The Origin and Evolution of the Startup Studio
Intro: For as long as I have been in the digital and creative space, I have been fascinated by emerging business models. The model I have been the keenest student of is the startup studio model, personally inspired by the work of Betaworks in New York. So I am happy to share the fascinating evolution of the startup studio model. Here’s a twitter list of key players in the space.
The supporting venture ecosystem for startups is multi-layered, ranging from angel and seed investors (SVAngels, 500 Startups) to accelerators (Y Combinator, Techstars, Dreamit) and then the VCs themselves (Andreessen Horowitz, Kleiner Perkins, Index Ventures — just to cover coasts, shapes and sizes — Union Square Ventures, FirstMark, Thrive, Greycroft). International friends, please forgive the US focus, it’s simply my particular playpit.
In recent years the startup studio, also known as venture studio, has emerged as a part of that ecosystem. People wiser than I have written about what a startup studio is. Here are some ‘Go To’ articles: this 101 by Royal Montgomery, this by App’n’roll, and this on the differences between venture players by Thibaud Elziere. There’s even a bloody book!
A startup studio deploys its expertise, resources and infrastructure under a platform approach to generate and validate startup ideas, then build and launch them into the market. The studio assigns a founding CEO to grow the companies into independent entities with the studio owning the lion’s share of the equity. The expertise and nest they provide allow them to increase a startup’s odds of survival and success over those of a startup, naked out in the wilderness. They are markedly different to accelerators and incubators, well at least they used to be.
In The Beginning, There Was Bill, And Bill Had A Groove
The venture studio is not a new model; the originator being Bill Gross’s idealab from way back in 1996, which served as an incubator. The first studio to take this concept into the post dot-com crash era as a true startup studio, the Lucy of the lineage, was Betaworks. Their founder, John Borthwick, was inspired by the now defunct venture trailblazers ICG and CMGi. Later Science and Expa came to help to establish the model within the ecosystem. Today there are well over 100 startup studios across the world, half having been founded since 2013. It is evidently a growing model and a global phenomenon, with well over half in Europe. Here’s a twitter list of notable examples.
I would sidebar Rocket Internet from the Genealogy above based on their ‘startups with proven business models’ approach. Just like that Eames ‘Inspired’ Lounge Chair, those with creative sensibilities will find the Xerox startup model of this Samwer Brothers founded studio somewhat controversial. I do however doff my hat to them for systemising the approach, creating a platform and listing on the Frankfurt stock exchange, becoming billionaires along the way. Objectively they are a very impressive organisation. Rocket Internet highlights the benefits of a platform, or productized, approach that creates value not only in the startups they launch, but also in the startup studio itself.
A Varied, Ever-evolving Model
In the opening remarks of the superb 2016 PIE Forum, the only formal gathering of US startup studio operators that has ever taken place, the host Jeff Stewart highlighted that there is not only one flavour of startup studio “founders inform the flavour based on their experiences”. i.e. the DNA of the founding team defines what kind of stack the studio offers. If you dig into the nucleus of nearly every major studio, the DNA is primarily technical, business school, finance, VC.
Furthermore, startup studio operator and Foursquare co-founder, Naveen Selvadurai, said that they consider the studio itself to be a startup. So just like any good startup, reacting to data and the market, you have a great deal of variation in the offering/stack and a lot of iteration of the business model. This is evidenced in several important shifts that nearly all major startup studios have made from their earlier iterations.
The Startup For Enterprise Play
There are a subset of startup studios that intersect with enterprise/corporate clients. Prehype, Founders Factory, and Human Ventures all have programmes focused on opportunity and value creation for corporate partners. The startup studio does the running on the opportunity space, deal sourcing, company, and team building. Within the ‘startup for enterprise’ model there are subtle differences in execution and focus so let’s look at a few of the key operators in the space.
Founders Factory in the UK develops up to 12 startups a year across a wide range of verticals from their London, Johannesburg and Paris offices. These verticals are aligned with the strategic interests and needs of corporate partners who symbiotically support the startups with insights, data, IP, and distribution. Founders Factory build a founding team and take a minority stake in each startup in exchange for the aforementioned support, £150,000 seed round and 12 months of operational support. Interestingly the corporate partners who invest up to the region of “several million pounds” take a stake in Founders Factory rather than the specific startup focused on their vertical. Whilst operating this model at scale, they also operate an early stage accelerator. As of 2019, their portfolio companies have raised £160m.
