Introducing Rainmaking Venture Studio — Q&A Style
This article is based on an interview with the founder and CEO of the Rainmaking Venture Studio, Jordan Schlipf. You can listen to the full interview in podcast format on Spotify.
What is a Venture Studio?
Simply put, we build new, high growth ventures. Like some other studios, we do this with different corporate partners.
Unlike other studios, we don’t take fees, and we actually put our own money in. We bet on the new ventures together, so we’re equally incentivized to make them work or kill them quickly if they don’t.
What problem are you trying to solve?
It’s actually two problems, one we face ourselves as investors and company builders, and then another our partners face.
So let’s start with the first.
The thing is building new businesses is really, really risky. We are entrepreneurs who all share a passion for building tech-enabled startups. But given that 90% of startups die, it’s a lifestyle that becomes a lot harder to justify as you grow older, start a family, and can’t go home to live with Mum and Dad if your latest idea doesn’t work.
So how did you go about solving this challenge?
Rainmaking was actually founded in 2007 to try to solve this problem. A group of four entrepreneurs partnered with the idea that they could each chase their own startup ideas, and they would share each other’s successes and failures. The ideas that worked would make up for the ones that didn’t. This approach worked.
We’ve now built 27 of our own ventures, which have brought in more than £350m in revenues and raised more than £50million in external venture capital. We’ve also killed around a third of the ideas which just didn’t work at all.
When we got lucky with one of our exits three years in, in 2010, we founded Startupbootcamp, with the idea that we could help support other founders like ourselves. Through this, we started working with big corporates, who partnered to fund the programs.
Back then 10 years ago, corporates were really just trying to get involved in the startup ecosystem, but they quickly moved beyond being happy to just observe these programs, to wanting to put innovation into practice in their own organizations.
They turned to us for help, and we evolved to meet the need for Rainmaking Innovation in 2013. Here, we constantly tested new ways to help corporates innovate themselves through capability and skills-building internally, partnering with startups for pilots and joint ventures, innovation strategy, and even building their own standalone ventures.
We tried a lot of things. Some worked, some didn’t. It’s fair to say that it was a sharp learning curve, as much for us as the corporates we were working with.
But what kept us going was a nugget of hope… if we could unite the best of big corporates, with their huge scale strengths and deep domain knowledge, with our expertise in starting new, fast-growing startups, we could gain a real competitive advantage over startups that were just venture capital-backed.
It sounds cliché but actually, it was just pragmatic.
Venture building is inherently risky. If you can find anything to help lower that risk, it’s a huge advantage. For us, partnering with corporates was the key to lowering the risk, because any startups we built together would get a huge leg up. It would even allow us to tap into industries and business models that no startup in the wild could get into, because of huge barriers to entry.
Moving on to the second problem.. why couldn’t corporates do this themselves?
Building new, transformative businesses in a corporate is like pushing water uphill. It’s muddy, slippery and, honestly, there’s very little chance of success.
It’s now 2020, and corporates know they need to innovate. 80% of corporates say their business model is at risk. 84% see innovation as a key growth strategy.
But the ability to repeatably reinvent yourself when you’re so finely tuned for optimization and execution… that’s still to come for corporates.
Less than 8% of ventures launched an internally reach scale. And the average corporate venture capital program (CVC) lasts just 4 years.
So the corporate challenge is how to create new business models that are strategically close enough to the core that they could become its future business… without crushing them.
Outsourcing this is a huge challenge for corporates, and why so many are intent on keeping it in house. After all, ultimately they need to own the venture. If they invest in other startups, for instance, through a CVC function, they’re rarely even given a board seat, let alone guaranteed the chance to acquire it.
But when they build it in house, they’re battling the learning curve of corporate employees who are trying to build a business for the first time. They’re also fighting incentives. Corporate Innovators are often on a comfortable salary, doing a more fun day job, and honestly, that doesn’t incentivize the rapid testing and killing of ideas that don’t work.
So corporates spend too much, take too long, and miss opportunities to own the business models which then end up cannibalizing them.
This is what we set out to solve for: if we want to unlock the best of big, we need it to work as well for our corporate partners as for us.
That means a guaranteed path for the corporate to own strategically aligned ideas while reducing the risk that corporate bureaucracy slows growth or kills great ideas.
So what’s the answer?
After a lot of mistakes, and three evolutions of the model, we think we’ve found the way to balance big and small. It’s part investment vehicle, part startup factory.
Step #1 Incentives
The first step is aligning the incentives. Historically, when corporates have partnered with external venture builders (ourselves included) they paid a fee for the service, but the corporate kept all the equity.
This fundamentally messes up the incentives. The venture builder is paid to keep projects going, or to always have a venture in the works, not to maximize the corporate’s investment.
Consulting models have inherently misaligned incentives. Even if all other factors are optimal, it remains the barrier to achieving the speed, scale and, ultimately, the success rate that we know is possible and that we expect from our ventures.
