A Comparative Analysis of Venture Studio and Venture Builder Models in Africa.
Abstract
Have you ever heard of the Valley of Death curve and the VC power law? This led me to dive deeply into venture studios. The “Death Valley curve,” or the “valley of death,” describes the stage in which substantial work on a new enterprise has begun, but no sufficient revenue has been generated. Over 90% of start-ups deplete their initial capital to establish the business during this period. It refers to the difficulty of covering the negative cash flow in the early stages of a startup before its new product or service brings in revenue from real customers (Ritter & Pedersen, 2022)[i].
VCs have provided a solution by providing scalable capital to these businesses with a huge market of over $1B, giving them the cash flow they need to increase their runaway and start generating revenues from real customers that cover their costs. However, the returns in VC are ruled by a key principle called the Power Law, which dictates that a handful of investments typically drive the bulk of returns. One successful investment can return 100x to recoup the losses of all the unsuccessful ones in the VC’s portfolio (Perdew, 2023)[ii]. It is a game of chance or luck. Shikhar Ghosh, a senior lecturer at Harvard Business School, in his research (Ghosh, 2012)[iii], found that up to 75 per cent of venture-backed startups do not succeed because they never return cash to their investors. His research also shows that 30 to 40% of those 75% liquidate assets, with their investors losing all their money.
On the other hand, research has shown that 84% of startups coming out of studios go on to raise a seed round. Of those startups that make it to the seed round, 72% of those ventures make it from seed to Series A, compared to traditional startups in which only 42% of ventures that get to seed make it to Series A, according to Global Startup Studio Network (GSSN, 2020)[iv]. The venture studio model is where investors find better capital efficiency. According to the Venture Studio Index Database James (Moran, 2023)[v], there are over 400 venture studios globally, with less than 5% in Africa. The Venture Studio model is still nascent in Africa despite its numerous advantages, such as higher start-up survival rate, faster market entry and exits, and better capital efficiency for investors. From the data I collected, about 29 venture studios operate in Africa (Image 15).
In my fellowship at the Dream VC Investor Accelerator program, I got motivated to do a deep dive research on venture studios in Africa, taking a comparative approach to assess different models of venture studios and venture building in Africa to get the complete picture of what venture and startup studios are, the different models of such studios globally and in Africa, and then exploring the nuances of such models in Africa. This will shed light on venture studio models in Africa to founders, investors, venture builders, academicians, and other readers of interest and support the growth of venture studios in Africa and their impact on start-ups leading to the building of high-quality and sustainable businesses, increased likelihood of successful market entry and exits and better returns to investors.
The research was prepared from secondary data from other existing researchers and primary data collected from a sample of active African venture studios.
Table of Contents.
- Introduction.
- Why Venture Studios.
- Startup Studio Operating Models.
i) Operating Models Based on Studio Legal Structure.
ii) Operating Models Based on the type of Co-Innovation.
iii) Operating Models Based on the origin of the idea.
iv) Operating Models Based on the Thesis Areas & Focus.
v) Operating Models Based on Capital Investment and Deal Structure.
vi) Operating Models Based on the Venture Studio Funding and revenue generation.
vii) Operating Models Based on the Exit Strategy.
viii)Operating Models Based on the support provided. - How Entrepreneurs Analyze Venture Studios.
- The Future Venture Studio Model
- Key Recommendations.
- Acknowledgement
- List of Venture Studios in Africa.
- References
Introduction
A venture studio is a structure that creates startups repeatedly by mobilizing a mix of human and financial resources (Start The F*** Up, 2020)[vi]. The three main criteria for defining a startup studio are the creation of startups, the repetition of the creative process, and the contribution of human and financial capital.
These companies work on building their portfolio of companies, organized to maximize success, speed, and returns. It is also known as a startup factory, foundry, venture builder, or venture studio. The studios provide a one-stop shop for all the resources and expertise needed to launch a successful startup by combining ownership, process, talent, and network to create value. This support includes everything from software development, finance, legal, HR, marketing, and communication.
