The Future of Venture Studios is Vertical
To build a successful venture studio, you need to focus on a narrow vertical. (#59)
Venture studios are meant to systematically build and fund startups with a decreased likelihood of failure. There’s no formula for guaranteed success, but a venture studio needs the ability to repeatedly (and quickly) create new, quality startups.
Call it a playbook, framework or system.
Every venture studio has some methodology for testing new startup ideas, validating or invalidating them, and pushing them through the process of building an MVP, securing initial customers, raising capital and so on. This is where the application of Lean Startup, Design Thinking, Jobs to be Done, etc. is the focus. Every venture studio will tout their “rapid innovation approach”—some will be great at it, others less so. Ideally a studio’s methodology does increase the frequency and quality of experimentation, learning and decision making, but in my experience it’s not as simple as following a framework and winning; it still takes creativity, instincts and luck to win.
I also believe that no matter how much validation is done by a venture studio, the success or failure of the startup is still heavily dependent on the founders. When a startup leaves a venture studio it’s still in its infancy. The startup has been de-risked, but not completely. The founder picks up the ball and has to run with it, adapting, pivoting and making lots of tough decisions along the way.
Venture studios need to bring many ingredients together, in the right amounts, at the right time, in order to systematically build quality startups.
No venture studio would visualize their playbook(s) this way, but be honest, building startups is messy. Venture studios clean up and organize the mess to some extent, but they’re not factories with production lines spitting out the same item over and over.
As more venture studios emerge, the differentiation between them will become more unclear. They’ll all tout their playbook or framework as “the best way to build a startup” but when you dig beyond the surface level, what will really make the best ones stand out?
It’s all about the vertical (and I don’t mean how high you can jump!)
Focusing on a vertical provides venture studios with the actual infrastructure to systematically create quality startups. While some venture capital firms and accelerators specialize in specific areas, they’re rarely hyper-focused on a narrow vertical. (To be clear, AI is not a vertical.)
When you think about building a vertical venture studio, it helps to clearly define all the key variables that are jumbled up in the word cloud above:
What are the problems in this vertical?
Who are the target ICPs (ideal client profiles)?
Who are the founders most interested in the vertical?"
What are the right go-to-market strategies?
How is pricing typically done?
Who invests in this vertical?
Etc.
Honestly, the narrower you go, the better.
For example, is B2B a vertical?
No.
It’s not specific enough. There is some leverage that comes from focusing on B2B software, but if your B2B studio goes across any industry, customer size, problem space, etc. you’re not getting as much leverage as you can.
Similarly, verticals such as Sustainability & Health are not narrow enough. These are massive industries with many sub-verticals within them. Instead take B2B + Sustainability and build a venture studio for AgTech Software for Farmers—now that’s a vertical you can dominate.
OSS Ventures only focuses on B2B software for factories and factory operations. That’s an awesome vertical. Hyper-focused. The founders of the studio know the space intimately and have incredible leverage. Here’s a podcast interview with OSS Ventures’ founder, Renan Devillieres.
As soon as you decide on a narrow vertical, everything you need to build in terms of infrastructure, playbooks, systems, etc. becomes much clearer. If you can build those capabilities successfully, you can build better quality startups faster. Take a look:
Every part of the “system” that you need to build a strong venture studio becomes clearer (and easier) when you’re focused on a specific vertical.
Every startup you build benefits from the work (and startups) that came before—because of the narrow focus, the relevant learnings, etc. That’s true leverage.
Let’s look at a few of these in more detail.
1. Problem Validation
As mentioned before, every venture studio has an “innovation model” for taking an initial idea and validating (or invalidating) it. Typically this starts with tackling the problem; i.e. is there a painful enough problem that exists for an identified group of users/customers?
If you don’t do a rigorous enough job of problem validation there’s a good chance you’ll build a solution that no one really wants. It’s a painful experience! (I’ve been there If you want to learn from those that suffered before you, please read my Standout Jobs Postmortem: Part I and Part II 😀).
This process involves interviewing potential users/customers, testing prototypes and looking for meaningful insights.
How do you do real problem validation?
Here are some past articles on the topic:
Having to start this process from scratch every time is tough and time consuming. You have to find the right people to speak with, gather a bunch of information, synthesize it into insights (assuming you find any!) and determine next steps.
When you’re focused on a very narrow vertical, you still have to do this work, but you can do it perpetually, engaging with design partners or new potential customers, collecting their input/feedback and storing it for future use. You’ll uncover hidden problems that others don’t realize exist. Your team will develop a deep understanding of the space with a crazy amount of empathy for users/customers, and an insights/research database that can be leveraged. When someone says, “I have a new idea…” your response becomes, “Hold on, I think we’ve spoken to people about that in the past.”
