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Venture founders often look to incubators and accelerators to help them find product/market fit and increase startup capital. But for entrepreneurial founders who want to start on their own but don’t have the right idea or team, there is another option. Startup studios don’t fund an existing idea – they develop their own ideas, create a minimally viable product, find viable and early customers for the product/market, and then hire entrepreneurial founders to run and scale the business. Examples of companies emerging from venture studios include Overture, Twilio, Taboola, Bitly, Aircall and most famous alum, Moderna. However, venture studios receive 30 to 80% of a venture’s equity in exchange for risk-freeing a large portion of the startup’s startup process. The author explains how venture studios work, why they can be an attractive option for some entrepreneurs, and what questions to ask if you’re considering joining.
Outside of a small university in the Midwest, I was having coffee with Carlos, the rising star of a midsize manufacturing company. He had a history of taking small teams and turning them into successful product lines. However, after ten years working for others, Carlos became interested in starting and growing his own company. I asked him how much he knew about how to get started. From what he’s read, he said the way to start and finance a company looks like this: 1) come up with an idea, 2) build a team, 3) start testing minimum viable products, 4) raise startup funding, 5) then get venture capital .
While describing his work in additive manufacturing and 3D printing, Carlos said he knows there are seed investors in his town, but venture capital is still largely on the coast and it’s hard to get their attention. He also wasn’t sure that his idea was great. But he still had a desire to turn something small into a solid company.
“Are there any other ways to start a company besides raising money?” Carlos asked as he ate dessert. she asked.
I pointed out.
Reducing Startup Risk
In the last two decades, three types of organizations have emerged: incubators, accelerators, and venture studios to help teams find product/market fit and increase startup capital, thereby reducing the risk of early-stage startup failure. Most are founded and run by experienced entrepreneurs who have previously founded companies and understand the difference between theory and practice.
I pointed out to Carlos that accelerators like Y-Combinator, Techstars, and 500 Startups are offering a startup group for a six to 12-week bootcamp. But they seek founders with technical or business model insight and a team. Accelerators provide technical and commercial expertise to these teams and connect them to a network of other founders and advisors. The culmination of this bootcamp is a “demo day” where all startups in the cohort have a few minutes to present their company to venture capitalists and angel investors. (In some cases, the accelerator provides the initial funding themselves.) In exchange for joining an accelerator, startups give 5% to 10% of company equity.
There are thousands of accelerators in the world. For many, the business model is to choose startups that can generate venture-grade returns—that is, grow into companies that could potentially be worth billions of dollars. For most accelerators, admission is by application and interview. Some, such as Y-Combinator, Techstars, and 500 Startups, are open to any type of startup in any market, while others such as SOSV, IndieBio, HAX, Orbit, and dLab are more specialized.
Incubators are similar to accelerators in providing space and shared resources to start-ups, but they often provide no or very small amounts of capital. Their financial model is based on membership fees that provide access to a shared co-working space, resources, and other founders and operational expertise.
Carlos stirred his coffee. “Accelerators don’t seem to fit where I am in my career,” he offered. “I don’t have a killer idea or technical team, but I know how to build, grow and manage teams.”
Alternative: Venture Studios
I pointed out that there are organizations that might be better suited to his skills and passion for going out on his own – venture studios. Unlike an accelerator, a startup studio does not fund existing startups.
Venture studios create startups by incubating their own ideas or ideas from their partners. The studio’s internal team creates the minimum viable product, then validates the idea by finding product/market fit and early customers. If the idea passes through a series of “Do/No Go” decisions based on milestones for customer discovery and validation, the studio hires enterprising founders to manage and scale those initiatives. Examples of companies emerging from venture studios include Overture, Twilio, Taboola, Bitly, Aircall and most famous alum, Moderna.
I suggested to Carlos that he think of a startup studio as an “idea factory” with full-time employees looking for product/market fit and a repeatable and scalable business model.
Most venture studios create and launch several ventures each year. These have a higher success rate than those coming out of accelerators or traditional venture capital firms. This is because, unlike accelerators, which run on a six to 12-week pattern, studios do not have a set time frame. Instead, it searches and summarizes until the product/market fit is found. Unlike an accelerator or VC firm, a startup studio kills many of its uninteresting ideas and won’t launch a startup unless they can find evidence that it can be a scalable and profitable company.
There are four main types of venture studios:
- technology transfer studiosWork with companies and/or government labs like America’s Frontier Fund as sources of ideas and intellectual property. They then transfer the IP and set up the venture in the venture studio.
- corporate studiosSource ideas and intellectual property within their own companies, such as Applied Materials. They then set up the venture in a separate corporate venture studio within the company.
- A niche studio is an independent venture studio that produces its own ideas and IP in a particular industry and field – for example, Flagship Pioneering, which incubated LS18, the company focused on healthcare and evolved into Moderna.
- A industry independent studioLike Rocket Internet, it is an independent venture studio that produces its own ideas and IP and is independent of industry and market.
Today there are about 720 venture studios worldwide – half of them in Europe. Many venture studios in non-major cities, both in North America and Europe, are funded by government agencies, sometimes with eligible donations from corporations, to encourage local growth. These studios have different metrics than start-up studios whose limited partners are private family offices or venture capitalists.
Why Would an Entrepreneur Join a Startup Studio?
While we were having our second cup of coffee, I talked to Carlos about the downsides of joining a company founded by a venture studio, how much stock/ownership they had acquired.
Venture studios take anywhere from 30% to 80%, as opposed to an accelerator that takes 5% to 10% of a startup’s equity. This is because companies coming out of a venture studio have been given a venture that has reduced the risk of most of the startup process. (There is a direct correlation between the amount of equity a venture studio receives and how much their founding CEOs believe they want to be practitioners rather than entrepreneurs.)
Why would an entrepreneur join a startup studio and give up the majority of his company instead of going to an accelerator? Most accelerators tend to look for a “founder type” – a stereotypical tech fresh out of college who already has an idea and co-founders.
Most people don’t fit this mold. Still, many are more than capable of taking a stress-tested and validated idea and building it.
What to Look for in a Venture Studio
As we stood up to leave, Carlos said, “How do I know if the venture studio is okay?” she asked.
It was a great question. While there are no clear-cut rules, I advise entrepreneurs to ask these four questions:
- Is the studio run by a former founder and do former founders have full-time employees? The most successful venture studios are founded by entrepreneurs who have previously founded companies with 100+ million revenues and have over 100 employees.
- What percentage of equity do they want? The answer will be directly proportional to what they think your worth is. Firms that ask for more than 60% are actually hiring an employee rather than a founder.
- Want a studio with specific expertise? Studios that focus on specific niches and industries may create a deep set of domain experts (for example, a founder, consultants, and mentors) who are experts in this single field.
- Do they have enough funds? Watch out for zombie studios. If you’ve given most of your company to a studio, it’s helpful to have them with you for support once you get started. If they don’t have enough funds to keep the lights on for a few years, you’re on your own. Make sure your studio has more than $10 million in funding.
A few weeks later, I received a note from Carlos informing him that he had found a venture studio in his city, another government-run, and a third focused on production in his own region. He applied to all of them.