In this article, I will use venture studio and startup studio interchangeably. However, technically, they are different models. The biggest difference between Startup Studios and Venture Studios is the funding source. Venture Studios raise a fund to provide financial support to the startups they build, while Startup Studios do not. Venture Studios have fiduciary duties to LPs, while Startup Studios do not. Venture Studios invest in spin-outs at the Seed Stage (and beyond), while Startup Studios do not. Venture Studios are under serious time pressure to produce exits and return funds to investors while Startup Studios are not and Venture Studios take more time and are harder to launch than Startup Studios due to the need to raise a fund (Lesage, 2023)[vii].
Venture studios create multiple startups at once, rapidly test new startup ideas, and either validate or “fail fast.” There are two main types of venture studios: independent venture studios and corporate venture studios. Independent venture studios provide all the resources needed to launch a new startup, while corporate venture studios provide a hybrid mix of talent, capital, and strategic direction in cooperation with a mid to large-size enterprise (Hancock, 2021).[viii]
Many entrepreneurs lack the money and guidance to turn their ideas into successful businesses. Studios can de-risk startups by providing capital and support in the early stages and by making it easier and safer for entrepreneurs from different backgrounds to start their own ventures.
Venture Studios has four key partnerships. These are the studio investors, i.e., the LPs who invest in the venture studio fund, the founders recruited to run the businesses, the follow-on investors who invest in the studio portfolio companies, and the studio GP and staff.
Why Venture Studios
According to the Global Startup Studio Network (GSSN) (2019)[xi], 84% of startups coming out of studios go on to raise a seed round. Of those startups that make it to the seed round, 72% of those ventures make it from seed to Series A, compared to traditional startups in which only 42% of ventures that get to seed make it to Series A. Ultimately, 60% of all companies created by studios make it to Series A.
The industry average for a traditional investment to exit is about 6.6 years, while the study of startups created in studios showed that the average age of a company at the exit was 3.85 years.
The reason for the continued growth of startup studios relates to the repeatable processes these businesses hone over time. As studio founders gain more experience fashioning new organizations, they leverage any lessons learned to become more efficient and more effective in their efforts. This ultimately helps reduce the risk of new business creation, resulting in improved ROI for those funding these concepts (Amann, 2022).[xii]
Startup studios improve over time. Startup studios can leverage past start-up experience, market research, and industry connections to test and develop an idea and reach the strongest iteration possible. This is why they have a higher average success rate than traditional startups operating independently.
Venture Studios provide:
● Higher Success and Return Ratios — The IRR of venture builder companies is around 50%, according to various studies. For non-studio startups, the IRR is only 21% (Duodeka, n.d.)
● Expertise And Experience — Recurring experience captured in playbooks (Duodeka, n.d.)[xiii].
● Access to talent — A venture building team typically comprises a group of specialists with skills and core competencies that are usually hard to find.
● Flexible skill deployment — No need to hire anyone permanently. The skills of the venture building team can be brought in as needed.
● Faster market entry and exits: Time to Series A averages 25 months (1.24x faster than non-studio startups). Time to seed round averages 11 months (2.27x faster than non-studio startups).
● Access to manuals, resources, and processes — Venture builders record their acquired knowledge in handbooks and create optimized processes. This way, there is access to accumulated knowledge.
● An entire team is ready to hit the ground running — All the necessary skills for building digital businesses are in-house. In this way, the team manages to leverage enormous acceleration.
Generally, venture studios offer a variety of diverse in-house support and outsourced resources that include:
Startup Studio Operating Models
Understanding various startup studio operating models is critical for all start-up and investment stakeholders. For founders and investors, understanding these models will help them comprehend what kind of studio they are most interested in partnering with. For studio operators, these will help them better articulate their model internally and to their stakeholders, and for emerging studios, these will inspire how to build their studios (Hayton & Riley, 2022). [xv]
Section i): Operating Models — Based on Studio Legal Structure
Venture studios have different legal structures based on whether the venture studio has a fund, where the fund sits and which entity invests in the startups and holds equity. The venture studio will be a separate legal entity from the startups they create.
