A Primer: Venture Studios vs. Venture Capital
Startup studios are vehicles that ideate and build companies in-house. As they discover innovative ideas and trends, they find entrepreneurs to build those businesses while providing continued support, including mentorship and ongoing funding. The model differs from VCs and Accelerators in that they are more operationally involved, further leveraging in-house capabilities and resources, and provide more significant ongoing capital. The below chart outlines the differences between various forms of venture vehicles.
Venture Studios, Company Builders, Startups Studios, and Venture Builders are interchangeable terms used to describe this vehicle that is becoming an important growing trend in the venture investing world. There are now a reported 724 venture studios globally, representing 625% growth over the last seven years. Almost every week, a blue-chip VC announces a launch, including a16z, which revealed “A16z Start” this morning.
Idealab pioneered the venture studio model in 1996. Idealab’s success has been astounding as they have developed 100 companies in-house, 5% of which have become unicorns, 35% of which have had successful exits, representing an overall 70% success rate. When compared to the traditional venture model, these numbers are staggering. For example, VCs typically carry a 33% success rate across their portfolio, with 28% of companies exiting and 1% becoming unicorns. Other notable venture studios include Rocket Internet, efounders, High Alpha, Wilbur Labs, and The Delta.
An intriguing trend in the venture studio model is the participation of corporate venture arms. Corporate VC (“CVC”) investing has been rapidly expanding. However, whereas CVCs have been investing in startups within their sector as a defensibility tactic, they are beginning to participate in the studio model since they can retain greater oversight and control. Over time, a greater share of R&D spending at the corporate level is expected to redirect to in-house venture studios, where incumbents will capture substantial value. A notable corporate venture studio includes newco (IAC), which founded Tinder.
Despite the statistics, it is still unclear whether builders will remain more successful than other venture vehicles in the long term. There are still far more VCs than studios, and studio founders are typically very seasoned, comprising best-in-class entrepreneurs and fund managers. As a result, it is still unclear whether performance data will hold up as the model scales.
However, because the economics are more favorable to studios than other venture models (more significant ownership %), their bench of talent is more incentivized to work on behalf of the entrepreneur than would be the case at an accelerator or fund. In addition, because of a more fluid funding structure, Studios can pivot before allocating resources to a single idea, unlike venture funds, where step 1 includes funding a pre-seed/seed. Of the cohort funds examined in the aforementioned study, I would bet that resources were dedicated to ideas that didn’t make it to the point of funding, giving studios a performance advantage.
