What is a Startup Studio?

I learned some painful lessons from my first startup’s failure. After a lot of introspection, research and valuable conversations I decided to found an uncommon startup model that can be extremely successful — the startup studio. Even among savvy entrepreneurs, the term “startup studio” is relatively unknown. For every studio there are about 10 accelerators and 40 incubators. Studios are on the rise, with nearly 30% having hatched in the last two years.

So, what is a startup studio?

Studios take several different forms, but they all focus on the idea of spinning off business ideas into independent products and standalone startups. Rather than funding external teams and ideas, they bring people into the fold around multiple internally conceived products/startups. Typically a studio works on several products or startups simultaneously. The goal is for each spin off to gradually become independent of the studio as they gain traction and income.

Every studio seems to take a different approach. One model is for digital agencies to spin off core technologies that they use for their existing client services (e.g., MintDigital). These agency-studios typically focus on a particular sector like marketing or app development. Another model is the investor-led model, in which the investors want to promote key technologies with a more hands-on approach (e.g., IdeaLabs).

Yet another group of studios act as a vehicle to quickly investigate more opportunities faster (e.g., Obvious Corp). They seek one rarified opportunity, and then abandon all others in pursuit of the brightest gem. In this last archetype, the studio dwindles or dies as the dominant startup gains more ground. I’d argue this last model is a pre-startup rather than a startup studio.

Incubator vs. Studio:

While the incubator supports individuals or teams, they don’t usually take a direct leadership role in the ideation, validation and formation of the company. Instead, incubators typically provide resources (mentorship, angel introductions, office space, etc.) for the early-stage team. Incubators charge wildly different amounts for their services, and often take a percentage of the startup’s equity.

In contrast, the studio takes an active role in ideation, validation and launch of the startup. Additionally, the studio funds the ideation/validation and then seeds the startup. Until the startup gains income or external investment, the studio provides for the fledgling entity. The studio’s primary function is to support stellar new initiatives until they become self-sustaining.

Slices of Equity Pie:

The studio typically gains a hefty chunk of equity in the daughter company. Because the studio itself acts as co-founder by providing the initial IP and assuming the financial risk for validation and launch, this piece of equity is justified. The studio acts as initial CEO, CTO and CFO until the validation and growth warrant an independent leadership team. Then there is the studio’s early-stage investment.

Rather than diversifying, like incubators, in ten or more startups per year — most of which will fail — the studio kills good ideas early and focuses on excellent ideas that are likely to skyrocket. By employing best practices and assembling teams, the studio increases their startups’ odds of success.

Fun Bits:

• The first startup studio was Idealab, founded by Bill Gross in 1996, who founded Idealab to test many ideas at once and turn the best one into a company.
• Expa, a successful startup studio boasting investors such as Sir Richard Branson and Meg Whitman (CEO of Intel), was created by Uber Founder Garrett Camp.
• Startup Studios are free to focus on whatever kinds of businesses they like. Obvious Corp focuses on #worldpositive venture capital, or ideas that deliver positive social and environmental benefits.

For entrepreneurs, studios offer a more efficient way of building startups. Because most resources are available in-house, teams can focus solely on the product and the customer. For investors, studios are a much more reliable deal flow source. Because a studio offers teams of people working on different products, investors can skip the people-vetting process and focus on the big idea being presented.

Stay tuned to learn more about the Boulder BITS model, and what we offer our partners.

Originally published December 5th, 2015 on our previous blog.