Many studios that originated as single-studio entities are migrating to dual-entity models by raising VC funds. Max Pog, in his Big Startup Studio Research 2023[xvi] identified 3 major venture studio structures as follows.
a) Holding company
In this structure, a studio creates and funds startups, taking a stake in them. Initially, the studio attracts investments by offering a stake to LPs (Limited Partners or investors) in the holding company. Examples include FirstFounders Inc. and Delta40 Venture Studio.
b) Fund as a startup studio
In this structure, the fund and the venture Studio are in the same entity. All funds, including the founders’ money and capital acquired from investors, are contained within the fund. All shares of the companies also belong directly to the fund, i.e., all equity sits within the fund — both founder provisions and purchased equity. This is a simple and understandable structure for LPs, making it easier to attract investor funds. There is the opportunity to receive management and earn a carry to finance the studio operations.
According to John Carbrey (2020), the Managing Director of Future Sight, the following are the pros and cons of the model[xvii].
Benefits
This is the simplest startup studio funding model. The studio will have raised funding upfront and, therefore, will be able to concentrate on building startups. This model is flexible. The fund can be used to finance the operations of the startup studio, which can be beneficial for smaller funds.
Disadvantages
The 2% management fee is insufficient to cover all studio operational expenses. There may be a higher fee load on smaller funds to cover incubation overhead. A high level of fund commitment may bias a decision to stop funding an incubated company or write it down. Studio owners are paid and rewarded as GPs, and this may, therefore, affect their role as co-founders in the startups they build (Quentin, 2020)[xviii] due to conflict of interest as a founder looking after the interests of the start-up and as a GP seeking to meet LPs targets.
c) Dual-entity model: holding company + fund (considered the most efficient structure)
In this structure, the studio and the fund are separate entities. The studio receives common shares upon launching startups, while the fund receives preference shares when investing in startups. The studio covers its expenses through the 2% management fee, and the fund’s first investment would be in the studio itself. Thus, the fund will own a share in the studio or separately attract investors independent of the fund.
The fund and studio are separate entities with distinct roles and responsibilities (Carbrey, 2020). The studio focuses on building new companies, while the fund provides financial support and makes investments in these companies. The studio is responsible for the day-to-day operations of building and developing new companies. It typically includes a team of experienced entrepreneurs, product managers, designers, and engineers who work closely with founders to turn ideas into successful businesses. At the same time, the fund is a separate entity that provides financial resources to support the growth and development of the companies built by the studio. It may also provide additional services such as mentorship, access to networks, and strategic guidance.
Benefits
The studio management is aligned with investors across both vehicles. There is no “win” for management without a win for LP’s both through ownership in the studio as well as fund exposure to incubated companies. There is no direct equity in incubated companies placed in studio management or studio staff names directly. This structure enables the studio team to focus on building and scaling companies while the fund provides the necessary resources to support their growth.
Disadvantages
This is a complex structure that investors may shy away from.
d) Other Structures
John Carbrey identified other structures as follows (Carbrey, 2020).
> Single Fund Model Foundry — Foundry with Bill Back
In this setup, you have a fund that is directly invested in the new startups. Each new startup has the studio founders on the cap table through a Limited Partner Advisory Committee (LPAC) agreement, which allows management and fund staff to have direct equity allocation in foundry companies and also allows the studio to invoice the startups built for the services offered. Then, there is an operating studio where the larger studio team sits with the staff and its associated costs. A bill-back relationship (where a studio invoices a company when it becomes independent, e.g., after receiving external seed or Series A investment or at spin-out and uses the studio’s services to cover its operating expenses) between the new startups and the operating studios, ensures that the operating studio would, in the end, break even because the new startups are covering the ongoing costs. The billback happens on a portion of post-incorporation services after validation and MVP. The model assumes that any services post-spin-out are billed at cost. Practically, studios can only start billing their companies when those companies have funding. This means billing back usually does not start until at least the pre-seed stage, when the company has spun out and received an initial check from the studio. At this point, a portion of the pre-seed funding can be allocated to directly reimburse the operating studio for its services.
