The New Engine of Intentionality in the World Of Startups and Innovation
Venture studios provide an innovative approach to funding startups and are creating a big impact. This model of funding entrepreneurs and big ideas continues to grow and evolve. We’re looking at what exactly a venture studio is and how they work to answer all the questions about this new engine of intentionality.
What is a Venture Studio?
Sometimes called “startup studios,” venture studio companies are organizations designed to create new startup companies. They do this either by generating new ideas for startups or by recruiting founders with ideas, and then they apply significant amounts of time and capital to the process of growing the startup successfully.
How Do Venture Studios Work?
At the heart of every venture studio lies a process, which generally has four steps (though each studio may give them slightly different names):
- Ideation – the process of coming up with a new idea and “pressure testing” it with potential buyers through conversation and the sharing of prototypes
- Productization – the process of developing the “minimum viable product,” or MVP, which is not the final version but is enough to share it with customers for feedback, first revenue and continued development
- Launch – the process of creating and initiating a go-to-market strategy, including sales, marketing and customer support
- Scale – the process of building an organization around initial market success that will help it grow
Venture studios are often outgrowths of venture capital funds, as each stage of the process requires capital funding to pay for each activity. Depending on the depth of the involvement, the equity stake taken in the company can be quite high, as startups are risky and most fail. The involvement of a studio in the startup tends to reduce the risk for investors, as the process and the experience of the team can help to avoid common mistakes that would cause others to not succeed.
What is the Venture Studio Business Model?
There are several different models for venture studios, but most of the differences center around how much of the company is owned by the studio as compared to the founders. How much equity do venture studios take? It depends on the type of model chosen.
- 1st Co-founder studios are designed for founders with an idea but little to no expertise in how to start a company. Generally, the studio will take 50%-80% of the equity in your company, leaving you with the remainder, and then they will do practically everything else,from validating the idea through development of the product through the launch of the product into the marketplace. Usually, the founder will move into the role of CEO at the launch stage, and the company then operates like other new startups.
- 2nd Co-founder studios are designed for startups that are further along in the process. Often, they have a minimum viable product and some degree of customer interest but are struggling with a go-to-market strategy and the funding required to launch the product and scale a team. This is frequently seen with engineering-oriented founders who are experienced with a technology and have created the basic product but lack the business skill and experience to create a company around it. More of the equity is held by the founder in this model – typically 65% with 35% to the studio, and the role of the studio is to supplement the founder’s team with additional resources working in concert to move the company forward.
- 3rd Co-founder studios are designed for startups that have a solid team but have certain “holes” they need filled. A very typical need is for someone to manage the product or technology, or perhaps to set up and manage a sales team or a marketing team. In this model, the studio operates like mercenaries brought in for specific purposes to complete the leadership picture. Here, the smallest amount of equity goes to the studio – somewhere between 10% and 25% depending on how many needs must be met.
Of course, all of these are guidelines, as there is an infinite range of models for studios across the spectrum.
What Does a Venture Studio Do?
The core value proposition of a venture studio is to access skills, expertise, and a network beyond the founding team thereby reducing the time to get the idea into the marketplace. These resources reduce risk and enhance outcomes by equipping a startup with resources they usually cannot afford early on:
- Skilled teams employed by the venture studio or through their partner network amplify the ability of the startup to execute and reduce the time and expense of rework based on mistakes and inexperience.
- Methods and tools created and offered by the studio to portfolio companies help obtain results more quickly as they are the result of distilling experience and failures into process.
- The willingness of venture studios to “roll up their sleeves” and provide hands-on guidance both reduces risk and provides accelerated mentorship and training to founders.
Additionally, venture studios support you as a founder figuring out how to attract or get investors to fund your business or how to convince someone to invest in your product. You get to focus fully on leveraging the skills, expertise, and network of the studio to build your startup.
How Do Venture Studios Make Money?
