Startup Studios: The New Way to Build Great Companies
This edition is about how to launch, invest in, and build great companies.
This edition is also personal. In a sense, each week is personal, because the Reader is a reflection of what I’m reading and thinking about. But this week is more personal because I’m using it to introduce the new business I’m building. It’s called Saturn Five and it’s a start-up studio.
Most people have never heard the term “start-up studio.” It sounds vaguely like an incubator or co-working space, but it is neither of those things. It’s a new way to build companies. It’s a new asset class. And it is growing like crazy. In a nutshell, we’re building a company that builds companies.
If you care about start-ups, this is a model worth knowing about and understanding. A lot of the bigger names in the start-up world are experimenting with it and some big companies are being launched.
If you don’t care about start-ups, you still might be interested to learn about this. Studios work to bring ideas to life. The principles they are built on could be applied to a variety of fields — from education to healthcare, to government and the larger corporate world.
Plus, start-ups increasingly occupy a large part of our vocational imagination. This is the age of the gig economy. It is an era when it seems everyone has a side hustle and an idea they’re trying to launch. To quote a stat my friend Dave Blanchard likes to cite, 53% of Millennials either work in a startup or want to work in one. If current trends continue, many of those companies will be launched from startup studios.
This week I’m sharing several articles about the emergence of start-up studios as a new way to build great businesses. At the end, I’m going to tell you what we’re doing at our company, Saturn Five. I’m even going to do something crazy. I’m going share our pitch deck publicly. Hope you enjoy it.
Read widely. Read wisely.
This Week’s Recommended Readings
1. HOW ‘VENTURE BUILDERS’ ARE CHANGING THE STARTUP MODEL
by Ali Diallo in VentureBeat (9 min)
Startup studios are sometimes called “venture builders.” Or startup factories. Or venture studios. They are still new enough that there isn’t yet a single, consistent nomenclature. This article is one of the earlier pieces describing what a startup studioreally is: a company whose product is other companies.
If you haven’t yet heard of venture-builders…let me introduce them to you: They’re organizations that build companies using their own ideas and resources.
Unlike incubators and accelerators, venture builders don’t take any applications, nor do they run any sort of competitive program that culminates in a Demo Day. Instead, they pull business ideas from within their own network of resources and assign internal teams to develop them (engineers, advisors, business developers, sales managers, etc.).
You’ll want to get used to the idea because we’re going to see a lot more venture-building organizations emerging.
Venture builders develop many systems, models, or projects at once and then build separate companies around the most promising ones by assigning operational resources and capital to those portfolio companies.
In its most basic form, the venture-building company is a holding company that owns equity in the various corporate entities it helped create. The most successful venture builders are, however, much more operational and hands-on than holding companies: They raise capital, staff resources, host internal coding sessions, design business models, work with legal teams, build MVPs (minimum viable products), hire business development managers, and run very effective marketing campaigns during their ventures’ pre- and post-launch phases.
2. THE TREND THAT’S SHAKING UP THE STARTUP ECOSYSTEM: VENTURE BUILDERS
By Natalie Edwards in GeekTime (7 min)
There are now more hundreds of startup studios in operation today (this is the best list I’ve found). GeekTime’s article profiles 10 of the best-known studios and articulates four principles that define the model.
What began organically is coalescing into a model with some fixed tenets. First, they take an active role in building several companies at the same time. In some cases they are generating the ideas for startups internally, while in others they partner with entrepreneurs and act as second co-founders or acquire promising startups in need of their expertise. Regardless, there’s an emphasis on intensively servicing multiple ventures simultaneously.
…Second, there’s a mandate to build a strong, experienced team that can service all of the ventures they build from within…
..Third, the startups built internally share resources beyond talent: processes, connections, funds — those things every startup struggles to create and every startup needs…
..Fourth, the goal of venture builders is for their startups to eventually become independent entities…
3. THE NEXT BIG THING YOU MISSED: TECH SUPERSTARS BUILD ‘STARTUP FACTORIES’
by Issie Lapowsky in Wired (7 min)
Some of the most successful entrepreneurs in Silicon Valley are building startupstudios as their next act. They include: Ev Williams (Twitter, Blogger), Max Levchin (Paypal), Garrett Camp (Uber), Mike Jones (MySpace), Jake Lodwick (Elepath), Mark Pincus (Zynga), Kevin Rose (Digg), and many others.
The founders of these businesses seem to fall into two camps. For some, it’s a way to speed up the process of serial entrepreneurship. “With each company, you’re applying for a seven to ten year journey at the very least,” says Max Levchin, who has launched two companies out of HVF, including the fertility app Glow and the financial services startup, Affirm. “Now, the recent trend is a bunch of people who have had success in the past areasking themselves, ‘Why does it have to be one idea per decade?’”