Benefits
This model is simple to understand as it is a single structure. The portfolio companies can allocate LP equity from new cap tables, which are not subject to the fund’s carry provisions. The new startups pay for management overhead instead of LPs.
Disadvantages
The largest disadvantage of this model is that there is a potential misalignment between investors and studio founders. The key challenge is aligning investor interests when the studio founders are involved as founders and as follow-on investors in these companies. The studio management is incentivised to create more companies to increase overhead/fee load and to focus on single winning companies due to direct management allocation on companies and fund returns may not correlate with management returns. There is also no or limited ability to incubate companies that are not conceived and initially owned by the foundry. There is significant risk of not being able to collect fees from all companies, materially affecting the operational cash flow of the foundry. There is also a probability of investor signaling when LP direct investors are not leading or participating in fundraising. Billing companies is also a non-standard VC practice.
> Single Studio Model — Venture Studio Without Fund
This model is as simple as you can get. There is a studio that is forming and funding New startups. The studio may have common and preferred shares in the New Companies formed. However, there are significant trade-offs. In this model, there is no carry and no fee economics. LP’s purchase a fixed percentage of ownership in the studio and studio management owns the remainder. LP’s contribute full capital at the time of subscription. Studio agrees to operate for a set number of years, typically 3, and draws capital as needed. The studio typically assigns pro-rata rights to LP’s.
Benefits
This model is nimble for evaluating concepts at will. The studio determines the necessary staffing level and capital allocation for projects.
Disadvantages
In this model, the studio and investors are not getting the value that they typically would in a VC fund from their pro-rata rights. While this is solved in the Dual Entity Structure, in this model, the studio is not able to capture that follow-on value over time, and needs an associated fund to leverage the full value of right of first refusal and pro-rata.
> Single Studio Model + Syndicate — Studio with Extended Syndicate
This model takes the idea of the Single Studio Model but mitigates some of the negatives of that model with the addition of a syndicate. The studio creates new companies, and when these new companies need additional investment, the studio management creates an SPV to enable LPs or a syndicate of angel investors to invest through or alongside the studio. This model introduces the concept of an investor syndicate. It captures carry through an SPV on follow-on rounds, unlike a single studio model. There is no management fee economics from a fund, and no pre-committed fund capital is available to be deployed for follow-on.
Benefits
Compared to the single fund model, this model captures most of the value of ROFR and pro-rata. An SPV typically gives control rights to studio GPs retaining ownership with the startup. Decision-making is flexible, including who to invest in, staffing levels, and project capital allocation. The structure is simple to understand (John, 2020).
Disadvantages
Getting investor syndicates up and running and enabling co-investment is a difficult process. Investor syndicate is not committing to the company creation program but rather individual deals hence not all ventures may be funded by the syndicate. There is also the potential to have alignment issues since studio and investor syndicate ownership are not the same.
Venture Studio Model — Comparisons
The image below shows summarized comparison of the various venture studio models.
Section ii): Operating Models — Based on the type of Co-Innovation[xix]
Venture studios can be categorized based on the type of partnerships created for innovation. A venture studio can work independently, with investors (LPs) or in partnership with corporations that are exploring new opportunities, seeking to get ahead of their competition, and driving innovation within their organisation.
a) In-house venture building — A corporation owns the venture studio and all the start-ups forming its portfolio.
b) Working for investors — The venture studio holds Equity in all the different ventures. It charges fees for the services it provides.
c) Working for corporations — The venture studio sells its services to corporations in exchange for fees. Corporations sometimes use this model to incubate new ideas
Section iii): Operating Models — Based on the origin of the idea
Venture studios generate innovative new ideas in different ways that include generating ideas internally, generating ideas in partnership with other founders or both.