The venture studio financial model is that the venture studio invests time, effort, and money into startups and in return, receives equity, as mentioned above. Depending on the model, the amount of equity varies:
- 1st Co-founder: 50%-80% equity
- 2nd Co-founder: 35-65% equity
- 3rd Co-founder: 10-25% equity
However, the venture studio doesn’t receive any money from that equity until an exit event occurs for the startup. This is where the company is either sold or taken public. If the company goes through either of these events, then the venture studio will receive their percentage of the return.
How Many Venture Studios Are There?
According to Enhance Ventures, there are around 560 studios operating across the globe contributing to 625% growth since 2013. Based on the success and growth of this model, it is anticipated that even more venture studios will appear on the scene over the next ten years.
Venture Studio vs. Incubator: What’s the Difference?
It’s all in the name: an incubator is a place where ideas start to grow and are hatched, then sent out into the world as fledgling businesses to make their own way. Venture studios, on the other hand, are a place where ideas are hatched, nurtured, cared for, and developed all the way through their entire lifespan.
The other way that venture studios and incubators are different is on the financial side. Incubators typically don’t invest money or receive any equity in the company. Venture studios receive equity in exchange for the wide range of services they provide, like business development, financial assistance, marketing, HR, sales, and more.
Why Do Startups Fail?
It is estimated that over 21% of startups fail in the first year. This often begs the question: why? There can be many contributing factors to why and how a startup fails, but certain critical factors can contribute to the loss. Entrepreneurs can often learn from one another about why successes and failures happen.
In his TED talk, Bill Gross, founder of Idealab, stated, “In the last 20 years, we started more than 100 companies, many successes, and many big failures. We learned a lot from those failures.”
Learning from failures and pivoting is not always easy, but by understanding why startups fail, entrepreneurs can make the right choices to avoid preventable errors in a startup’s early stages.
Here are a few of the most common mistakes startups make that can lead to failure.
Failure to Launch
Many startups fail before they even launch and hit the ground running. Many of the details in the startup world can bog down entrepreneurs. Figuring out structure, finances, partnerships, strategies, software, technology, and many other factors can be overwhelming. Due to refining these elements, many startups fail because they were overly optimistic about their timeframe, but they don’t launch on time due to incomplete details. Failing to get a product out before competitors is a significant reason why startups don’t even get off the ground.
Operational challenges are the kinds of problems that put unnecessary strain on a startup’s energy and resources, leading to failure if not handled properly early on. These kinds of issues make a startup less efficient, less profitable, and defunct. Anything from managing overhead, monitoring performance, and mitigating cyber risks can all count as operational challenges.
Not having the right team is the third leading cause of startup failure, according to CB Insights. Since choosing an inadequate team is a big reason why startups fail, entrepreneurs must do everything they can to choose the right partners. An entrepreneur has the immense responsibilities of raising capital, selecting the suitable business model, and leveraging marketing channels. If they fail to gather the right team with diverse skill sets necessary to handle this immense workload, they will inevitably fail.
Trouble Receiving Funding
Over three-quarters of startups fail due to lack of funding and running out of money. What frequently goes wrong is that the startup does not achieve sufficient traction and hit the next milestone before cash is used up. Entrepreneurs need to learn how to regulate the accelerator and avoid the risk of becoming broke before they hit their intended milestones. This is most important in the early stages of a startup. When products and services are developing, the business model and plan need to consistently be refined and corrected to conserve as much money as possible.
Although these are the main reasons why startups fail, they can be avoided by partnering with a venture studio that can lend their expertise to prevent these slippery slopes from happening.
What are the Best Venture Studios?
The top venture studio is the one that works for you. Next Studios is one of the most successful venture studios in Indiana. We are a studio designed and operated by entrepreneurs, for entrepreneurs, with entrepreneurs. We are the first Benefits (B) Corporation venture studio in Indiana, and our model provides an alternative that supports the entrepreneurial ecosystem of our community. We believe in partnering with visionaries to help shape their ideas, craft them through a repeatable process, and move them forward with capital and talent.