2. Design Partners & Early Customers
Finding early customers is hard. Focusing on a single, narrow vertical should make this easier, especially if you’re already from that space and have a network and credibility (i.e. don’t go into a vertical if you personally don’t know what the hell is going on in that vertical!)
The dream scenario is identifying a group of customers that say, “Anything you guys build, I’m open to testing.” This should significantly speed up the initial validation work. Having trusted design partners or early customers that will test your MVPs, provide regular feedback, and help you validate the opportunity is absolute gold. Imagine recruiting a founder and telling them, “I’ve already got your first 5 customers ready to try this out, no matter what you build.”
As you scale past early customers, the approach should be “rinse and repeat.” Go-to-market strategies are likely the same for each startup you build. For example, you might realize that SEO is absolutely critical for startups in your vertical. If that’s the case you can invest in the proper infrastructure, systems, playbooks, etc. to provide each startup with the SEO services they need. A lot of startups figure out how to get their first handful of design partners or early customers, but then can’t scale, often because they don’t have a channel that’s working for customer acquisition. If you already know what channels work, you can be setup to activate them immediately.
Your portfolio’s business models are probably all the same. There may be some variation (one startup charges a monthly subscription, another tries usage-based), but you should know beforehand how customers want to buy and apply that model each time. Pricing becomes easier, because you already know what your customers pay for other things (including your existing startups’ solutions), which means less experimentation is required. While experimentation is important, experiments are designed to fail as much as they are meant to succeed. That means they take time to iterate through and generate learnings. If you already know (or have a strong indication) as to what the price should be and how the business model should operate, you can speed up the entire process.
3. Raising Capital
Venture studios need to help their startups raise capital from other investors. Building an investor network is critical. If you pursue a horizontal strategy (i.e. you build startups across an array of industries) it’s harder to build a strong network, because most future / downstream investors will only have specific interests. There are generalist venture capitalists, but we’re seeing more and more specialization in that asset class as well. If your venture studio is focused on a narrow vertical it’s much easier to identify the right co-investors / future investors that are also interested in your space.
Venture studios will also need to raise capital for themselves—either directly into their operating companies or for VC funds that they create. (Here’s more on venture studio math.) Finding the right investors for your venture studio is tough. Focusing on a specific vertical makes your messaging and differentiation clear. In an overwhelming sea of emerging venture studios that’ll be essential. It’s better to know if someone isn’t interested in your vertical quickly, so you can find the investors/LPs that do care.
Going Vertical = Clearer, Better Processes that Run Faster
It’s clear to me that going vertical (and as narrow as possible) should result in clearer, better processes (i.e. the playbooks, frameworks, etc. get more useful) that can be executed quickly. The venture studio industry is hanging its hat (at least partially) on its ability to build better startups faster—but doing so requires infrastructure/systems and leverage.
The infrastructure/systems you need are significant. I identified 60+ variables to consider when designing and launching a venture studio, many of which become easier to think through and execute against when focused on a vertical.
How to Build a Venture Studio: The Checklist
·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, st…
Some of the variables or components of a venture studio work across verticals. For example, equity splits/cap tables. The equity you take versus what you provide a founder shouldn’t necessarily change because you’re in Vertical A or Vertical B. The amount of capital you invest may not change either. Even the methodologies you use for validating opportunities won’t change significantly across verticals.
This means there’s the potential to build a more horizontal venture studio platform and subsequently launch vertical venture studios on top of it.
This is the approach we’re taking at Highline Beta. Over the last 7 years we’ve built our venture studio through a ton of experimentation, iteration and learning. Our focus areas have been broad-ish, although generally fitting within two key themes/thesis areas (“Financial Wellbeing for All” and “Creating Sustainable & Resilient Operations”). We’ve also gone deep into partnering with corporates/big companies to explore spin-out opportunities. We’ve built a lot of capabilities and gained a ton of experience stress-testing our hypotheses on how startups should be built and how venture studios play a role.
We now see an opportunity to scale vertically. This will allow us to amass unique expertise and capabilities within specific verticals, then build + fund more quality startups faster. We will continue to build the platform components, and build + fund startups in broader thematic areas, but at the same time identify the right verticals to go deep into.
I’m connecting with a lot of venture studio founders/leaders and people considering venture studios, and my recommendation will be clear, “Go vertical. As vertical as you can. Figure out how to win in one vertical, and then decide if you want to go into another one.”
Well done! Very on point! Jeffery Moore would be proud!