a. Internal Idea Sourcing:
Ideas are generated, vetted, and accelerated from inside the organization itself. Internally, these ideas are validated, and capital is raised in-house. Once the new idea has proven its product-market fit, the studio spins it into a separate portfolio company (NewCo). The studio then invests the funding, advisors, human resources and other business necessities to assist the startup to success. The venture studio will then look externally for additional co-founders and other team members to scale and grow its newly validated business case (Doyle, 2021). For example, Nation Media Group ventures in Kenya and GreenHouse Venture Studio in Nigeria use internal idea sourcing.
b. External Idea Sourcing:
While most venture studios generate all their ideas internally, some studios will acquire and invest in external ideas or corporations as a part of their portfolio i.e., some venture studios recruit founders with ideas. Venture studios will host open calls to scout for new ideas and partner up with driven entrepreneurs looking to build on their own ideas but lack the resources to do so. Others will charge corporate partners for work that’s being done in the earliest ideation phases. Studios will usually have done deep research on the target market for the new business. This research-based approach provides critical insights, ensuring the new idea actually solves a problem for the user community.
> The accelerator model — Experienced startup studios with a sterling reputation for successfully incubating new businesses attract interested entrepreneurs looking for support to build ideas. This model is most like an accelerator or an incubator — the entrepreneur gains a team of experienced business builders to help develop their idea. Partnering with a known entity with a proven track record offers a healthier opportunity to make an impact in the business world.
While the entrepreneur brings the idea, the startup studio offers advisors, strategy and execution through full end-to-end development, to bring the idea to market. Because these studios are invested in the venture’s growth, they generally have a well-established vetting process to focus on businesses that have the best chance of success.
> Product development model — other venture studios focus on product development, venture studio that is mainly focused on creating a product or extending current products for the client that has the potential to become a venture.
An example of external idea sourcing is the Founders Factory Africa second fund, that is entirely focused on partnering with great founders that have great ideas.
c. Hybrid Idea Sourcing:
In some cases, venture studios take on a hybrid approach. This means that the venture studio will source new ideas from both internal and external networks, combining the best ideas of both worlds.
The work done to support other entrepreneurs provides experience and insight to power internal idea generation. These studios gain critical insights by working within different industry sectors. It also provides studio employees with exposure to the operational pain points within a certain market. These venture studios employ a hybrid idea generation model: Adanian Labs, Delta40, First Founders, Pyramidia Ventures, and Purple Elephant Ventures.
Section iv): Operating Models — Based on the Thesis Areas & Focus
Venture studios can also be categorized based on the sectors they are in and if they are focused on specific sectors or are sector agnostic. Some venture studios specialize in specific areas based on specific industry domain expertise, corporate partners, potential customers, etc. Focus may be vertical or more horizontal, e.g., B2B-focused venture studios, Deep Tech, or Agri-focus. Sector focus may be an advantage for the venture studio as it can build domain expertise better. For example, Pyramidia Ventures focuses on climate-smart Agri-Food tech, while Purple Elephant Ventures focuses on the tourism sector.
Section v): Operating Models — Based on Capital Investment and Deal Structure (Equity) (Doyle, 2021).
Venture studios can also be categorized based on the amount of initial capital they invest in the startups they create, the percentage of equity taken, and whether they do follow-on investments as the startup scales. Some venture studios will have a target initial ticket that they invest in the startups, which will be compensated with preferential shares in the startup. Venture studios will usually also take common shares for the company building work they will put into the startup. Some will invest on Day 1, depending on what stage of the business they onboard. Some will require co-investment from other investors. It is also a common practice for venture studios to make follow-on investments, with some preferring to be the single source of funding for the start-ups up to Series A.
According to a report by the Global Startup Studio Network (GSSN) (2019), venture studios take an average equity stake of 34% in the start-ups they work with, though the range can be anywhere from 15%-80% depending on the amount of work they do before recruiting a founder. It becomes problematic if a venture studio takes over 40% of a deal upfront. Investors will have concerns over such a cap table, specifically that the founder is not incentivized enough to really build the business and if there is an alignment of interests between the interests of the venture studio and the startup. Since venture studios take a significant equity stake in the companies they help create, there is a risk that the studio’s interests may not be aligned with those of the startup founders. There is also the risk that the studio may not be motivated to sell the company at a price that is acceptable to investors (Gardner, 2020)[xx]
Section vi): Operating Models — Based on the Venture Studio Funding and revenue generation.
