Startup Studio Expectations: Entrepreneurs

The term “Startup Studio” elicits varied responses depending on whom I talk to. In this series, I’ll discuss what entrepreneurs, investors, and mentors should expect from a startup studio. First, I’ll focus on entrepreneurs’ expectations because a startup studio is nothing without an awesome team. Unfortunately, each studio is unique, so expectations should be different from one shop to the next. Hopefully, this blog will clarify why studios differ from each other and provide a framework to evaluate the pros and cons of each.

The Deal

Studios provide diverse menus of support for entrepreneurs in exchange for equity. All studios focus on problem, solution, validation and team building. Some studios have the ability to invest more, others focus on mentorship. All studios provide improved odds of success by validating solutions before even considering spinning up a startup. As a result, studios provide more resources (and take on more risk) to retain more equity than an accelerator. Furthermore, by sharing resources across the studio’s portfolio (like HR, accounting, and facilities), the startup achieves a lower overhead/burn rate — which helps the startup stay lean and productive.

Entrepreneurs should expect to retain less equity, but also take on less personal risk. On one end, the entrepreneurs are considered intrapreneur employees with typical early-stage employee option packages. On the other end, entrepreneurs are treated as founders with slightly less than typical founding equity. In all cases, the entrepreneur’s options vest over some period (typically four years) with a cliff before which no options are issued (about 1 year).

Each Deal is Different

Startups are like snowflakes. Each one is different. As a result, the equity share is different each time. Some startups require greater resources, which equates to greater investment by the studio. Others require more seasoned entrepreneurs, who will gain greater equity. In some cases, intellectual property may play a role, but is usually considered a lesser factor than risk or time and dollars invested.

A Studio Pool

Some studios also provide shares for a “studio pool”. The pool has a few shares of each startup formed by the studio. The benefit of the studio pool is that with a diversified portfolio, everyone wins because several of the portfolio startups will scale amazingly. If you receive X equity in your startup then you could loose it all if the company goes under. Instead, if you get 0.8X of your startup and 0.05X of 4 other startups formed that year, you’re much more likely to get something valuable.

A secondary advantage of sharing equity across a pool is that each startup is more likely to promote the other startups in the portfolio. By partnering and leveraging strengths of the portfolio, the sum is greater than the parts. Aligning founder interests with cross-portfolio partnerships is hugely important.

Mirror Image Accelerator

I often view startup studios as mirror images to the accelerator model. The following chart shows the difference between an accelerator and the model we use at Boulder BITS’. Our model takes much of the early-stage responsibility from the entrepreneurs’ shoulders and places the load on us. This frees the entrepreneur to focus on the things they should be focusing on (scaling).

Team–Startup Alignment:

Studios work tirelessly to make sure the right leadership teams lead the right scalable solutions. Studios typically bring in experienced teams — not first-timers. By flexing our networks, we can assemble the best team (CEO, CTO and CSO) for each validated scalable solution. Typically, normal startup teams begin with a rough idea that must pivot wildly during the validation process. A common outcome is for a company to either pivot one to many times. Another likely result is for the founders to pivot themselves out of a company they have the skills or desire to run.

By validating first, studios take cycle through a few pivots and align the founders’ goals with a closer approximation of the startups ultimate goal. Strong alignment of the founders and company goals is critical for any startup’s success.

Guaranteed Investment:

If you’re placed on a startup team, you know you’ll get at least an initial seed round. Most studios have a fund to draw from for seed and follow-on rounds. Some studios don’t even consider external rounds, in favor of direct funding solely from the studio. In such cases, tranches are often defined to guide the wholly owned subsidiary towards a next round of investment by the parent studio.

The size of the available investment pool is different for each studio and typically varies over time. Early in a studio, the resources may be limited. Later (after successful exits), the pool may be much larger. Just like VC funds, investments may flow more freely at the beginning of a studio fund and may dry up to a trickle towards the end.

Control:

Understanding who controls what aspects of a startup is critical. Studios differ widely on how much control they retain vs. how much control they grant their founding teams. Several studios are notorious for retaining leverage over their startup. Others exert only enough to protect their investment. Boulder BITSoperates with a concept of control vesting. Like equity, the entrepreneurs should gain more and more control of the company they’re running.

Reward:

Working with a Startup Studio is dynamic, interactive, quick paced, and exhilarating. Depending on whether you are an entrepreneur, investor, mentor or all three the rewards will vary. One of the main advantages for an entrepreneur is the studio takes the risk and he/she gets to “play” on a new concept — worry free. For an investor the studio has systems in place that allow ease in pivoting through the validation process, the concept can scale much more rapidly, and their investment is worth something relatively fast. For mentors, it’s intriguing to work on new challenges with extraordinary people who have insight and intellect. In fact, some mentors join the startup once they find how well they gel with the idea and team.

Fun Bits:

• 6 Signs that your company needs to pivot: one piece is working better than the whole, a misjudged market, lack of understanding industry standards, lack of funds, your competition is excelling, the passion is dwindling. (Entrepreneur Paula Andruss)
• When building a startup team it’s extremely important to know and understand your team members and how they work, clearly define their roles and responsibilities, provide a lot of feedback, and reward your members for their achievements.
• The strongest CEOs are honest and ethical, inspire and motivate others, have clear visions, and are customer oriented.
• “Nearly 90 percent of companies are working on their original product vision. The four “pivots” after a different initial product were all in consumer companies (Groupon, Instagram, Pinterest and Fab)” (Steve Blank-“Do Pivots Matter?”)

Despite all of the hard work that is required in building a startup studio, the end result is extremely enriching and rewarding. The process of forming startups to solve problems for society is fulfilling, and you never know where the next “great” idea will lead.

Next up

I find that investors often don’t know what to expect when they consider investing in a startup studio or one of the spinoffs. Next time, I’ll discuss the differences between studio models and what that means for investors.

Originally published on January 14th, 2016 on our previous blog.