studios. It’s not an easy model to pull off, and there are no cookie cutter solutions or perfect frameworks that can be implemented. But it is possible to innovate at the fringes of a big company, build new ventures (ideally with new business models) and create immense value.
7. We remain hands-on after startups leave the venture studio. In most cases we sit on the board (until future investors want board seats, and then we roll off.) We work very closely with our founders to raise additional capital, recruit a team and get them established for success. We also continue to support in an advisory capacity, because these startups are now an important part of our overall portfolio.
We are always learning and iterating on Highline Beta’s model.
There’s no “perfect way” to start a company. And there’s no perfect venture studio model either. We’ve iterated multiple times on how we build startups, and I expect we’ll continue to do so. After seven years we’ve learned a ton, and we’ve seen a lot that hasn’t worked, but also figured a few things out.
I love building and funding startups.
It’s amazing to find a great founder, get excited about their vision, invest money, and then roll up our sleeves. I don’t think I could exclusively invest without also wanting to get my hands dirty. Remember: We’re investing at incorporation—you can’t get earlier than that.
Marcus (my co-founder) and I have been building and funding startups for 26+ years—we’re always learning, testing new ideas, etc.—but we’re also very confident that we can create incredible value.
Types of Founders that are Attracted to the Venture Studio Model
Because of the biases that exist around what makes an ideal founder, I often get asked, “What type of founder wants to join a venture studio?”
There are plenty of them.
Typically it attracts solo founders. This makes sense, because a venture studio can serve as co-founders. Most solo founders tend to be non-technical. Note: There are co-founder teams that also join venture studios.
“Been there, done that” founders. These founders have built startups before, perhaps won (not huge wins) and definitely lost (they have scars.) They want to jump off the proverbial cliff again, but they don’t want to do it alone, because they know how tough it is.
New founders. These founders have never built a company (so they’re the opposite of the “been there, done that” group), and they may be teetering on the edge of doing it. Some times people need a gentle push, or a hug. New founders may not have the right networks (of potential co-founders, investors, etc.) so they can feel quite isolated without support.
Diverse founders. There are a lot of great founders that don’t look like what we envision as the prototypical founder, including older founders, female founders, etc. I believe venture studios can play a positive role in attracting and guiding diverse founders.
Domain experts. I find that domain experts (in some topic/industry), who have identified an “under the radar” problem, are a great fit for venture studios. I love chasing boring problems, and in certain industries or verticals there are experts that see these issues and feel compelled to fix them.
Venture Studios Versus Accelerators
Venture studios and accelerators are very different (although there are lots of variations in both.)
Accelerators are typically 3-6 months, with a cohort (~5-20+ startups), and focused primarily on helping startups fundraise. There are corporate pilot accelerators (which Highline Beta also runs) that focus less on fundraising and more on bridging the gap between big companies and startups.
Accelerators typically have standardized programming and robust mentorship programs. Many take a small amount of equity up-front and invest a small amount of capital. There are some accelerators that don’t take equity or invest.
There are some very early stage accelerators, but typically they’re looking for startups that have a product in-market or are at least actively building something.
Accelerators can be extremely beneficial to founders. They’re often very good for building networks and relationships. But they’re more of a volume game in terms of portfolio size, because they run quickly and you can put a lot of startups through them. As a result, the level of help provided is spread thinner across a cohort, whereas a venture studio is rarely working on more than a few things at the same time (again, it’s a tough model to scale.)
Venture studios typically have less formal programming or giant mentorship networks. They operate more ad hoc and customize what they deliver for the needs of each specific startup (which in my experience varies a lot!)
A good venture studio will have an operating model by which it validates new startup opportunities. This can be fairly rigorous, applying Lean Startup, Design Thinking and/or JTBD methodologies, but it’s not the same as structured programming with specific workshops, mentorship sessions, or training experiences.
A good venture studio will have strong networks, but they don’t necessarily operate a formal mentorship program, instead opting to connect founders in the studio to the right mentors at the right time.
Venture studios provide a more personalized approach to building new startups. Accelerators provide a programmatic way to help grow startups (i.e. accelerators don’t build new startups, they accelerate existing ones.)
There isn’t One Way to Build a Successful Startup
Venture studios are not factories. The “factory” analogy is a terrible one—startups can’t be built following an instruction manual with a rigid process that spits out the same thing over and over. There’s too much uncertainty and too many variables involved.
Venture studios do need a process by which they validate opportunities. I’m not sure they can massively de-risk things (because there’s always more to do / figure out than what a studio does in 6-12 months time), but I do believe they can help founders find real insights and build startups on an uneven playing field. Venture studios, through their methodology of validating ideas and a startup’s potential, should be able to uncover genuine insights and piece together the makings of an unfair advantage. So when a startup emerges from a venture studio it’s been built differently. But it’s not a factory spitting out widgets.
Startups are built in lots of ways, by lots of people, in lots of places
Without question, the centre of the startup universe remains Silicon Valley / San Francisco. Pretending otherwise is silly. But that doesn’t mean startups can’t be built in other places by other people. I was part of a startup, GoInstant, founded in Halifax, Nova Scotia and acquired by Salesforce. Halifax is a great city, but no one would consider it a startup mecca.
Successful startups are being built all over the world by all kinds of people.
And to-date, no one (anywhere)—including venture studios—has created the perfect startup success formula. Venture studios streamline the creation process, and in my opinion, can be a great way to build a company, but there’s no formula for guaranteed winning.
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Want to learn more?
Here are some great resources on venture studios:
Founders: Why Join a Venture Studio? - a blog post I wrote on why the venture studio model may be interesting to founders
Venture Studio Index - a regular newsletter focused exclusively on venture studios
The Emergency of Venture Studios - a free downloadable report