When is a startup studio a good model for innovation?
Hello world! We recently founded STARTegy, a startup studio building fintech companies in Mexico. Startup studios have not been around for very long, and the startup studio model has only taken root in the last few years. There isn’t much research on the topic given its novelty, and there is public uncertainty as to what startups studios really are. We are writing this post (and potentially others in the near future) to demystify the startup studio model and raise awareness of how startup studios operate. In this post, we aim to answer the question of when you should launch your own startup studio, a lesson that we have learned through experience.
Before we get into the details, let’s just start with the basics. Plainly stated, a startup studio is an entity that brings together ideas, talent and funds to create multiple startups from scratch.
Don’t be mislead by the many names people use to identify startups studios — e.g. startup factories, startup foundries, company builders, venture builders, etc. Some authors have tried to differentiate these terms, but we don’t believe there is a consensus on the exact differences. Moving forward, we will use these terms interchangeably.
How does a startup studio compare to other models?
When we talk to investors and potential recruits, we often describe the startup studio as a model that lies between a single startup and an incubator.
Studios are similar to single startups in that the management team at the studio works hand-in-hand with the founding team of each portfolio company. We are involved in the day-to-day operations and, therefore, view the studio as an additional “co-founder” in the startup. This is obviously different from an incubator or VC, where founders receive some degree of support but are left to their own devices to make day-to-day decisions.
Studios are similar to incubators in that they deal with a portfolio of startups and provide shared services across that portfolio. The intensity of those shared services, however, is an important difference between the two models. While incubators might provide office space, access to mentors, coaching, etc., company builders typically provide more tailored services. As an example, many e-commerce cohorts at Rocket Internet share software that has been developed internally, which gives them a nice headstart on bringing products to market. Additionally, startup studios have longer incubation periods of 1–2 years, whereas incubators typically run for 3–4 months at a time. This greater degree of support, of course, usually means that the builder’s equity stake in the startup is significantly higher than that of a traditional incubator.
Risk tolerance also varies from model to model. While VCs or incubators typically place a large number of small bets, startup studios can only operate a small number of companies at any given time and therefore should focus on models with medium risk/return profile. As an example, a VC might invest in 10 companies. Success, in this case, may mean receiving a 20x return on just one company and 0 on the others. In a startup studio, we don’t have the luxury of having a success rate of 10%, because we can only place a small number bets. For example, if we invest in 3 companies, we need to have a success rate of at least 33%. Startup studios typically don’t work well with moonshots (i.e. high risk/high return business models) and therefore should focus more on businesses that can address clear market needs quickly.
To summarize this in one graphic, we believe that a company builder lies between incubators and startups in terms of operational intensity (how much of your resources are dedicated to running the operations of the startup) and scalability (how many startups can the team be involved in).
When does it make sense to launch a startup studio?
We see four factors that can help determine whether a startup studio is a good fit: the experience, interests, and risk appetite of the studio founders and the strength of the entrepreneurial ecosystem.
Experience of the studio founders: It is key that the studio founders have experience in the industries they are focusing on and in scaling startups, as a big part of their role will be coaching the startup founders in these areas. On top of that, it is obviously harder to build multiple startups at once. Experience building at least one startup will, therefore, be necessary before jumping into building several in parallel. In our particular case, Bernardo is one of the founders of Linio, the second largest e-commerce platform in Latin America. I have developed deep expertise in fintech through my years at The Boston Consulting Group. As we were looking at our next career move, we both wanted to leverage our experience to help other entrepreneurs in a scalable way. We wanted to do this, however, without losing touch with the real world of running a startup. Startups studios are uniquely designed such that both objectives are achievable.
Risk appetite: As we previously mentioned, company builders don’t work well with high risk/high return business models. This approach limits the type of businesses that you can run. So, if you are interested in the next breakthrough technology that will change the world forever, this might not be a good fit. The only exception that I know is Elon Musk, who is directly involved in the operations of Tesla, Space X, Solar City and Hyperloop (all clearly high risk/high return business models). While he does not officially run a startup studio, you could argue that he is running these companies under the startup studio model given the similarities. In most cases though, startup studios are better suited for those who have less appetite for risk. As we mentioned before, startup studios are placing a relatively small number of bets and therefore need to adjust the risk profiles of their cohorts accordingly.
Industry interests: Company builders work well if there is some focus on industry. This allows for synergies to be created between companies, and you can also create economies of scale with shared resources. We decided to focus our studio on fintech for two reasons: we had expertise in this industry, and we believe financial technology has great potential in Latin America (both in terms of economic return and social impact through financial inclusion). Most importantly though, having an industry focus creates greater alignment amongst studios companies. A lesson learned at one company may be a lesson learned for all.
Ecosystem: When we decided to use our expertise in a scalable way, the first model that came to mind was traditional VC. Unfortunately, the fintech deal flow in Mexico is still weak, and finding skilled teams working in business models with high potential can be quite difficult. The benefit of company builders is that we create our own deal flow. First and foremost, we look for talented founders. The company builder is very attractive to talented individuals, as it lowers the risk of starting a new business. Founders are receiving the necessary support and, therefore, have a greater chance of succeeding. Additionally, we have an intuition on what types of business models may have greater potential for success given our expertise in the industry. Lastly, we are bringing strategic investors to the table, and we have the experience to execute. By putting together all these pieces we can create our own dealflow, an area in which VC in underdeveloped ecosystems might struggle with.
We believe that successful startups require four key elements: talent, a sound business model, strategic investors, and flawless execution.
In summary, it makes sense to start a studio if:
- You are already an experienced entrepreneur who wants to stay active on the day to day operations but leverage your skills in a scalable way.
- You want to have a focus on industry/geography.
- You are interested in models with medium risk/return profile that require excellence in execution as opposed to moonshots that require significant amount of pivots to find market fit.
- You want to contribute in developing the entrepreneurial ecosystem in areas where dealflow might still be weak.
If you want to know more, I suggest looking at these links:
- Build Together — a blog about startup studios managed by efounders x
- Startup Studio Playbook by Attila Szigeti
- efounder’s letter #4 — blog post by Thibaud Elziere, founder of efounders summarizing his experience
About STARTegy Venture Builder
At STARTegy Venture Builder, we create high growth fintech startups for the Latin American market. We are a group of entrepreneurs, designers, engineers, marketers and fintech enthusiast that create startups from scratch. Want to join us? Reach out to us, we’re hiring!
About me
Victor Noguera is a Founding Partner at STARTegy. Prior to that Victor worked for 8 years at The Boston Consulting Group New York and Barcelona, where he advised large financial institutions in startegy and innovation.
Acknowledgements
Thanks to Ross Palley for his help in putting together and editing this article.