The startup studio, an alternative model of financed entrepreneurship
We are among those who believe that entrepreneurship is the lifeblood of innovation, progress and future job creation. The world moves at supersonic speed today and new ventures are exceptionally placed to take advantage of the opportunities being created.
However, while starting a new company (especially in tech) has never been easier, and cheaper, the challenges of building a real company remain the same. It is often said that 9 out of 10 new ventures fail. Regardless of what the number actually is, the odds remain against aspiring entrepreneurs.
Risk will always be a component of building something new, but we think that the risk can be mitigated, and the odds improved, by taking a different approach. At Founders, we have designed our capital structure, internal organisation and “Business Creation Process” to address these challenges.
Master the science of building new companies
Building a successful company is a long and in most cases exhausting endeavour. Few entrepreneurs manage to build one successful company and even fewer go back to building a new one once they are done. Some become angels or VCs (which is a welcome fact) but the truth remains that most new ventures are started by rookies who only get to benefit from the advice of experienced entrepreneurs-turned-investors if, and when, they are able to demonstrate a certain degree of traction on their existing products. It can be argued that this is a useful example of “survival of the fittest” but a lot of good ideas, and a lot of energy get lost in the process.
We believe that starting new businesses is a discipline that can be mastered. There are plenty of resources available for entrepreneurs today, but the gap between theory and practice remains wide. In order to retain critical knowledge and expertise, a core team of people should dedicate themselves to the sole purpose of mastering the process of starting new businesses. That can be achieved only by going through the cycle over and over again. We are well aware that the task of building a business is not over once the first few steps are taken, but the importance of those first steps is such that it is worth dedicating to that alone.
A second aspect is the ability to reduce execution risk in the early stage of a company. A new venture has a lot of moving pieces: the idea itself, the execution of it, the initial team, the ability to raise capital. Each component presents great risks and the ability to eliminate, or at least mitigate, some of these can have a great impact on the final outcome. We think that execution risk can be largely eliminated by creating the conditions to have experienced teams working on new ideas.
Attract a new breed of entrepreneurial talent surrounded by great experts
Entrepreneurship is gaining popularity. For many is even becoming excessively “hyped”. Generally speaking we think it is good that more talented people see starting a new business as an attractive path, but the reality, especially in Europe, is quite different. Starting a business is generally perceived as “too risky” and only a few people, mostly very young and tech minded, decide to take the proverbial plunge.
The result is a population of entrepreneurs skewed towards the very young and inexperienced. While this is not a problem in itself, it is certainly a shame that a lot of potential entrepreneurial talent is “lost” in the trap of the safe choice (how “safe” this choice actually is would deserve another long discussion). Again, it might be said that entrepreneurship is not for the risk averse. We are less judgemental and think that creating the right conditions to attract a new breed of entrepreneurial talent (the experienced professional, the 30 and even 40 something, the ones with a mortgage to pay and, yes, the risk averse) by lowering the perceived risk is a win-win.
We think there is much to gain for both the companies being started and their investors. Stronger managerial experience, stronger networks, deeper knowledge about the inner workings or large companies (especially important in B2B plays). By creating an attractive environment for experienced professionals we can stimulate the creation of companies that address “unsexy” problems previously untouched by tech, problems that require the experience of having worked in a specific sector or industry to even be aware of their existence. We see a great potential for what has been dubbed “the full stack startup”. For that to happen it is vital to attract entrepreneurs with deep sectoral experience and we believe that our alternative model can make a difference .
A separate talent problem is the recruitment of expert resources like developers, designers, marketing professionals. In our experience it is extremely difficult in the early days of a company to attract these much needed resources. Like above, most people would not join a startup before meaningful financing is obtained, most VCs would not finance a startup with no product or market traction. Allowing entrepreneurs and ideas to access expert technical talent early on can break this vicious cycle.
Allow to fail, make it easy to succeed
It is clear that failure, and the fear of it, remains one of the greatest hurdles preventing more talent to answer the entrepreneurial call. A lot is being done to change this perception but especially in our part of the world failure remains a stigma and very few people get the luxury of a second chance (in the form of capital, energy and moral support).
A startup is normally defined as “entity in search for a repeatable business model” and while all types of companies can fail it is obviously in the early “search” phase that the risk is higher. A possible solution is to promote an environment where ideas fail, not people. A risk-free zone where early stage experimentation is possible and where admitting that something is not working should not be associated with personal failure, morally and financially. Silicon Valley has managed to externalise this problem by creating a broader ecosystem where the idea of testing something and failing in the process is part of the status quo. An alternative, better suited to other realities, is to internalise it within a structured setup, for example a company. A company that builds companies.
The other side of the coin is what to do when things do work. Entrepreneurs who have tried it know that raising capital is a full time job and takes a disproportionate amount of energy out of the process of building a business. The same setup should have the ability to finance projects that move beyond predefined gates. Mixing the ability to fail with the certainty of being financed can provide an answer to the failure dilemma.
How we are doing it:
Founders is our attempt to build an alternative model for financed entrepreneurship along the principles outlined above. Here is how we are doing it:
1) We follow and continuously improve a repeatable “Business Creation Process”. We have combined and adapted existing methodologies, resources and tools to build a repeatable process to start new companies. We continuously experiment “in the field” and improve the way we work learning from our experiences and from those of the people joining our team.
2) We have a Core Team dedicated to building new businesses. The nucleus of Founders is a Core Team of people whose main task is to build new businesses. We build companies from scratch following our Creation Process and partnering along the way with talented people that eventually become Co-founders of the businesses we start. When the time is right (approximately after 1 year if the project is successful) the Core Team member assigned to the project leaves day to day operations and goes back to a new project.
3) We match ideas with entrepreneurial talent. While following our Creation Process we look for the best suited individuals to join us and eventually become Co-founders of the business. The ideal Co-founder is somebody who is an expert in the specific field or somebody who shares our passion for the problem we are attempting to tackle.
4) We add Experts to bring great execution skills to new businesses. We aspire to attract great developers, designers, marketing professionals and project managers to our team. These “Experts” work on individual projects during the initial phase depending on the need of each business and product being built. If the project fails the team simply goes back to a new project. If it succeeds we offer them a chance to join the company on a permanent basis as Co-founders or key early employees.
5) We focus on testing early, killing losers and doubling down on winners. Our entire process is based on experimentation and iteration. We focus on progressive de-risking and we strive to create a culture that allows us to kill losers rather than pick winners.
6) We invest in seed and series A rounds through our evergreen fund. When a project graduates from our Discovery phase we make the first “seed” investment and formally create the company. The next stage is about building the product and finding product-market fit. When that happens we make a second investment to scale the business. Our fund is evergreen which gives us the ability to focus on long term value creation. We never start a company with an exit in mind and we believe that valuable exit opportunities emerge by themselves when focusing on creating sustainable, profitable growth.
Final remarks:
We are not alone doing this. In different shapes and forms the “studio” or foundry model has gathered momentum especially in Europe. We haven’t taken the time to truly understand the different variations and we are sure that there are many experiences out there which we can learn a lot from.
Note: our analysis is based on observations from our region of operation (Scandinavia/Europe) but we believe its conclusions can be extended to other geographies with few exceptions (Silicon Valley as the most noticeable) where the “ecosystem” is mature enough to find alternative, internal, solutions to the same challenges.
