Over the past few years, since I published the Startup Studio Playbook, entrepreneurs and investors approached me with a lot of exciting questions about the studio approach. Here is a collection of the most frequent ones. If you have a question, send it to me via the contact form and I will add it to this FAQ with an answer.
What are startup studios, also known as venture builders, company builders, foundries…?
Hollywood movie studios produce movies. Startup studios do the same with new ventures. Ever imagined how it would feel to be the George Lucas or Steven Spielberg of your innovative ideas? That’s how it feels to run a studio.
Startup studios are organizations that produce startup companies one after another, mainly from in-house resources. The most common characteristics:
- Take a core team & entrepreneurs in residence;
- Add a shared infrastructure & in-house funding;
- Generate ideas internally (or in some cases, act as a cofounder);
- Build multiple startups in parallel;
- Trash what doesn’t work, reassign team;
- Spin off what works and get follow-on funding;
- Grow. Exit. Repeat.
What are the key differences between incubators/accelerators, startup studios and VC’s?
Incubators/accelerators: They attract and support startups, invest little effort and resources for little or no equity, have low influence over the startups, can’t do much after startups fail, and are tough to make financially viable (except the top accelerators).
Startup studios, venture builders are the founders and builders of startups, invest high amount of effort and resources, have higher equity stake. When a startup within a studio fails, the studio usually keeps together the team and assigns to a new initiative — so the expertise remains in-house and growing.
VC’s are usually investors in later-stage startups, with mainly financial motivation.
Why should I care about startup studios?
Because startup studios are on the rise. More and more software agencies, accelerators are experimenting with this approach and falling in love with the increased efficiency of earliest-stage venture building.
How to start a studio? And how to get money for building a new venture building company?
The basic recipe for a well-working startup studio is:
- Build a strong founding team.
- Get funding — either own capital, cash-flow from agency work, corporate sponsor or direct VC investment. Build long-term investor relations.
- Set up your startup production tools and processes and get the ball rolling, start building.
- Let go of failed attempts.
- When a startup initiative works out, spin it off, raise follow-on funding, let it grow, exit, profit, repeat…
How to turn a software agency into a creator of startups? How to bootstrap a startup studio?
Having a solid agency business is the easiest (but not easy!) way of creating a startup studio. You do agency work to create free cash-flow that you reassign to build your first internal startups — product and business side also.
The main difficulty: Sacrifice time and thus lucrative agency work for long-term startup investment.
What you need: Strong decision from owner of agency, buy-in from team.
Fortunately talented people love working on their own in-house initiatives, so buy-in from the Team is usually easy. As long as the agency-arm provides the stability.
Needed capabilities to build startups: Ideation, Design, Development, Marketing, Investor relations, Portfolio management, Back-office…
Corporate Venture Builders: How to work with corporates to co-build ventures?
Corporates love to say they are innovative. But usually a large organization is optimized for stability, and not for fast and break-through innovation. More and more corporations are separating the innovation teams from the main organizations, to shield them from bureaucracy, while protecting the main brand from startup risks. I call this Startup-as-a-Service.
“I was told by a VC that he would never fund a startup studio because we would be effectively replacing him, by choosing which startups to pursue in the studio like he would for his fund. I found the argument valid. What’s the counterargument? ”
VC-s focus usually on later-stage investment, while studios take care of earliest-stage building and validation. And they do it with high efficiency. Data suggest that growth-efficiency of startup studios is higher than of accelerators — definitely more research needed.
VC-s investing in a startup studio has the benefit of investing into a whole portfolio of startups. And having deep and intimate insight on all the portfolio companies from day 0. If the studio gives right to first invest in later stages, then this might be a source of exclusive deal-flow for the VC.
“Are there startup studios structured as VC funds, ie GP / LP relationships, and remuneration through Management fees & carried interest? ”
Yes, and there are also alternative legal and financial structures. For example, we created a holding company in the form of a corporation, where our "LP-s" were shareholders in the holding company, that had all the equity in the portfolio companies.
“What is a typical share/equity structure of start ups in a studio?”
Key question: Is the startup from in-house idea or external? If a studio joins an external startup, they will act as a kind of institutionalized co-founder — but in the sweat and tears for equity. Usually minority equity.
If the studio builds a startup from an internal idea, then their initial equity will be usually 50%, the rest divided by CEO and dedicated team of that startup. This equity stake will “normalize” at later stages of investment.
By the time a startup reaches Series A, B or exit, the equity stake of the studio might dilute to that of an angel investor. Depends on a lot of factors, the continuous contribution of the studio in the startup, the investors, the market…
"How do you see the future of studios? Aren’t you concerned that VC-s and entrepreneurs will abandon the model?"
Ryan J Negry, Founder of Negri Electronics, Founder and CEO of Laicos Startup Studio and MD at Iron Yard Ventures said:
„Normally in tech, when you read about something in a book, it’s already old news. This time, you’re reading about a trend that will be wildly popular in 3–5 years . From an investor standpoint, putting money into a studio should be easy. By investing in one company, you invest in a whole portfolio — all heavily vetted startups, qualified and guided, by the company and core team you trusted with your money in the first place.”
I predicted 4 trends for 2017–2020:
- More accelerators and corporations will experiment with studio approach -> Driven by the desire to reduce risk and cost, increase control
- More „Entrepreneurs-in-Residence” will be needed — people who understand the studio model and have entrepreneurial attitude
- Studio approach as a new tool in Intrapreneurs’ hands
- More studio mentors and advisors needed
What, if any, is the bibliography behind the approach?
- Startup Studio Playbook by Attila Szigeti
- „Startup Studio 2.0” by Daniel Feeman & Team
- „Chasing the chasm” by Sergio Marrero
- „Organisatorische Best Practices von Company Buildern — eine qualitative Untersuchung” by Tobias Gutmann
Blog posts, articles:
- buildtogether.co is a great collection
What are some of the famous startup studios?
Can you tell some examples from emerging markets?
Why are you doing this?
I believe that the transforming effect of technology is a great thing. -> Building startups is one of the best ways to achieve progress. -> Startup Studios are a better way of creating new innovative companies. -> By empowering entrepreneurs and investors to build more studios it feels like I contribute to this process.
How can I contribute to this movement?
If you have a studio related question, idea, thought that you would like to share, get in touch.