Another way of categorizing venture studios is on how they fund their operations and their revenue generation model. There are various ways in which a venture studio raises funds to cover its operational expenses and to invest in start-ups, and how they generate revenues internally, as below: -
a. Funding a Venture Studio
There are various ways to fund a venture studio. They include [xxi]
i. Bootstrap
Just like start-ups, a studio can also be bootstrapped. Bootstrapping has the advantages of being in greater control of the studio, faster decision-making, efficiency in the operations, and flexibility. The problem with this approach is that new ventures cost a lot and take a long time to pay back. Cashflow can hence be a big problem. Examples of initially bootstrapped studios are Adanian Labs, First Founders, and Pyramidia Ventures.
ii. Fund
Some venture studios have an associated fund that they can draw on. The studio gets management fees from the fund, which can be used to cover Opex, and the funds are also at hand for deployment of investment to a portfolio company. However, running a fund and a studio are two different things. Having a fund may create bias, leading to poor funding decisions. For example, the portfolio ventures may receive funding before they are ready if the fund has pressure to deploy.
iii. Parent Company
For venture studios that are associated with a parent company, the parent company can provide the funding for the studio team and the ventures created. All corporate venture builders adopt this model. This model ensures sustainability, commercial viability, and security, but the trade-off may be over-control and interference by the parent company, which may be detrimental to the studio’s operations. Examples include SC Ventures whose parent company is Standard Chartered Bank, and Nations Ventures Studio by Nation Media Group.
iv. Syndication
Syndicates like Naiban, ABAN, Lagos Angel Network, The Cairo Angels, ViKtoria Ventures, etc. provide an alternative funding source to studios. These funds offer the flexibility of access to funding as and when required without the rigidity of a fund. Syndication will help cover studios’ Opex and is usually augmented with any of the above models to provide additional funds for direct investments into portfolio start-ups. Examples include the Innovation Village.
b. Venture Studio Revenue Generation
Some venture studios have revenue-generating business models, which allow them to fund operations. Due to their high operational costs, studios need alternative revenue generation as the average venture studio fund size of less than $50M does not provide enough management fees to support the studio, hence the need for additional revenue streams. These revenue streams are as follows, according to Dianna Lesage[xxii].
i. Corporate Innovation Deals:
This involves partnering with corporate entities that fund the development of new ventures. By entering into such strategic arrangements, Studios not only secure funding but also gain access to invaluable expertise and resources. Studios like SC Ventures by Standard Chartered Bank and Nations Ventures by Nation Media Group are examples of corporate venture building.
ii. Service Fees:
Studios can charge their ventures for services rendered to them. After the spin-off, the ventures will have raised funds externally. Theoretically, this sounds viable and economical — a venture relying on centralized services technically pays less than hiring in-house. However, the long-term execution can be messy because as the ventures become mature, they will desire more independence from the studio. Furthermore, it may be hard to justify the correct fee structure. Examples include venture studios like Delta40 Venture Studio, The Innovation Village, and GreenHouse Venture.
iii. Agency Services:
Depending on the Studio’s expertise, the studio provides a range of agency-specialized services aligned with the Studio’s core competencies, such as design, software development, marketing, validation testing, and more. These services are provided in exchange for funds. This diversified income model has proven to be a lucrative source of revenue for venture studios. The limitation of this is that a large part of the resources will be used for such projects, leaving little resources left for venture building. Hence, a significant scale must be achieved for this model to work, e.g., First Founders.
iv. Consulting:
For studios that have a niche e.g., they’re experts in AI, Web3, sustainability, healthcare, real estate, etc., they can leverage their internal resources to advise organizations on innovation strategies within their sphere. Often these entities are corporate organizations, but the range spans from academic institutions to governments and non-profit organizations. These deals often follow the typical structure of how consulting firms work with clients.
