Studio (CTO) Services?

It’s one of the most talked about subjects in the studio world. Should a studio charge for its services or not? Wait, what do you mean a studio in its core doesn’t charge for its time spent? Correct. Like a fund, a studio gets paid by its investors to create equity value, mainly through management fees charged to the fund entity as a pre-payment on profits to be made when liquidating the assets in the fund’s wind-down period.

So why the question, does a studio need to sell services in the first place? Well, a few reasons. Studios usually start as evergreen holdings and not funds, meaning they hold their position in the companies they build for an undefined period. They will use a portion of any profits to keep building value in the holding. As such, they have a very undefined operating expense depending on the lifecycle of the studio.

Secondly, a studio has larger operating expenses at the start compared to capital raised than a fund due to the simple fact that they build companies with entrepreneurs instead of investing in them after incorporation/initial signs of success.

Thirdly, this is true for most things in life, it takes time for a studio to partner with the right founders, almost like a chicken and egg problem. The studio process gets better when the studio attracts better founders, and the studio attracts better founders when the process is better. From what the market says, it takes around 4 to 5 cycles of company building before this chicken-egg-studio problem has less effect on the outcome. The market? Yes, from the data, the fund-in-funds by now have the ability to foresee when a studio ‘matures.’

Having said that, the overall theme here is the same: just like with traditional/emerging fund managers, the studio needs time to prove its worth. The differences are that a studio takes some more time to show traction (but rockets when it does), is a bit more cash-needy at the start (but attracts better-quality deal flow early on), and has operational superpowers of tremendous value at its disposal.

The Agency Trap: Selling Services for Growth

So why not sell services to build the companies, just charge the companies you bill at cost!? That was our initial modus operandi at Builders. Because it makes sense, firstly, we validate and shape a company together, and the studio picks up the tab during that time. For that effort, the studio is also part of the co-founding equity. Once the company is incorporated, the studio core team becomes the fractional founding team, so let’s charge them at near costs to the startup. Excellent idea, isn’t it? The newly launched company enjoys a well-oiled team and doesn’t need to spend time scouring for this precious resource. Agreed. It does create a better P&L for the studio, but the money invested at launch also comes through the studio. So when looking at this from the top, this doesn’t change NAV at all; it’s money doing its own victory lap without a multiple. And to be honest, it creates a service provider kind of relationship. It’s not meant like that, but it does happen almost instantaneously, either outspoken or kept under wraps until hitting a bump in the road, and building companies is a very, very bumpy ride indeed ;).

P.S. We’ve implemented this in the past in a slightly more technical way, ‘charging’ at cost and adding that to a convertible loan instrument so that cash doesn’t deplete from the newly launched company, but the net asset value way of things remains the same as above. It also introduces a tax problem cycle for the company because of the sales tax it now receives and has to ‘pay’ to the studio. Creating a cash flow that still feels like it’s paying a service company while in reality, it’s just sales tax received by the company and paid back to the Tax Authority by the studio.

It does create a more logical cash flow at the holding level, and at the P&L, one could have a neutral state. But there are so many arguments to make here, which ultimately lead to bigger hurdles in partnering with the better founder and taking longer for the studio to ‘mature,’ and in this game, that could mean slow death by design. Doesn’t sound too appealing now, does it?

The Reality of Corporate Venture Building

Ok, then we just sell services like an agency, and we do corporate venture building. Well, I’ve been quite outspoken about this in the past, haven’t I? Let me reiterate for argument’s sake. This is a wonderful way to create a revenue stream with very decent margins. How do we know? We did this for a long time while building our studio processes and playbooks. In a way, this gives a studio time to get their bearings, test their hypotheses with somebody else’s money, and build up a team of A-players whilst building their own companies.

Very sellable, right? It is! Even to this date, this is a very sellable argument to all the studio stakeholders. Why have we stopped doing that then? Well, the corporate venture game is just an agency with some more balls. It’s not the high-risk entrepreneurial group of people with skin in the game and compete as hard when they are 0–3 behind or 6–0 up. Yes, the studio buys time to navigate the waters. Still, it doesn’t create the deal flow of quality founders, the payroll of kick-ass studio team members with the urge to create value and impact the world, and above all, it doesn’t prove that they know how to co-found companies in parallel and serial at the same time. Whoah, sounds hard, eh? It is, so proving that is what matures the studio to the promised land.

Challenging Balancing act

Nah, this can’t be true; I’ve worked at an agency; we can do this and build our own companies! Sure, some can, but how does your team like it when they get paid less when you stop doing the corporate work, or how do your own companies like it when you charge them at cost? Even when you don’t, do you, in the end, genuinely believe that the politics of corporate venture building translate back to building your own companies? Of course, it doesn’t. The one real upside to this way of working is the fact that the team is wired to run projects in parallel, thus knowing how to perform and split their time between projects. It doesn’t mean that the goals are the same: finish projects versus hold value and sell at some point.

Reverse engineering services

Personally, I believe every studio could, at some point, build out its platform to have an innovation department that does just this. But from what I’ve experienced and what the data shows, one should do this after maturing the studio to piggyback the reputation created, not the other way around. For the record, these departmeots are rarely, and I mean rarely, run by the same people that run the independent studio. And if they do now, ask them again in a year.

Giftwrap the playbook

We got it, sell pieces of your studio playbook or processes as a service. Very interesting and could really benefit the bottom line. Packaging, for example, the validation playbook to support founders and investors in getting things up to speed. It’s very easy to explain that the studio has a better understanding of what needs to happen here than most. Yep, for sure. But how does one package this? Because most of the time, the outcome is validated by invalidating the initial assumption. Plus, in almost all cases, a founder is needed to do the work with or to transfer the knowledge.