The second camp, however, takes a more meta approach. For people like Mike Jones of Science Inc. and John Borthwick of Betaworks, the factory model is as much about building new innovative products as it is about innovating on the business model, itself. By starting, investing in, and acquiring a slew of companies within a larger company, there’s far less pressure on any one product to generate a quick return. That’s rarely the case with venture-backed startups. “We can drive companies to quick profitability or we can build companies with long term equity that we’re excited about,” Jones says.
4. STARTUP STUDIOS: THE RISE OF HUMAN CAPITAL
I like this article for the chart above as much as anything else. The x-axis shows how much financial capital (i.e., money) different groups put into startups, with Angel investors at the $10K-$1M range and the venture capitalists stretching past the $10M range. The y-axis shows the human capital (time) that these investors put into the businesses.
Startup studios are defined by investing the most time in their ventures, working alongside founders to ensure the success of each venture they choose to launch. Results vary, but the difference can be extraordinary. As one of my friends who has worked at a studio put it, “9 out of 10 startups fail, but 9 out of 10 of our studio startup succeed.”
What if investing in early stage startups wasn’t just financial? Exchanging a few shares of a startup’s capital against mentoring or advice — sometimes in addition to seed money — is a trend that is becoming more and more serious. It started with accelerators like Y Combinator or Techstars a few years ago; more and more VCs are also jumping on the bandwagon by offering guidances and other services in addition to their financial rounds — for instance, a16z is providing strategic advice and help on recruitment to all startups in its portfolio.
Some VC firms, most notably Andreesen Horowitz, are trying to build toward this model, selling entrepreneurs not just on their financial investment but on the promise of an entire team of operating partners to help them.
5. BUYING YOUR WAY INTO ENTREPRENEURSHIP
by Richard Ruback and Royce Yudkoff in Harvard Business Review (10 min)
Most of the talk in startup studios is about building businesses from scratch. But there are a few studios who also buy small or struggling companies and give them new life. The advantage to this strategy is you start with product-market fit: you have customers and cash flow on day one.
These two HBS professors teach an increasingly popular course at Harvard about “entrepreneurship through acquisition” where they study cases of students who at a young age eschewed traditional and resume-padding career paths to do what amounts to micro-scale private equity, buying decidedly un-sexy companies at attractive valuations and then growing them as the CEO.
Many aspiring leaders take conventional routes to the top in business: They get on a C-suite track at a large company, climb the ladder to partnership at a consulting or investment firm, or launch their own start-up. But there is another career path that has become increasingly popular in recent years: buying and running an existing operation — or what we call acquisition entrepreneurship. A record number of such transactions occurred in the United States during the first three quarters of 2016, according to BizBuySell, an online small-business marketplace.
I’ve spoken in the past about Organization Kids, and Excellent Sheep — how elite schools train smart kids to be rule followers who climb the greasy corporate ladder rather than producing leaders who take charge. Small business acquisition is a great counter-trend, one that could re-focus talented young people on career paths that don’t involve just pleasing their superiors.
My good friend Evan Loomis and I are launching a startup studio called Saturn Five. I’d like to tell you about what it is, how it came to be, and what we’re working on. I’m not asking for investments in this email — just want to share what we’re up to with this community.
WHAT WE’RE DOING
For me, the easiest way to understand what we’re doing in building a startup studio is to think of a startup studio like a movie studio. In a movie studio, the producer’s job is to find a script, attach a director (and often a star), round up the capital, and get the movie distributed to audiences who’ll love it.
In a startup studio like ours, our jobs are akin to being a film producer. Instead of producing movies. We’re producing businesses. To stretch the analogy, the business model is the script, the founding CEO is the director, a technical co-founder might be the star. Just like with a movie, we raise the money and bring the pieces together to make the project go. And like a film producer, we stay involved. We advise the director (the CEO), help deal with issues as they arise, and work to figure out the distribution to customers who will love the product we’re creating.
I shared this analogy with my teammate Jason (more on him below). He noted that in addition to playing producer, the studio will provide other services:
“We will often write the script (business model), build the sets (MVP app?), edit the promotional trailer (pitch deck?), etc…It’s a collection of experienced people (many of whom are screenwriters and producers) and resources (money, but also cameras, etc) that can be shared by film after film to make it easier to get a new project up and running. When we eventually have some big creative office spaces, they will function as the back lots and sound stages that every project can take advantage of.”
In the movie business, they say the easiest way to lose money is to invest in a single movie. The odds aren’t good. Most movies, like most startups, don’t make money. However, investing in movie studio can make you a lot of money, because you get to have a piece of all the films the studio creates, including all the winners. The same dynamic applies to investing in a startup studio.
I was introduced to the studio model before it really had a name, by learning about a firm in New York called Accretive. Run by Michael Cline and Edgar Bronfman, Jr., Accretive built the movie ticket purchasing site Fandango and several other B2B companies that are even bigger. They had a small team and took a McKinsey-like approach to mapping out an industry and identifying where in the value chain there was an opportunity to build a big, valuable company. They would then recruit a talented executive to co-found the business with, put the first money into the deal, and work in the business to build the team and sell the initial customers.
We have become students of other studios, learning from our friends at Juxtapose, Human Ventures, Pioneer Square Labs, Polymath, and Accretive, to name a few. The more we learn, the more fun we have and the more we believe in the model.
My partner Evan and I began talking about this model a few years ago with our friend Dave Blanchard, and later with Evan Baehr. We’d meet weekly to hammer out the model and our thinking has been deeply influenced and sharpened by them to the point where this spring, Evan and I felt confident enough to plant a flag in the ground and to go for it.
Evan is both hilarious and serious. He is a guy who cares deeply for his friends and his family. And he is a natural born entrepreneur, seeing opportunity behind every corner and moving faster than lightning to get after it. He’s the better looking one.
Me, I read a lot. :-) I take ideas and synthesize them. I try to move us toward building not just one-off great companies but a system of building great companies. Right now I’m also working on our acquisition strategy (more on that below).
We’ve been joined by Jason Ford, as our Chief Technology Officer. Jason is a full-stack developer, a marketer, and a a crazy talented entrepreneur who successfully built and sold his own company, FeedMagnet. He is wicked smart and a blast to work with.
The last few months have been both exciting and harrowing, sometimes on the same day. We went without salaries for a long time, tightened our belts, and wondered at times if we were crazy. But we have never been so energized and happy as we are in the work we are doing now. It is a privilege to steward people’s investments and it is just plain fun to have an idea and work your tail off to make it something real in the world.
We are building companies that we believe need to exist in the world. We’re deeply philosophical about it. We only want to work on ventures that encourage human flourishing, helping individuals, families, and communities be better off because of the products and services we deliver.
Our plan is to invest in companies where all 6 of these things are true: 1. We’ve done extensive due diligence on the industry and business model. 2. We or one of our core investors have industry expertise 3. We have a strong CEO to found the company with who is smart, determined and emotionally intelligent. 4. We are able to work hands-on in the business to influence it and help steer it to success 5. We have an anchor customer or unfair distribution advantage. 6. We have an engaged and expert chairman who can open doors and or bring expertise that we don’t have ourselves.
To come up with venture ideas, we take inspiration from our extensive reading, from frequent meetings with friends and leaders across a variety of fields, and from a concerted idea generation process. We have nearly 100 business concepts on the board today. Admittedly, most of them seem pretty bad. But about two dozen are interesting, and we have about 8–10 that we are actually pretty excited about.
Because this is a broad distribution list, I won’t share the details of the companies now, but they range from 3-D printing to internet pornography filtering. They aren’t all high-tech either. We are on the verge of launching a startup lending business with a talented entrepreneur and we’re also studying a unique opportunity in the construction space.
In addition to building ventures from scratch, we intend to buy a couple smaller businesses that already have customers and recurring cash flows. This approach de-risks our overall business — we become immediately profitable and can return money to our investors sooner than a VC fund would.
Our goal is to launch or acquire 2–4 companies a year. We have launched 1 already, another is on the five-yard line, and we are a couple months away from our first acquisition. We’ve been raising capital to support this work and have a dozen amazing investors on board — people who have been successful entrepreneurs, CEOs and investors themselves. We’re planning to close our round in the next month.
I’m taking a wild step of sharing our pitch deck with you here. Don’t worry, I’m not going rogue — it was Evan’s idea. You see, Evan wrote the book on startup fundraising, literally, and is an advocate for being open and transparent about all you’re doing. My background at Bridgewater led me to hold the same values, so we decided to share it, removing only the details on some of the companies we’re building. Hope you enjoy it. Here’s the link.
WHAT DOES THIS MEAN FOR THE WEEKEND READER?
I’m going to continue writing the Weekend Reader. This is just too much fun to stop. It’s a way for me to process what I’m learning about the world. It’s a way to stay in touch with friends, by sharing ideas. Frankly, I love it.
We may bring the Reader into Saturn Five at some point and try to grow it further — several of you have approached me about investing in it and scaling it. I’m humbled by that. If we take that approach, I’ll let you know. For now, we’ll keep it going and growing the only way it’s grown so far — by you recommending it to your friends and forwarding editions to people whom would like it.
Thanks for reading and for your support.
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