What are Venture Studios? And how have they evolved with the market?
A venture studio, or startup studio, is a business model where studios not only offer venture capital to startups but also operational support and resources. Studios are often built with in-house talent-sourcing teams, marketing teams, industry specialists, extra office space and other resources they can offer to early-stage startups. Over time, the venture studio model has evolved into two subtypes: concept-led, where a firm works with founders and their team to create the business idea, and founder-led, where the founder comes to the studio with a business idea and the studio works with the team to evolve the idea and build out the business in numerous ways beyond just capital. In addition to this evolution, while many venture studios existed as stand alone models, we’ve witnessed a shift where more venture firms are starting venture studios within their new or already existing funds and operations.
Unlike other formats like incubators, accelerators, and typical VC firms, venture studios offer the most hands-on support to founders. Venture studios provide all resources that a startup needs to succeed such as talent sourcing, operations management, legal advisory, and capital. This helps to address some of the biggest problems that startups face: identifying proper PMF, lack of funding, and finding the right team. In return, the venture studio ask for equity has drastically ranged from participating in rounds traditional market pricing just like other VC funds to a steep 30–80% of equity. To summarize, the average equity ownership ranges drastically.
Why are they so successful?
While some data reports that 90% of self funded startups fail and 25–30% of startups with VC funding fail, venture studios may offer even better prospects for startups. In a study of 23 venture studios, only 9% had failed. IdeaLab, the first venture studio, 5% of its portfolio became unicorns, as opposed to the industry average of 1.28%. There are now an estimated 724 venture studios globally with over 50% launched in the last 6 years. What are some clues to their success?
While incubators, accelerators, and venture capital firms offer founders capital and some may offer small forms of support, venture studios are often built with dedicated resources specifically for startups. Incubators invest in companies that need help developing their idea into a business but that don’t plan on needing support all the way until exit; accelerators seek startups with a minimum viable product (MVP) and provide them with capital to grow. Venture studios help founders with just an idea build a business model, like an incubator, yet they also stay on past the MVP phase to help the startup continue to grow, like an accelerator. Venture studios cover both these stages and help startups through a longer chunk of their lifecycle than other venture funds. Craig Kronenberger from the Startup Studio offers a great breakdown of the types of funding and support available to early founders and how venture studios offer unique value to founders, particularly those that seek to break into or break out of current systems.
So, how are venture studios able to provide so much support to startups? Venture studios take advantage of economies of scale: hiring in-house talent recruitment, marketing, operations, and finance teams which they can offer to many different startups. Founders get access to a direct ecosystem that can fill their every need without having to spend time and money searching for top talent and without having to commit to hiring an employee that they might not need throughout their entire journey.
Venture studios get to develop in-house talent that they can trust to create and scale founder’s startups. Employees at venture studios become almost like consultants, gaining hands-on experience growing early stage businesses across a variety of industries. Founders then get access to these seasoned employees who’ve seen and helped many, many startups before them.
Because venture studios provide so much of the talent and assets that startups often have trouble sourcing, they can take on potentially “riskier” investments: founders with a great idea but no proven track record or an unvalidated market. Startups with great ideas but no comparable exit multiple or industry p/e ratio can get the funding they need to grow from a venture studio whereas otherwise they may not have had an option or the right amount of support in this new space.
VC and Corporate Strategy
According to CB Insights’ 2021 mid-year report, corporate venture capital (CVC) reached record levels in 2021. Funding surpassed 2020 levels at only half-way through the year.
Corporate venture capital (CVC) offers a solution to the Innovator’s Dilemma, where small startups are able to iterate technology until it’s good enough to take market share from large companies. CVC allows large corporations to keep their market share by creating novel products and technology internally. Eventually, all large corporations will need to create a CVC arm or invest in venture capital funds in order to grow and prevent disruption from young tech startups.
Working with a VC fund/venture studio is one of the best forms of CVC for large corporations. This is because while many growth strategies of large conglomerates fail to create economic value, corporate venture studios properly incentivize large corporations to grow without destroying economic value through the application of adjacency strategies.
Corporations can create economic value and achieve high levels of growth by using adjacency strategies to grow their market or even shift their core. Successful adjacency strategies must be singularly chosen and carried out; corporations are very rarely able to execute multiple simultaneously because each strategy represents a tradeoff. Types of adjacency strategies include product adjacencies (new product for the same core set of customers), geographic adjacencies (new region — this has a lower-than-avg success rate), value chain adjacencies (vertically integrating across value chain), channel adjacencies (new distribution method, same product), customer adjacencies (modifying product or technology used to serve a new customer segment). Corporate venture studio partnerships incentivize the use of singular adjacency strategy — by investing hard dollars into companies, corporations are more invested in the success of their startups. Corporations that are able to carve out a competitive advantage from their venture studios will need to choose a particular adjacency strategy aligned with their current core competencies.
For example, if a company is best known for its customer service and relationship with its customers, it will have the proper resources to support startups that could serve its existing clientele. It could easily provide founders with beta testers and maybe a customer base as well. On the other hand, if a company is best known for its stellar product, it may be best to invest in innovators in the distribution space that could take the corporation’s product into new channels. The startup could in turn benefit from having a stellar product to test its new distribution technology on.
Corporations can achieve these synergies by deliberately choosing and implementing an adjacency strategy through their venture partnerships. Rather than investing in many early-stage companies and seeing what sticks as a typical CVC would, corporations with a venture capital/studio strategy could successfully grow by investing in startups that build on its existing core competencies. As the number of startups increases and corporations continue to face the Innovator’s Dilemma, corporate venture studio funds and partnerships will become an increasingly important part of corporate strategy, especially smart growth moves for large corporations looking to keep their market share from an increasing threat of new entrants.
Venture has historically been a driver of economic value: eighty-two percent of R&D investment and 57% of total market capitalization of public U.S. companies from 1979 to 2015 were from VC-backed companies. Paul Romer’s theory of endogenous growth helps explain why. His theory states that investments into intangible assets will lead to economic expansion while investments into physical capital will not. This means that investing in research and development (R&D) creates more jobs while building factories does not provide as many benefits for society as investing in R&D would. Venture capital funds the R&D investment that grows the economy. Venture studios are now the smart way forward to ensure that R&D spending is well-invested with a higher success rate (remember only 9% fail!) compared to other venture firm models.
Capital is shifting from public markets to private markets as an increasing number of investors are seeking higher returns and regulations ease on acquisitions. Though this is an exciting time to be in venture, an increased amount of funds does not equal success for all VCs. In order to win in their markets, venture firms will need to carve out a competitive advantage and execute an accompanying strategy. Independent venture studios are an attractive offering to founders with an idea in a novel market that benefit from developing a successful business model and strategy for. Corporate venture studio partnerships will become necessary for corporate growth and continued survival as large corporations face an increasing amount of disruption from nimble, iterative startups.