Dissecting the Venture Studio Model
Innovation at the earliest stage of company building
Throughout my career I’ve been fortunate to gain experience in various asset classes and investment models in roles spanning asset management, private equity, private credit, and venture capital. Through these experiences, I’ve been able to gain an appreciation of how investors can impact companies throughout the capital stack. Looking to build a long-term career in early-stage investing, I felt compelled to learn more about the most recent phenomenon proliferating in the VC ecosystem: venture studios.
This summer I have been interning at Human Ventures, an early-stage venture studio based in New York City that backs and builds industry-changing businesses. Their unique focus is on early team dynamics and matching founders with the best Human capital from the beginning.
For those unfamiliar with the venture studio model, venture studios serve as a co-founder for entrepreneurs and provide critical services, advice, and expertise to guide them toward building a successful scalable business at the earliest stages. It has been fascinating to see firsthand how this model is solving a lot of the pain points and inefficiencies that often trouble entrepreneurs at the outset of company building. Similar to how there has been an explosion in seed investors in the past couple of years, an increasing amount of studios are now coming in even earlier in the funding process — bringing with them a greater hands-on approach and a suite of early-stage services (MVP creation, beta testing, design, HR, etc) so that founders can focus more of their time and energy toward building their business. This represents a natural evolution of the early stage ecosystem, one that is increasingly enabling entrepreneurship and encouraging greater diversity.
The following represents key learnings from the venture studio landscape. While each studio has its nuances, the below is intended to provide a broad overview of how the model works and how it compares to traditional early-stage investing models.
The keys to a successful studio can be drilled down to three factors: (1) unique theme and/or industry expertise, (2) proprietary value-add service platform, and (3) effective hands-on involvement at the earliest stage.
- Unique Expertise
The studio’s team will either have specific insights into a particular industry or will have valuable expertise on broad themes that are driving transformation across industries.
- Service Platform
A valuable platform is able to leverage a broad network of collaborators, including potential future founders, early-stage hires, advisors with deep industry expertise, and early adopters.
- Hands-on Impact
The impact of expert assistance cannot be understated in a pre-product startup, especially for first-time founders. Seemingly trivial decisions such as co-founder equity splits or incorrectly assessing the fairness of a term sheet can cripple a business in the long-run.
Provided at the earliest stage these three value-adds de-risk startups, help founders avoid common pitfalls, and give a startup a great opportunity to set a strong foundation for a successful business.
In exchange for these services, venture studios will take significant equity stakes (typically ranging between 25%-50%), reflecting their role as a co-founder, while also ensuring that the Founder incentives are aligned correctly.
Venture Studio Performance
Given these value-adds at such an early stage combined with high initial ownership, it is reasonable to expect exceptional returns from studios that have been executing well on this model for years. I conducted a deep dive on some of the most well-known venture studios and it is clear that they have been very successful when compared to the performance of traditional VCs and accelerators. To begin, I analyzed how the top studios stack up against the top accelerators by portfolio company status over a 5-year period (based on publicly available information from Crunchbase, Pitchbook, and CB Insights). Currently, the studios have a comparable percentage of Active companies, but a more favorable percentage in the Failed and Exited buckets.
Additionally, through analysis of studio portfolios, I estimated that portfolio returns of up to 10x can be achieved through a well-run studio model.
Traditional VCs, who are typically considered top-performing if they reach a net return multiple of 3x, almost never reach these levels of return. Although the best VCs provide some or all of the value-adds described in the previous section, they would be hard-pressed to achieve as high of an equity stake in their portfolio companies as studios do (this variable has a massive impact on returns).
It is important to note that VCs are able to diversify their risk to a greater extent by investing in a greater amount of startups. However, studios can lower their concentration risk by bolting on an investment fund that also invests in external companies.
Outlook on Venture Studios and the Greater Startup Ecosystem
As their collective track record continues to become proven, venture studios will proliferate and the best will become permanent fixtures in the startup ecosystem. Studios provide traditional VCs with an additional sourcing avenue and a “stamp of approval,” depending on the perceived quality and reputation of the studio.
By streamlining the company-building process, I believe venture studios will attract brilliant entrepreneurs who perhaps would not have pursued the founder route (including those who lack a safety net, lack a co-founder with a complementary skillset, or just need a helpful nudge to get going). This will increase the diversity of founders, which will ultimately lead to more startups solving problems in underserved markets.
For these reasons and the value-adds provided, I believe that venture studios can create an enormous amount of value. Those that are exceptional company builders, possess a strong reputation, and complement their practice with a traditional fund, are poised to outperform top-tier VCs in the long-run.
Previously, Chris was an Associate at Flat World Partners, an impact investing advisory firm focused on early-stage direct investing and fund manager selection. Prior to that, he worked at various impact investing funds, including TriLinc Global, Tau Investment Management, and Impact Investment Group. He began his career at AllianceBernstein and Netplus Capital. Chris has an MBA from The Wharton School and a BA from the University of Virginia. He is a CFA charterholder.