So what is your offering then, exactly? Well, in the validation service case, assuming that the studio is founder first, something like this: We’ll offer you a very exclusive service for your founder (assuming the investor pays) to join the studio as if it were our own. Together, we’ll work through the studio’s validation processes. You just have to ensure the founder is available for 10 weeks and has all the skin in the game, and you’ll get the same outcome the studio would have. Great, so I’ll have a validated business case at the end? Nope, most likely, we’ve pivoted a few times, and the outcome does not proceed. What? Yep, that’s the actual playbook, sir/mam. But I want success! Sure, I’ll sell you some corporate venture-building success if you’d like, right?

Similar to the corporate vs independent situation, the studio will build up a corporate rapport to package the services so that the outcomes are favourable; this doesn’t translate back to the main studio activities at all. Again, yes, it builds up the playbook and offers time to navigate, which is worth something, but when the market is moving, do we really need time to wait before riding the wave, or does it pass while we are navigating?

The final frontier

Then what is left? At some point, a studio needs a great core team to build great successes, and there’s only so much one can do before the operational costs become a true burden. Agreed, the options listed above do need to be considered to keep the machine going, but they are far from ideal.

So let’s start with the end in mind. Services are great, sending invoices is freakin’ incredible, and sales change everything, just like it does for the companies you build with founders. In the end, the services need to add value to the main process, should not be packaged so that they lose the studio’s soul, should build up the brand, and solve more problems than they create. Whoah, quite the list, eh? Yes, but it also should deliver an aha! moment when you’re reading this as a studio founder.

Cashflow conundrum

Before going into that, let me add one more piece of information you’ll be amazed by. As with any capital-intensive company, a studio is always fundraising, and at some point, everyone will wonder why there are no studio fund-in-funds to put some big checks into my financial instrument, fund, or holding. Well, there are quite a few out here these days! Really? Yes, check out Vault Fund, for example, has been around for a while, and Sarah and Francisco are the best. So what’s to learn from them? Well, all of the studios invested in have run their 4 to 5 cycles and have a cash flow component in them to offset operational costs short and long term. Without it, there is no chance of an investment. Why? Because those create a perfect median for risk vs reward for a fund.

The only way? Nah, all models could work, but the fund in funds has shown me this data over and over now. Just something to consider, and in time I believe the family offices will follow the same play. For now, they’re playing their own game.

Guardians of the Studio

So, with the end in mind, what services do make sense. Builders these days is a founder-first studio, meaning we partner with talented entrepreneurs months before a company launches to solve real-world business problems. Before the company is established, the founders join the studio as entrepreneurs in residence and validate the riskiest assumptions both on the business and technical side. This is also where we’re different; both business and technical founders join as residents, future CEOs and CTOs if you’d like. Doing so, we have tremendous exposure to who is out there with stellar ideas and xxx (fill in) building power.

Each month we interact with 50–250 entrepreneurs, of which a big part are experienced CTOs and tech leaders. Those who want to build, either from the ground up or join a running train for more significant impact. The one thing all CTOs have in common, in the end, they want to build products that have a significant impact or a large amount of users. A studio’s goal is to validate before incorporation, ensuring a large need for the product, thus making it a great match. That doesn’t mean we’re the only match and that our criteria for residency fit everybody. One of the things we live by is an onsite dedicated residency, and that’s not in the cards for everybody.

Since we’re builders, we really enjoy all the conversations with tech leaders and the like. Why don’t we introduce the CTOs, with whom we just spent a decent amount of time and assessed potential fit, to scale-ups in our network? Of course, the challenges are a tad different, but on the other hand, the process is, we now know, very similar.

A Platform Odyssey

Today, we connect tech leaders to scale-ups from our network. How? Just like we do internally all day long. Same psychometric tests, due diligence, and assessments, with the difference being the CTO partners with a CEO outside of the studio. The real upside? Next to a revenue stream of course, this attracts even more awesome CTOs! And you guessed it, what do those attract? More talented CEOs. To be very clear, we’re not headhunting anyone; we’ve created systems and processes to know if a CTO from our network is an excellent match with a CEO, which we also assessed. These systems include a deep understanding of the person, track record, and skills in both depth and breadth. Of course, we’ve created an internal LLM-driven toolset to make our lives easier, but at its core, it’s what we do.

Universe expansion

After some initial trials this year, we’ve elevated the studio brand to an almost platform-like brand. There’s now an extra flavour for everyone to enjoy, and the success stories from the Collective are to die for. Today, Builders is more and more a Platform to empower entrepreneurs to build stellar companies, with…

Builders Studio: We partner with talented entrepreneurs to build stellar companies that harness the power of AI to define the future of work. We’re committed to solving real business challenges that impact businesses’ joy and bottom line, turning pain points into opportunities.

Builders CTO Collective: We connect tech-driven companies to top-tier CTOs. Using battle-hardened playbooks and rigorous assessments, we create perfect, interim and permanent connections as if we were partnering.

Builders Capital: We invest in and build stellar companies from pre-idea to seed stage, specializing in B2B SaaS and AI-first solutions. We partner with founders from day zero to beyond, empowering them to leverage the full extent of the Builders platform to create industry-defining companies.

The Trifecta: Studio, Collective, and Capital

A trifecta that interplays forces all day long, building our way to a global Builders Platform. So, to conclude, studio services? Only if they empower one to do the primary mission better. The rest of the options will become noise before becoming a symphony.

Cheers, your friends at Builders🖖🏻