Frequently Asked Questions about startup studios, venture builders, company builders, foundries… [weekly updates]
Get answer to your questions about fundamentals of the approach, fundraising, best practices…
Over the past few months, since I published the Startup Studio Playbook, entrepreneurs and investors approached me with a lot of exciting questions about the studio approach. Here is a collection of the most frequent ones. Bookmark this post and check back once a week, as I will update the list continuously.
What are startup studios, a.k.a. venture builders, company builders, foundries…?
Hollywood movie studios produce movies. Startup studios do the same with new ventures. Ever imagined how it would feel to be the George Lucas or Steven Spielberg of your innovative ideas? That’s how it feels to run a studio.
Startup studios are organizations that produce startup companies one after another, mainly from in-house resources. The most common characteristics:
- Take a core team & entrepreneurs in residence;
- Add a shared infrastructure & in-house funding;
- Generate ideas internally (or in some cases, act as a cofounder);
- Build multiple startups in parallel;
- Trash what doesn’t work, reassign team;
- Spin off what works and get follow-on funding;
- Grow. Exit. Repeat.
Why should I care?
Because startup studios are on the rise. More and more software agencies, accelerators are experimenting with this approach and falling in love with the increased efficiency of earliest-stage venture building.
What are some of the famous startup studios?
First and largest one is Idealab, founded in 1996. More than 150 companies built, 50% successful exit rate.
Can you tell some examples from emerging markets?
Innovation Village, Uganda — read an interview with the founder here.
Innohub Mexico — a perfect example of corporations creating their own studio
… there are many more. Get this 2015 report to explore 51 studios.
What are the key differences between incubators/accelerators, startup studios and VC’s?
In an overly simplified way:
- Incubators/accelerators: They attract and support startups, invest little effort and resources for little or no equity, have low influence over the startups, can’t do much after startups fail, and are tough to make financially viable (except the top accelerators).
- Startup studios are the founders and builders of startups, invest high amount of effort and resources, have higher equity stake. When a startup within a studio fails, the studio usually keeps together the team and assigns to a new initiative — so the expertise remains in-house and growing.
- VC’s are usually investors in later-stage startups, with almost always pure financial motivation.
How to start a studio? And how to get money for building a new venture building company?
- Build a founding team.
- Get funding — either own capital, cash-flow from agency work, corporate sponsor or direct VC investment. Build long-term investor relations.
- Set up your startup production tools and processes and get the ball rolling, start building.
- Let go of failed attempts.
- When a startup initiative works out, spin it off, raise follow-on funding, let it grow, exit, profit, repeat…
How to turn a software agency into a creator of startups? How to bootstrap a startup studio?
Having a solid agency business is the easiest (but not easy!) way of creating a startup studio. You do agency work to create free cash-flow that you reassign to build your first internal startups — product and business side also.
The main difficulty: Sacrifice time and thus lucrative agency work for long-term startup investment.
What you need: Strong decision from owner of agency, buy-in from team.
Fortunately talented people love working on their own in-house initiatives, so buy-in from the Team is usually easy. As long as the agency-arm provides the stability.
Needed capabilities to build startups: Ideation, Design, Development, Marketing, Investor relations, Portfolio management, Back-office…
Corporate Venture Builders: How to work with corporates to co-build ventures?
Corporates love to say they are innovative. But usually a large organization is optimized for stability, and not for fast and break-through innovation. More and more corporations are separating the innovation teams from the main organizations, to shield them from bureaucracy, while protecting the main brand from startup risks. I call this Startup-as-a-Service.
“I was told by a VC that he would never fund a startup studio because we would be effectively replacing him, by choosing which startups to pursue in the studio like he would for his fund. I found the argument valid. What’s the counterargument? ”
VC-s focus usually on later-stage investment, while studios take care of earliest-stage building and validation. And they do it with high efficiency. Data suggest that growth-efficiency of startup studios is higher than of accelerators — definitely more research needed.
VC-s investing in a startup studio has the benefit of investing into a whole portfolio of startups. And having deep and intimate insight on all the portfolio companies from day 0. If the studio gives right to first invest in later stages, then this might be a source of exclusive deal-flow for the VC.
“Are there startup studios structured as VC funds, ie GP / LP relationships, and remuneration through Management fees & carried interest? ”
We experiment with such a fund, called Studio One. Outside investors put money in the fund, which finances the build of a portfolio of 30–40 startups. It’s still experimental.
“What is a typical share/equity structure of start ups in a studio?”
Key question: Is the startup from in-house idea or external? If a studio joins an external startup, they will act as a kind of institutionalized co-founder — but in the sweat and tears for equity. Usually minority equity.
If the studio builds a startup from an internal idea, then their initial equity will be usually 50%, the rest divided by CEO and dedicated team of that startup. This equity stake will “normalize” at later stages of investment.
By the time a startup reaches Series A, B or exit, the equity stake of the studio might dilute to that of an angel investor. Depends on a lot of factors, the continuous contribution of the studio in the startup, the investors, the market…
How do you see the future of studios? Aren’t you concerned that VC-s and entrepreneurs will abandon the model?
Ryan J Negry, Founder of Negri Electronics, Founder and CEO of Laicos Startup Studio and MD at Iron Yard Ventures said:
„Normally in tech, when you read about something in a book, it’s already old news. This time, you’re reading about a trend that will be wildly popular in 3–5 years. From an investor standpoint, putting money into a studio should be easy. By investing in one company, you invest in a whole portfolio — all heavily vetted startups, qualified and guided, by the company and core team you trusted with your money in the first place.”
I predict 4 trends for 2017–2020:
- More accelerators and corporations will experiment with studio approach -> Driven by the desire to reduce risk and cost, increase control
- More „Entreprneurs-in-Residence” will be needed — people who understand the studio model and have entrepreneurial attitude
- Studio approach as a new tool in Intrapreneurs’ hands
- More studio mentors and advisors needed
What, if any, is the bibliography behind the approach?
- „Startup Studio 2.0” by Daniel Feeman
- „Chasing the chasm” by Sergio Marrero
- „Organisatorische Best Practices von Company Buildern — eine qualitative Untersuchung” by Tobias Gutmann
- Startup Studio Playbook by Attila Szigeti
Blog posts, articles:
- buildtogether.co is a great collection
New Q&A on 31st July: What are the main benefits of this studio approach?
- By using a centralized core-team, the earliest stage of startup building becomes very cost-efficient. (Yes, startups created this way will need to transition to a dedicated team later on.)
- If the studio focuses on one technology or industry, there will be synergies between startups.
- Studios provide a safety net for the core team and for the entrepreneurs.
- Impact of failure of one startup initiative is greatly reduced: The team of the studio will stick together, reassigning focus and resources on another idea. So the startup builder competency and experience will increase over time, making the build process even better.
Why are you doing this?
I believe that the transforming effect of technology is a great thing. -> Building startups is one of the best ways to achieve progress. -> Startup Studios are a better way of creating new innovative companies. -> By empowering entrepreneurs and investors to build more studios it feels like I contribute to this process.
Also I built a startup once with the traditional approach and it failed and it sucked. There has to be a better way of doing this. lo and behold: startup studios :)
How can I contribute to this movement?
We need to do more education, more eye-opening so more entrepreneurs, innovators and investors realize the opportunity in the studio approach.
If you want to help me spread the word about studios, or you plan to build your own studio and could use my expertise, find the best advanced pack and support my campaign for the v2 book: