Early-stage venture capital has been steadily unbundling and morphing over the last decade. As the emergence of new technology helps make it easier to find investors and the development of new deal types helps make it easier to access capital, entrepreneurs have a lot of good options when it comes to fundraising these days- and they know it.
Great startup founders aren’t struggling to raise money, they’re struggling to bring in smart money. For the opportunity to back the next wave of startup unicorns, it’s no longer good enough to simply throw money at the team and let them work it out. These brilliant founders are looking for support, resources, connections, execution power, process playbooks, and capital.
This is why founders are increasingly choosing to work with startup studios. As you will learn in this paper, studios help startups achieve accelerated results while managing risk and maintaining capital efficiency.
As the proliferation of the model comes to light, we are seeing many studio-born ventures finding spectacular success including Snowflake which was co-built by a startup studio called Sutter Hill Ventures and IPOd for $33B in 2020, Clubhouse which was built by Paul Davidson as a project coming from the Alpha Exploration Co startup studio- currently valued at $4B, HelloFresh incubated with the German startup studio Rocket Internet (currently valued at $1.9B), and one of the fastest companies to ever go from launch to IPO ($1.6B valuation) Hims and Hers which came out of a startup studio called Atomic Ventures.
The studio is a model on the rise and smart investors are monitoring closely. At its core, the studio model matches talent with resources and proven startup building processes to help new ideas validate, launch, and scale with speed and efficiency. These entities are as valuable for investors as they are for entrepreneurs.
As more and more studio-born-ventures return incredible multiples, it’s becoming clear that studios are one of the most promising vehicles for high-yield, low-risk, investments.
What is a Startup Studio?
The startup studio model is an approach to building companies. Startup studios build venture-scale startups in parallel using a proven process, a core team, and shared resources.
Startup studios each operate differently but at the core, a few key elements don’t change:
There are many ideas in the works at any given time.
Sometimes the core studio team comes up with the idea and other times an entrepreneur brings an idea to a studio to co-build it.
All startup projects are put through the same validation process.
Startup studios are so successful because they’re experts at the early stage launch, scale, grow process. With each venture, studios get better and better at this operation which further reduces risk and increases the chance of success.
There are pre-defined milestones all startups must pass- if they don’t, the idea is killed.
The milestones are used to objectively evaluate startup ideas. Studios are so successful in part because they have no “innovators bias”. Additionally, studios deploy capital strategically in stages. An example of this staged approach to investment can be found in figure 1.1
As stage gates are “passed” the studio invests capital strategically and allocates resources as the startup grows increasingly independent.
Most studios have a venture arm for supporting ventures through the idea-to-launch phase. When the venture is mature enough to spin-out independently, the studio makes a follow-on investment in the seed round to help support their startups and doubles down to enhance their position.
How Are Studios Different Than Accelerators, Incubators, and VC?
At a basic level, studios are hands-on in building ventures with the early founding team…and accelerators, incubators, and VC firms are not.
Accelerators provide startups with mentors and curriculums within the context of time-based programs, usually 3–4 months. When the program ends, that’s essentially the end of the active value-adding relationship. Accelerators work well for product-market-fit stage startups with an established team in place and some proven traction. YC, 500S, and Techstars are in a league of their own.
Incubators provide most of the same resources as accelerators, but the time limitation is lifted. Incubators work well for validation-stage startups with a team and a viable business model in place. Traditionally, incubators provided space and a place for ideas to ‘incubate’.
Venture Capital Firms
VC firms allocate funding and advisory resources to startups-in other words VCs add the least value. They give money and advice (hopefully not bad advice.)
Studios get in at the earliest stage- often pre-product and sometimes even pre-idea. Studios are all about talent. Second-time founders and those with deep domain expertise are the perfect candidates to work with studios to bring ideas to life. The entrepreneur brings the execution power and the studio provides the necessary innovation expertise, human capital, and infrastructure resources to make building a successful startup easier and faster.
According to the Global Startup Studio Network (GSSN), studios experienced an explosive 625% growth over the last 7 years (2014–2021) which means they are growing faster than funds, accelerators, and incubators.
What is Driving The Success of Startup Studios?
The goal of a studio is to match talent with proven processes to build and scale startups efficiently. The success comes from the intentional design of the startup building process which works to reduce the risk of startup development by solving for the most common startup killers.
When a startup studio builds a venture, the core team remains intact (reduces the risk of the founding team falling apart), the right resources are deployed at the right benchmarks (capital and time efficiency), and success-criteria is pre-defined which reduces the risk of making foolish “first-time founder” mistakes.