v. Innovation Programs:
Venture Studios can also generate revenues from innovation programs offered to other organizations i.e., cities, governments, academic institutions, and more. These programs, often structured as innovation boot camps, startup accelerators, or events, serve the dual purpose of fostering innovation and entrepreneurial growth and generating revenue that supports Studio operations. Adanian Labs generates revenues by providing innovation programs to other organizations.
vi. Selling Access:
This involves leveraging studios’ extensive networks and expertise to sell resources and access by sharing their knowledge and connections with those who want them. For example, those who might want early access to innovation in a specific field or parties that need an introduction to forge a deal or partner together. If a Studio can be the conduit between two groups that want to do business, they have the potential for a lucrative revenue stream.
Section vii): Operating Models — Based on the Exit Strategy
Venture studios have different exit strategies. Some will exit at seed stage, others at series A, B or C. Most venture studios will provide 1–4 years of support to the startups they create, after which they spin out but may remain hands-on by either sitting on the board or in an advisory capacity. The sample taken from African venture studios shows that most studios provide between 1–3 years of support. Some ventures like Purple Elephant Ventures, provide support for 4+ years
Section viii): Operating Models — Based on the support provided
A studio can bring in a co-founder either pre or post-validation. First Founders Inc. and Delta 40 studios bring in a co-founder at the pre-validation- Idea stage. Other studios bring in co-founders at the post-validation — after the MVP stage, i.e., Pyramidia Ventures, Purple Elephant Ventures, Innovation Village, GreenHouse Venture, and Nations Ventures.
How Entrepreneurs Analyze Venture Studios
Venture studios are increasing in numbers and popularity. As an entrepreneur interested in joining a venture studio, it may be confusing based on the numerous venture Studio’s modus operandi and model of founder support, when choosing between options. MVPF Venture Studio model allows entrepreneurs to analyze the different venture studio concepts using six key metrics[xxiii]:
The Funding Amount: This is the initial funds provided by the studio to the founders to help set up the business and operate. This amount is between 100k to 500k. A founder should assess the funding amount to see if the financial support from the studio is valuable to them. The table below shows an analysis of ticket sizes of initial funding to start-ups from a sample of venture studios in Africa. Most venture studios offer an average of $100K and below and take between 15%-25% equity ownership, while those offering above $100K take an average of 40%-60% equity ownership.
Equity stake: Venture studios usually get a stake in the startup venture in exchange for funding and services. For services offered, common stock is usually the compensation if the services are not paid for, while for capital investments. Founders can benchmark venture studios against the above-mentioned average to understand why some studios take more equity than others and thus weigh the perceived extent of the studio support.
Type of operational support: Operational support can be MVP validation, fundraising assistance, scaling for founders, optimizing existing networks for investors, go-to-market, branding, etc. Reviewing the type of operational support a studio offers can help founders decide if the studio model will complement the founder’s ambitions. etc.
Support time: Venture studios determine how long they want to support the ventures after the initial phase, usually 18 months or less, after which the ventures start operating without external support from the studio. Understanding this timeline can help founders comprehend if the studio approach fits the founder’s growth goals
Joining stage: Venture studios can either generate ideas internally or externally by inviting founders with ideas that they validate. Founders come up with their ideas, come to studios, and get help during the pre-validation or post-validation phase. Understanding the joining stage can help a founder see if there is a studio x founder fit.
Founding frequency: Founding frequency is the number of ventures a studio builds and develops in a year. This helps a founder to analyse the studio’s experience in the field. The image below shows the founding frequency of — the number of startups that a venture studio supports every year. From the sample taken, most ventures target creating between 4–10 start-ups every year.