It also hamstrings new ventures. Talent is one of the key reasons any VC will invest in a startup. More specifically, proven talent.
To lower the risk in venture building, you want talent who’ve done it before. That’s why we look for entrepreneurs who’ve done it before. They’re still searching for their big exit, and they too are reaching a stage of life where they need to balance the risks. But they’re still incentivized by equity and they need to be free to act like a true founder, so this isn’t talent who’d take a corporate job.
This means every party needs skin in the game.
That’s why in our new model, we don’t charge fees. The equity is split between us, the corporate, and the founders. This ensures everyone is really in it together. And there’s a real opportunity cost for every party.
This means we earn our equity in two ways only: investing and Sweating.
Step #2 Co-investment
We co-invest millions alongside our corporate partners. In addition to being entrepreneurs, we’re also investors. Our team has a wide range of experience in VC and investing our own money as Angels.
As investors, we’re never going to spend our money on ideas we don’t really believe in. Again, this is key to aligning incentives. We want ideas to win as much as corporates, and we’re as keen to kill ideas that aren’t working quickly, so we can both redeploy our energy and capital to more fruitful ideas.
Step #3 Sweat
The rest of our equity is earned in our work to come up with, test, and support the ventures.
Because we never charge fees, we don’t do paid ideation. But because we’re an investment vehicle, it’s key for us that we get deal flow. That means we run the ideation for ventures for all our partners for free.
In fact, we do 6 weeks of scoping for every new venture idea or for every space our corporate partner wants us to explore. In this, we’re looking at answering:
- Is the market big enough: we’re looking for high growth ventures, which means we look for opportunities which could be $1bn, so we’re looking for $100bn markets
- Is the business model environment favorable: are the micro and macro trends supporting it (right now for example: does COVID help or hinder)
- Is there room to play: how dense is the competitive landscape? How mature are other startups? What barriers to entry do incumbents have?
- Is there an unmet need: what pain exists that we can solve? How big is it? Is there a niche to start with but room to expand?
- Is there an unfair advantage: what is the corporate partner bringing that really lowers the risk and increases our speed and chances of success
Once we have an idea we think passes these questions we put it to two investment committees: our own independent committee, and the corporate’s investment committee.
Neither party has a commitment to invest. But if we’re both excited, we’ll put in c. £200k and the corporate puts in c. £400k.
If it’s a no, we’ll keep looking for ideas for that partner in different spaces, but still ensuring the ideas are of strategic interest to the corporate.
If it’s a yes, then it’s time to find incredible talent for the idea.
#Step 4: Startup founders
This is where our incredible Head of Talent Matt comes in. He matchmakes proven founders to create a CTO and CEO pair who have a combination of skills tailored for the specific venture.
What is also important for us is to ensure they have a great working-fit because they’re going to be in this together for at least 5 years if the venture is a success. With our talent on board, they build out an agile team, no bigger than 5, typically with one designer, one more dev, and a marketeer/sales dependent on the business model.
The seed investment of £600k gives the founding team roughly a year of runway to put the idea to the real test in the market. They can and do kill the idea at any time if the market shows it won’t work. Remember, they have equity and they’re not on big comfy corporate salaries, so it’s in their interest to do so.
We support our portfolio of ventures in multiple ways: from help with tech from our CTO Lee, support hiring from Matt, lean startup and business model coaching with our expert trainers Jordan and Hattie, to financial modeling support from our resident fundraiser Mats, to support connecting back to the corporate unfair advantages with our Principal, Eric, or even hands-on help with customer development and experimentation from our amazing Associate, Marianna.
If the idea is proving a success, it will be re-pitched to Rainmaking and the Corporate’s investment committees towards the end of the runway to raise its Series A. At this point, we invest c. £1 million and our corporate partners put in c. £2–4m, again dependent on each venture’s need.
Step #4 Path to exit
Now we all have equity, we’ve raised a Series A and we’re scaling the business model, so what are we aiming for?
Well because they’re looking at the venture as a strategic acquisition from day one, we know the corporate wants to wholly own the venture. It doesn’t want it to exist in the wild, so our successful ventures exit back to them.
This is protected from the beginning, so the corporate doesn’t have to worry about a bidding war when it comes to acquisition.
You may be wondering: how is the value at the exit set? Or, if you’re as cynical as me, you’ll be thinking “is this where you ham the price up”?
We set the valuation formula with our corporate partners for each venture to allow for different business models. We always co-agree this with our partner at the Series A investment, to make sure they don’t end up paying for things they don’t care about. This reassures them that there are no vanity metrics, and allows the venture team to optimize the business for what really matters. So everyone wins at the exit.
Typically, we exit back to the corporate in year 4 or 5. Once the venture is proven and able to survive reintegration. At that point, the majority of the value is still to be realized. So we’re capping our part of the upside, but it allows us to build more ventures with lower risk, so for us, it’s worth it.
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