For these reasons, studios have a much higher success rate than that found in traditional startup creation and studio-born ventures realize an exit in less time than it typically takes for that process to happen organically.
There are many examples of studio-born successes, the most widely referenced being Dollar Shave Club which sold to Unilever for $1B just 4 years after inception. As mentioned Snowflake, Clubhouse, HelloFresh, and Hims and Hers all were born inside studios and have achieved massive success in short periods of time relative to the typical startup launch to exit timeline.
Startup studios are proving themselves over and over again as the winning model for producing successful startups that return many multiples on investment.
Why Are Ventures Investors from VCs to Angels to Institutional LPs All Investing In Studios Now?
Startup studios have been around for almost three decades now with the first being Idealab, developed by the infamous Bill Gross, which has been building ventures and spinning successful startups into companies since 1996 with over 45 IPOs to date.
As depicted in Figure 1.3, the startup studio market is growing rapidly and we postulate that it’s reached the tipping point in 2021. According to an expert source on studio frameworks, Enhance Ventures, there are around 560 studios operating across the globe contributing to 625% growth since 2013. This massive growth is attributed to the studio model gaining mainstream attention as studio-born ventures begin to show nice exits in waves. These fast-unicorn success stories highlighting the studio model are fueling investment in this space.
Startup studios infuse portfolio ventures with the required capital to build and blitzscale when the lights are green. To do this, studios raise funds from LPs, Angels, and Venture Capital firms. Some examples of the big bets being placed in this categories are as follows (information courtesy of CrunchBase):
- Atomic closed a $260M funding round in March of 2021
- High Alpha Capital raised $110M for their third fund in March 2021
- Pioneer Square Labs raised a total of $220.8M across 3 funds, their latest being a $100M round in March of 2021
- Human Ventures raised $50M in a single venture fund in February of 2019
There are 3 main reasons investors are investing in startup studios:
1. Reduced Risk
- 60% of companies created out of studios make it to Series A
- Startups are 30% more likely to succeed coming from a studio compared to the traditional startup building approach
2. Higher Returns
- Studios maintain an avg of 36% equity in the startups they bring to market which offers investors a lower valuation with a larger equity multiple advantage.
- The average IRR of studio-born startups is 53% compared to that of traditional VC-funded startups at 21%
3. In Less Time
- Studio-born ventures launch, scale, and exit in ~half the time it takes traditional startups to do the same (see data in figure 1.4)
Conclusion: If you aren’t already invested in a studio, you will be in the next 12 months.
Studios build venture-scale companies with speed and precision. They provide portfolio companies with a strategic advantage at every stage of their development. At the idea stage, it’s all about process. At the validation stage the game is traction support (team, tech, and operational power). At the product-market fit stage, it’s all about funding, recruiting, and infrastructure.
Studios are the earliest investors in their portfolio ventures providing funding and human capital to support the startup from day one. Using established processes, deep domain expertise, robust networks, and shared resources- studios have a higher probability of producing successful startups as compared to traditional startup creation. In addition, studio-born ventures are proven to exit faster with higher returns than traditional startups.
Beyond the financial benefit, investing in a startup studio gives LPs the unique and otherwise unavailable opportunity to get in on the ground floor and work alongside talented entrepreneurs to shape and build the future through technology. Additionally, investing in studios helps diversify an investment portfolio and investors in studios enjoy the benefit of building their own dealflow. As corporate innovation is an explosive model, working with a studio to co-build ventures is a huge advantage for corporate investors.
Untapped Ventures is a startup studio in LA now launching a $10MM fund to build venture-scale Future of Work companies with cofounder-level value-add leveraging a model proven to generate faster exits, less losses, and outsized returns.
Grinding a 9–5 isn’t working for anyone anymore. We fundamentally believe that the purpose of work is to find meaning and add real value to the world. That we can self-actualize at and through our work. As technology advances the way we work, but also the reason we work is changing as well. We are not only aware of this transformative shift- we are actively building and investing in startups on a mission to accelerate it.
Our mission is to help millions of people achieve breakthroughs and lives their best lives through the work they do — to leverage their full untapped potential (yes, that's the origin of our company name). We have identified 5 key Future of Work focus areas that define our investment thesis:
- Purpose & Personal Development
- Emerging Models of Work
- Well-Being at Work
- Enhancing Entrepreneurship
For more info, see our seminal investment thesis whitepaper.
If you’d like to learn more, I’ll be hosting an in-depth training webinar for venture investors on Wed. May 12, 2021 @ Noon PST.