Prehype, also proponents of the ‘startup for enterprise’ model, have a slightly different approach. They build or reshape startups for and with enterprise partners, with the ultimate objective of integration or acquisition by said enterprise partner. Prehype installs an ‘intrapreneur’ selected from the corporate as CEO and builds a startup fine tuned to the needs of the enterprise partner — the buyer in waiting. That partner has the option to share ownership of the startup or purchase the startup outright down the line, facilitating an early exit for the studio. They are open in highlighting that not every initiative should by default end up turning into a company. For Prehype ‘corporate co-creation’ is only one strand of their operations. They have had success in building and/or exiting their own startups (BarkBox, Managed by Q, AND CO, and Roman), support EIRs in developing their next startup, and invest directly.
Entering the fray in 2019, New York’s Human Ventures established an enterprise arm focused work with Fortune 100 companies helping them ‘accelerate and de-risk entry into new products and markets’. They leverage their operator network and platform to quickly launch companies with/for enterprise sponsors. Those NewCos are either ‘spun in’ (absorbed by the sponsor), or kept as free standing companies with the sponsor retaining a minority stake and potential future acquisition.
This is also a play space for the management consultancies such as BCG Digital Ventures who offer a similar service — acquiring or developing a startup and getting paid 10x per solution by enterprise clients. Though having what is still in essence a management consultancy, agile as a corpse, build a startup feels like insanity. Anyway, whether its actually effective or not, this service generates a significant revenue stream for the management consultancy.
The startup for enterprise model reads like a win-win for all concerned. It is a compelling proposition to large and unagile enterprise partners keen to surface opportunity, avoid disruption, or satisfy a mandated innovation agenda. The corporate partner as ride along sponsor, gets access to dealflow, investment opportunities, technologies, all at a fraction of the cost of attempting it themselves. They get to check their shareholder mandated innovation box. For the startup studio serving as an innovation comfort blanket to big corporates, it offers the opportunity to generate smooth and stable revenues to offset the venture studio model’s feast or famine mode, where you are holding your breath for your next liquidity event. The fees involved, very much chump change for a large corporate, are significant funds for a startup studio model, providing a stable foundation to operate from. The corporates commit to an annual multi-million dollar investment over a 3 to 5 year period. Location also presents a significant advantage to studios situated in major cities with diverse industries.
However, startups are from Mars and enterprise is from Venus. Meshing with large scale corporate partners brings as many challenges as it does advantages. Many generations bear the scars of meaningless corporate ‘innovation theater’. Startups are already high risk endeavors without the need to simultaneously satisfy a corporate sponsor so let’s consider some of the risks.
- Cadence. Working with enterprise is slow AF! What feels like light speed for the enterprise partner is actually eons for the startup studio endlessly crafting corporate stakeholder decks three months in.
- Stakeholders. Getting the attention and focus of key corporate stakeholders, for whom this is often a passive interest rather than a necessarily all absorbing obsession, is hard and slows things down.
- Product. In terms of product development, building for an enterprise sponsor might take you off the path to product market fit, lead to expensive code branches, and distracting bespoke feature sets.
- Data. The promises of rich sets of enterprise data to build insights from invariably flounder when the realities of corporate data privacy policies kick in, especially in the financial and insurance sector (hello GDPR!).
- Talent. The model attracts quasi startup CEOs, business school types, who want to be a startup CEO in a ‘safer’ environment. At a stage in their career, perhaps with a family, mortgage, and living standard that fosters a correspondingly lower appetite for risk. That’s not necessarily a bad thing, but it’s a factor to be aware of.
- Lifespan. Once a startup is acquired and integrated by its enterprise sponsor, the medium to long-term prospects of survival are diminished. Unless held at arm’s length by its corporate buyer, it will most certainly die a rapid death because the only reason it worked in the first place is that it did not grow in a stifling enterprise environment.
This subset of the venture studio model is a solid line of business if you enter into eyes open and cater for the compromise and opportunity cost. Cleary to make this work you need to build a two speed operation that can culturally and operationally tolerate the juxtaposition, and maintain a membrane to keep the two from intertwining. This is a space that I can only see as growing in value potential and opportunity. How it all plays out is still to be seen but a number of studios have cast their die.
The Startup For Enterprise Model is perhaps ideal for traditional agencies who can get their act together. However, if they bring the same approach as they do to their enterprise clients, then they are going to fall on their face. Building startups is a very different game. There is a very clear line between the experience in holistic venture building that startup studios have and are staffed for and the abstracted product-focused offering of the agency and consultancy world… Buyer beware!
