Creating a successful startup from the ground up is no easy feat. As a first-time business owner, you face unique challenges in team building and capital raising. Unfortunately, 90% of startups fail, so we must figure out where we fall short and make adjustments.
While funds and accelerators are essential components of the venture ecosystem, they aren’t always the best option. Instead, we need to think outside the box when tackling the structural difficulties inherent in the company life cycle and use the lessons we’ve learned as entrepreneurs (both first-timers and seasoned pros).
Since Idealab’s founding in 1996, startup studios, often called venture builders, have existed. In my experience as a founder, I’ve seen this model steadily gain ground and eventually dominate the market. Here are some frequently asked questions about studios in case you’re interested in the growth in popularity of venture studios and what all the fuss is about.
First of all, what exactly is a “Venture Studio?”
Venture studios function somewhat like startup factories since they create new businesses. Studio teams, whether independently or as part of a larger corporate innovation division, use both internal and external resources and relationships to generate ideas for new businesses, find suitable founders, and help those businesses get off the ground.
However, the real magic of studios lies in all the behind-the-scenes action. When I say “internal resources,” I’m referring to anything from software developers and salespeople to marketers and human resources professionals to lawyers and other legal advisors.
In addition, they provide entrepreneurs with money and office space for up to two years, as well as mentoring and support services valued at up to $1 million. Studios often take the most hands-on approach and provide the most assistance. They also tend to grab the most shares from the firms in their portfolio. High Alpha, eFounders, Pioneer Square Labs (PSL), and Polymath are some of the world’s leading startup studios (and all members of GSSN).
How do venture studios vary from traditional funding mechanisms like venture capital funds and startup accelerators?
Studios are a more direct kind of startup help than other models in the broader investment ecosystem. Studios make their own choices about which firms to create, whereas funders and accelerators help already-established entrepreneurs. They invest heavily in a company only after they have shown its viability.
It should also be emphasized that studios function as separate entities. For example, accelerators help firms that have already started by providing them with space and resources as they go through the early stages of the startup life cycle. In contrast, funds specialize in researching existing companies and making strategic investments. On the other hand, studios generate ideas in-house and then test and invest in those ideas themselves.
Is it true that venture studios make more money?
Although not a brand-new concept, venture studios have recently seen a resurgence in popularity. Consistent achievement over many decades has led to this. Of the 415 firms launched by these top venture studios, just 9% have failed, 3% have successfully departed, and the remaining 89% generate over $1 million in annual revenue.
Proponents of venture studios and seasoned entrepreneurs agree that the strong, hands-on management style is a big reason for the success of these organizations. Venture Studios only back new ventures once they’ve defined the product, performed market research, confirmed customer demand, and polished their plans instead of investing in established businesses.
There is a direct correlation between the recent uptick in studio interest and shifts in the broader venture environment. Startups and large businesses need to develop more efficient strategies to compete with platform giants, who use their almost infinite resources to shake up entire sectors. That’s what the studio model provides: knowledgeable guidance, efficient use of resources, and proof of concept in the marketplace.
What are the difficulties often encountered by venture studios?
Despite its benefits, the studio model does not come without its share of difficulties. Studio “manufacturing” of new businesses requires several in-house services, some of which may use streamlining. Studio-based firms can only flourish if their use of these resources, from software development to business support, is optimized and can be readily standardized. In such a case, the model will be useless.
It is also crucial that the studio’s management possesses relevant expertise in the entrepreneurial field. The value that makes venture studios a welcome addition to the startup environment can’t be realized without the expertise to determine which concepts are worth pursuing and which lack sufficient market interest to invest in.
What kind of startups are created by studios?
When it comes to the kind of companies venture studios are creating, there is a 50/50 split between B2B and B2C firms. About half of startup studios (47%) reported being open to all ideas for new businesses. Financial services (43%), e-commerce (30%), transportation/logistics (22%), entertainment/media/sports (18%), and artificial intelligence (13%) were mentioned as areas where they would be interested in forming a business (26 percent of the time for each of those three). Healthcare, real estate, food and beverage, retail, and fashion/design are the top 10.
What Goes on Inside a Coworking Space for Startups
Compared to other organizations, such as accelerators, startups that get their starts in a studio are more likely to remain there for a considerable time. There is a wide range of time spent “incubating” a business in a studio. However, typically it is between 8 and 19 months. Two main factors keep new companies from moving out of the studios.
To begin with, the typical studio employs about 12 employees full-time and another four individuals part-time to assist with the launch of their companies. Team members allocate their time and energy to the following (in order of priority):
After a Startup Leaves a Studio, What Happens to It?
Sixty percent of studio-backed startups earn more studio funding, while the remaining 40 percent venture out and seek funding elsewhere. Twelve months after launching, the typical company raises $2,473,906.
These startups are also proving to be resilient. Only 9% of the 415 businesses launched by startup studios have failed, while 3% have departed, and the remainder is still in operation. Those businesses that have survived are also profitable, with average annual revenue of $1,117,997. The success of these firms has also resulted in the creation of 2,078 jobs, which did not exist before.
What Does the Future Hold for Venture Studios?
Given the current focus, success, and expansion of startup studios, we don’t see many signs of a shift in the paradigm very soon. Perhaps the most promising trend among studios is their opening of satellite offices in areas that aren’t traditionally thought of as tech hubs. Currently, 26% of studios operate out of a second site, which is rising. These days, startup studios are often regarded as the best option for catalyzing emerging startup ecosystems by injecting high-quality human and financial resources to make an immediate regional effect.