A Startup Studio (also referred to as a Venture Builder) is an organization that builds startups.
Unlike accelerators, Studios don’t run “programs” with cohorts and timelines (a typical accelerator runs for a 3-month period with a cohort of ~50 culminating in a demo day).
The difference between an incubator and a Studio is the hands-on work that Studio teams put into ventures rather than just providing startup capital and other more tangible assets.
Essentially, a Studio acts as an investing co-founder to your startup.
The Studio team will help you from day 1 all the way up through raising your seed round of funding. Besides investment, Studios provide human capital, expansive networks, and resources like technology and proven methodology that make building startup ventures easier and faster.
Through my work with Startup Studios, I often have exploratory calls with emerging Studio founders. On these calls, I help entrepreneurs get organized and answer questions about how to build and launch a Studio. The following is a list of the most frequently asked questions regarding Startup Studios.
1. What does a Startup Studio need to have before going out for investment?
Fundraising for a Startup Studio is different than fundraising for a startup venture. With a venture, there is typically a product or service that can be shown to investors and early traction that helps sell that product.
With a Startup Studio, this is not the case.
Studios create startups and as such, startup ventures are like the products. But these “products” take time and money to develop and as such, Studios typically need funding before they can get off the ground. The typical Studio won’t have any “startup products” to show investors when they’re going out for their first round of funding. What they do need to have is a great team, a well-defined startup validation process, and a collection of resources and partners that are uniquely positioned to help their specific Studio succeed.
2. How much money do emerging Studios raise on average?
The major Studio players set the bar high when it comes to fundraising for a Startup Studio. For example, Pioneer Square Labs has raised $80M to date, Atomic has raised $170M to date, and Rocket Internet has raised over $2,200M to date. These figures may scare or excite you, but as an emerging Studio founder, you should know that these are the exception rather than the rule. Typical Studios raise between $500k and $2M in their first funding round. I most often advise Studios to shoot for raising enough funding for 2 years of runway, as this is the average length of time Studios take to develop a startup and see that venture have an exit.
3. Who invests in Startup Studios? When is the right time to approach the VC to invest in a Startup Studio?
Major VC firms are the most typical investors in Startup Studios.
Examples of firms that have invested in Studios include Index Ventures (invested in Entrepreneur First), Sherpa Capital Group (invested in expa and Science Inc.), Greycroft Partners (invested in Pioneer Square Labs), Hearst Ventures (invested in Science Inc.), and Bonnier Ventures (invested in betaworks).
The common thread among most VC firms that fund Studios is a strong focus on “early-stage investment” and a technology investment thesis.
Studios typically find success raising money 6 months after inception. VCs want to see that the Studio team can work together efficiently and have a strong enough GTM strategy that they’re able to make progress with what little resources they do have. If a Studio can develop a robust talent pipeline and get 1–3 projects underway, a VC firm is likely to be interested in investing.
4. What is the typical team size and make up for a new Studio?
Startup Studios are typically launched by serial entrepreneurs but this not to say that the only people qualified to launch Studios are repeat founders. On the contrary, there are professional athletes, scientists, and entertainment moguls who have launched successful Startup Studios. The profile of a Studio founder is simply someone with a lot of passion for building startups and deep knowledge of a particular industry, technology, or mission.
Studio teams tend to start off small and expand as the workload does.
- Having a CEO/ face of the company is very important.
- Having someone to handle the behind the scenes operations of the Studio (a COO) is equally as important.
- You’ll want to see someone in a talent pipeline recruiting and sales roll.
At the minimum, these are the positions that need to be filled but many Studios have in-house engineers, marketers, and product developers to help build ventures quickly and efficiently. While it is nice to have these talented individuals within the Studio, it is also fine to run an “asset-light” Studio and outsource the tech, marketing, product development, accounting, and legal.
It is important for Studios to keep good working relationships with their partners because they’ll use them over and over again with each new startup venture. Reusing a partner’s services results in better the synergy, lower costs, and easier maintenance.
5. How much capital do Studios typically put into the ventures they work on?
From my research and conversations with Studios, $150k — $250k is the average amount of capital injected into a startup venture over the course of their incubation period within the Studio. This funding is mostly spent on validating the idea, building the product, introducing the product or service to the marketplace, and acquiring customers.
6. How much equity do Studios typically take from the startups they bring in?
Studios take much more equity from startups than traditional VC firms, accelerators and incubators do. This is because Studios act as “investing co-founders” in every startup venture they help launch.
Both Studios and VC firms provide funding for early-stage startups, but Studios will assign members of their own internal team to help build a startup alongside the entrepreneurs of the original founding team. This is a huge deal because Studios have access to networks, resources, and frameworks that founders typically don’t. For all of this hands-on help and support, Studios take anywhere from 30 to 60% equity in each venture they incubate.
7. Where do the startup ideas come from- outside the Studio or inside?
This varies among Studios and is one of the first Studio design decisions that need to be made. As you can see from the matrix I’ve developed below (written about in detail here), “idea generation” exists on a spectrum. Some Studios only work on building startups based on ideas they’ve come up with inside the Studio whereas other Studios don’t develop any in-house ideas but rather source ideas from outside and bring them into the Studio.
8. How important is a thesis for a Studio and how do we formulate ours?
A Studio thesis is the focus of the Studio.
Some Studios are focused on building AI-powered products and services- these Studios have a “technology focus”. Others build around a specific industry thesis like “improving healthcare” or “building the future of work”. These Studios are industry-focused.
No matter what a Studio chooses, it is important that a thesis is identified and top of mind with every decision made. Studios building in different industries using various technologies will quickly become overwhelmed and lose the cost-saving efficiencies that make Studios so valuable.
9. What happens after a startup “spins out” from a Studio?
According to research by GAN, 60% of studio-spin-out startups go on to receive additional capital from the studio. Even if the Studio doesn’t participate in the next funding round, startups spinning out from Studios typically go on to raise funds from other VC firms and angel groups.
10. How does a Studio make money?
Studios make money through exits. When a venture is mature enough (typically after 12 months of Studio “incubation”) a startup will leave the Studio and raise additional funds. Once the startup has a significant amount of traction in the marketplace, the startup must work on an exit. This could be an acquisition, merger, or a sale. The goal of a studio-born venture should always be to get to an exit. That is how Studios make a return on their investment and generate returns for their investors.
I hope these answers were helpful for you in designing your Studio business. Venture Builders are a fast-growing segment of the startup ecosystem and have an excellent track record of success. Case in point: only 9% of Studio born ventures fail. Compare that with the 90% failure rate for startups launched outside of Studios and you can see that Studios bring real value to the table.
If you’re interested in learning more about Startup Studios head over to my blog and you’ll find a collection of articles that will help.
If you’re interested in joining a community of Startup Studio founders and talent, join Studio Upstart- Build.
Lastly, if you want to schedule a call with me to chat about a Studio you’re thinking of building, schedule some time here.