The “Pre-company” Venture Studio Model
It is a long standing convention for venture capital firms and venture studios to offer a temporary home to startup entrepreneurs who are preparing for their next lap of the startup circuit. The ‘entrepreneur in residence’ system through which the VC/Studio offers a desk, support, and resources, all in the hope that they might get to be the first cheque in said entrepreneur’s next big idea. Two venture studios in particular, Entrepreneurs First (EF), and Antler (not to be confused with branding shop Red Antler), have made that somewhat informal system the basis for their entire model.
EF and Antler operate a matchmaking entrepreneur in residence programme on steroids and at scale, in the belief that a true opportunity lies in investing at the ‘pre-company’ stage in potential founders, and matchmaking founding teams. They see many more potential founders around the world beyond the atypical Stanford and Ivy leave track. They offer a system and support to surface them, and help match them with co-founders, and help them work on their ideas over a half year process. EF takes roughly 10% of the companies they have helped found in return for their efforts. Interestingly, both studios were founded by former McKinsey management consultants, not the typical startup builder pedigree, but as you will see those skills have been applied to make a model work.
EF’s co-founders Matt Clifford & Alice Bentinck (rare and very welcome founder’s diversity in the venture studio space) say EF “pays you to find a co-founder & invests in your company. We’ve helped 1000+ people create 200+ companies, worth a combined $1.5bn.”. Antler calls itself “an international Talent Investor, which supports individuals to build technology companies” with a similar focus of identifying and investing in people ‘pre-company’. Check out this a podcast interview with Matt for a lovely breakdown of the model.
They also share two unique characteristics that their fellow venture studio brethren do not. The first is global reach, as startup studios largely operate in one or two geographies. Both EF and Antler have spread their wings globally. EF was founded in London, and then over eight years expanded to six locations including Berlin, Paris, Singapore, Hong Kong, and Bangalore. Antler was founded in Singapore and in under two years expanded to Amsterdam, London, Oslo, Stockholm, Sydney, New York, and Nairobi.
The second is the funding of venture studios themselves, which has been a challenge historically with investors asking what exactly they would be investing in (studio or the portfolio?) as well as what a liquidity event or exit looks like. But EF has attracted serious backing from LinkedIn co-founder Reid Hoffman, raising $115M in their recent 2019 round. Antler has been backed by Facebook co-founder Eduardo Saverin and raised a $50M round in 2019. Both have proven that the venture studio model, or their take on it, is in itself investable, which is something that previous generations of venture studios have found challenging. That in itself is a remarkable development for the overall venture studio model.
The Startup Studio’s Diminishing Value Proposition
The value proposition has had to shift from the inception of the ‘modern’ startup studio model in 2007. Way back then it used to be prohibitively expensive to launch a startup. Before the cloud hosting era that gave us those awesome, omnipresent, Microsoft Cloud ads, on-premise server costs alone were too high a barrier for the average entrepreneur. As such, a startup studio was a far more compelling proposition for a potential entrepreneur to get their idea off the ground than it is today. That meant, by deploying its infrastructure alone, a studio could attract startups and startup entrepreneurs on favourable terms. However, with it becoming cheaper and cheaper to launch a startup, possibly too cheap, the startup studio model has had to adapt to continue to compete.
Bug Tracking The Startup Studio Model
Whilst Angels and VCs can make multiple investments and spread their risk, requiring a two in ten hit rate, the startup studio can only launch so many companies a year, and each bears considerable risk. It is heavily cash and resource intensive and if you have several unprofitable startups suckling the teat in parallel, the air can get pretty thin for the studio. You might be sitting on tens of millions in equity value. But it might as well be monopoly money unless you can get to a revenue generating round of financing that lets you cash in a slice of your pie. I am sure that major investments into Betawork’s Giphy and the sale of Science Inc’s Dollar Shave Club to Unilever for a cool billion were like coming up for air from a record free dive.