The Future Venture Studio Model
We have already seen great progress and growth in the venture studio model. Therefore, there is little doubt that this business framework will continue to evolve in the future. With a streamlined company-building process, the playbook, fewer resources will be required at each stage of project development, meaning that resources that were once tied up can now be focused on bringing on more ideas into the pipeline. However, greater focus will need to be placed on PMF and defining venture value propositions as competition rises for both venture studios and their portfolio companies[xxiv].
The number one reason why businesses fail is due to the fact that there is no market need and they run out of cash (CBInsights, 2021)[xxv]. Venture studios challenge the premise that failure is the default by substantially increasing the odds of startup success through the provision of capital, fast idea validation and go-to-market, and other support services.
According to Max Pog’s (2023) Big Start-up Studios Research 2023, start-up studios have doubled to 877 from 2018 to 2023 globally. However, progress in Africa is still slow with the venture studio sector being at nascent stage.
African venture studios are not without challenges. Sam Sturm of Founders Factory Africa says the greatest challenge is and will be matching great ideas with outstanding entrepreneurs. The continent lacks a sizeable pool of entrepreneurs who are former founders. A great idea without a great co-founder is a recipe for failure. Also, important to note is that a great idea with a great founder without a founder-problem fit, will lead to failure. He also mentioned that studios need a lot of funding for both their operations and investment into the startups they are building.
With more venture studios emerging, there will be ecosystem competition based on how these studios source ideas, attract talent, differentiate themselves, and expand their global network.
As the venture studio model matures, even more innovative ways of building, growing, and investing in compelling new startups will emerge. By offering aspiring founders the full scope of development toolkits, mentorship, funding, and the innovation quality stamp, venture studios are on an upward trajectory in creating scalable and sustainable businesses.
Key Recommendations
There is a need for more funding for venture studios from LPs or Angel investor syndicates. There is also a need for grant support for developing and supporting the venture studios’ operations and developing the African venture studio ecosystem, hence increasing the number of venture studios active in Africa.
Finally, there is also an urgent need to develop a pool of entrepreneurs who can take on the co-founder role.
It would be interesting to see how venture studios and the venture studio model evolves in the coming years. I recommend further efforts to research and document venture studios in Africa for the benefit of the ecosystem.
Acknowledgment
I would like to express my deepest appreciation to Sam Sturm, the Co-founder and Chief Portfolio Officer of Founders Factory Africa, for his invaluable insights in an interview on the state of the venture studio ecosystem in Africa and to Mark Kleyner, the co-founder and Programs Director of Dream VC for his guidance and for reviewing this article. I also want to acknowledge Ruth Berterns, Managing Partner and Founder of Pyramidia Ventures; Loise Warui, Venture Design Lead at The Innovation Village; Ben Peterson, the Founder and CEO of Purple Elephant Ventures, and David Lanre, the Founder and CEO of First Founders for their additional insights and feedback.
List of Venture Studios in Africa
The table below shows some of the venture studios active in Africa.
First Founders, Nigeria; Pyramidia Ventures, Kenya & East Africa; Purple Elephant Ventures, Kenya; Ceed Cap, Nigeria; Delta40, Kenya, Sub Saharan Africa; Adanian Labs, Kenya Nigeria, South Africa, Zambia and Tanzania; Founders Factory Africa, Kenya; Team Africa Ventures, South Africa; Innovation Village, Ghana & Uganda; Nations Ventures, Kenya; Amaete Venture Studios, Nigeria; Next 176, South Africa; Mstudio, Ivory Coast; Far Ventures, South Africa; Vamambo, Zimbabwe; SC Ventures (Standard Chartered), Kenya; Enviu, Kenya; Africa-Impact Ventures, Morocco; Sunray Ventures, Nigeria; Fast Forward Venture Studio and Fund; Antler, Kenya; Equator Invest, Kenya; Haske Ventures, Senegal; SpringLab, South Africa; Factor [e] Ventures, Kenya; Provarex, Nigeria; RHIP Factory, Nigeria; Sequence Startup Studio, Egypt; Tes Ventures, Kenya; Uncommon Ventures, Senegal; UNIMAS Capital, Egypt; Ventures Garden Group, Nigeria, Kenya.
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