The In-Vitro Founder CEO Paradox
When it comes to launching their own startups and installing the founding team, there lies a paradox at the heart of the startup studio model. A founder of their own startup would enjoy 100% ownership, vested of course for best practice. They need to hand out a slice of their pie with each round of financing and issuance of stock options to the management team. If she is successful in establishing a profitable and valuable business (in the world of tech those are not often bedfellows), except in the case of an early exit, they may go through four(ish) rounds of financing. This will often leave the founder with 10–20% of the business, 20% for the management team and 60% for their investors of all ilks. Cases of course vary, but forgive numbers to illustrate the point. That’s the natural founder scenario, the hidden reality behind the outlier situations for Zuckerberg, Gates and Kalanick who retained significant ownership and majority voting rights as their companies scaled.
The tension in the startup studio model is that the amount of equity an installed ‘in vitro’ founder receives is significantly lower. Rightfully so as the startup studio is taking all the risk and needs to retain equity to recoup its investment. This equity distribution has led to accusations of startup studios being greedy — perhaps a misplaced interpretation as it is simply a necessary characteristic of the model.
Running the model, if the startup goes the full gauntlet, the installed founder CEO may end up with low single digits for practically killing themselves over the 4 to 6 years of their life. This has the potential to trigger an existential crisis in the installed freshman founder when they realise “I’ve got this”, but also that their upside is incomparable to that of a ‘natural’ founder. The pressure is immense, and the founder’s dilemma is real. It risks creating a disincentive to run the full course and could destabilise the startup if key people leave — we have to maintain those all-important narratives. This, in turn, has the potential to affect VC funding, where the preference is to invest in teams ahead of products.
It also means that a startup studio will not easily attract an experienced founder without giving up a significant stake in the business. That does not work for the startup studio model. This reduces the candidate pool of installed founder CEOs to those with potential to develop into the role. However, just like the ‘startup for enterprise’ founder CEO we discussed above, it might be the ideal, risk-appetite appropriate, comfortable fit for many a talented human.
Ideally, this is all a matter for an honest upfront conversation between all parties. Perhaps this outcome is already considered by the venture studio ownership and, if they manage transitions well, they end up with a valuable company and an even stronger equity position.
The Inside-Out/Outside-In* Model
The startup studio model was grounded in acting as a foundry for developing its own startups, working inside-out. However, to improve their odds, many startup studios have extended their services to work ‘outside-in’ with external startups that already have their wheels in motion. This involves either bringing them into their own incubation or accelerator programmes. Naturally, in this capacity, they take a much smaller equity consideration in return for the services of the studio than they would for their own creation. Expa launched its Lab programme in 2017, Betaworks launched their 11-week Camps, and Science their Incubators, shifting the model towards the accelerator model rather than exclusively developing their own companies. *confession: phrase stolen from an Anders Frostenson deck I might have peeked at.
Packing Cash For The Journey!
Another bug in the startup studio system found the studio in the ironic position of being priced out of their most successful creations. When one of their startups would get solid traction and a correspondingly high valuation, they would not have sufficient cash on hand to follow on in each round of financing and get slowly diluted. Yeah, you might have spent 1 million building startup X, but now you own 30%, it’s series C and with a $100M valuation, 5% is going to cost you a cool $5M (just let me check what’s left in my Venmo). This has led to the recent trend of startup studio’s raising their own funds to follow on and stay in the game. It also means that many startup studios are now serving as VC funds, or have migrated completely to the model. In fact, it does not look like any major startup studio does not now have an associated fund. Doesn’t seem like you can have one without the other.
So, What The Hell Is A Startup Studio?
Right?! As you can see, the lines have blurred as to what a startup studio is, with many originators of the model shape shifting into startup studio, cum-accelerator, cum-VC. For example co-founder of Uber, Garrett Camp’s Expa looks more like an incubator VC today and Obvious Ventures, who gave birth to Medium and Twitter, seem positioned more like VCs based on their latest fund. Science has pushed hard into the ICO and blockchain space with their Science Tokenhub ICO.
You’d be forgiven for wondering what defines a startup studio after all this. The point is that the definition does not really matter. It’s a vessel for an assembly of smart people, well-versed in making things and starting companies, working out every and any which way they can best apply their energy, experience, network and knowledge ;).
Seeking Creative DNA?
If you look at the origin and composition of all the main players in the startup studio space, the founding DNA is not creativity. The founding team are usually any combination of a business school, consultancy, finance/VC, crowd. There are however, creative capital exceptions emerging from the likes of Combine, started by Soleio and Adam Michela and Sweet Studio in Stockholm. It will be interesting what we see from them as they find their way.
Outro: The startup studio is not new, but it is constantly evolving. Learning from the evolution of the model, defining a model based on deploying creative capital presents a clear opportunity.