A Venture Studio is basically a company that builds other companies repeatedly following a specific step-by-step methodology to create and scale successful businesses.
The main idea of the business model is that comprehensive, diverse, and expert teams can achieve amazing results when building over and over again, rather than just dedicating themselves to one single company.
Venture Studios have become increasingly popular over the last 10 to 15 years, but we are only now starting to see their success in different parts of the world, where they have been able to create transformative businesses in different sectors and industries.
In the meantime, we want to dedicate this blog to better understanding why some Venture Studios go on to become funds that invest in companies outside of the Studio, but that align with the studio’s thesis and are able to leverage some of the studio’s capabilities.
As we stated before, Venture Studios are able to create and scale companies at a high success rate by employing a repeatable, relatively standardized methodology. However, there’s always a limit to how many companies you can build from scratch, even with a robust and talented team.
An increasingly common way for Studios to leverage their company-building expertise in a more scalable way is to look out for other like-minded entrepreneurs and fund them, while also giving them access to the expertise of the Studio’s team.
According to research by Enhance Ventures, at least 21% of Studios in the world are now also investing in external companies, while 45% of them are considering starting a fund parallel to their building activities.
As you can see in the graph, 80% of studios are now transitioning to a hybrid business model, which helps them expand their reach and create even more impact as they work together with other entrepreneurs.
With that in mind, here are 4 benefits of a combined Studio + Fund business model.
4 reasons why Venture Studios make great funds.
- Robust operating platforms:
Studios have large, multifunctional teams specialized in working with early-stage startups. Studios pay for these large teams with a variety of mechanisms, but in general, they are significantly larger than fund teams that are supported only with management fees (typically 2% of the fund size). When a studio launches a fund, it can make some of the studio team available to help the companies the fund invests in. This help isn’t free - it must be paid for through a combination of service fees and/or sweat equity - but it usually comes at a good value and can be a game-changer for early-stage startups.
Startups face plenty of challenges, but three stand out when it comes to sourcing talent:
- Knowing how to find and attract top talent usually isn’t something entrepreneurs have a ton of experience in, and it always takes a lot of time and effort. Additionally, it’s tough for a small company to afford top talent in an increasingly competitive job market. The studio team can provide a roster of top talent ready to step in, and studio + fund combos are usually a lot more flexible when it comes to taking equity or other performance-based compensation.
- Working for a startup is…kind of crazy. Priorities change quickly and often, resources are limited, the product is constantly in a state of flux, new ideas can get implemented over lunch meetings, and operating procedures need to be created from scratch. Some people love this sort of fast-paced, high-impact environment and it’s exactly what they need to thrive. For other people…not so much. Incredibly talented, top performers that leave large corporations to work for startups can struggle to adjust. Studio teams have extensive experience with the craziness of early-stage startups and have learned best practices from having been there and done that (several times).
- Small companies often don’t need and/or can’t afford full-time help. When companies are growing so quickly, their talent needs change just as fast, and the labor market isn’t built to offer such agility. Tech development needs could change from front-end to full-stack, to data expertise in a matter of months. Closing a single large deal could mean customer success needs to double in 4 weeks. The CEO could become too busy to lead sales efforts and finding a VP of business development becomes crucial. Studio teams are used to working on multiple priorities simultaneously and can be deployed for quick, high-impact projects.
The challenges around talent can be especially acute in emerging markets, so the advantages provided by studios should be even more impactful.
2. Entrepreneurial experience
A lot of investors come from financial backgrounds like private equity or investment banking and have no entrepreneurial experience. This is especially common in emerging markets (where the successful entrepreneur → VC route isn’t nearly as established as it is in places like Silicon Valley). While this background is great for later-stage investments in companies with multiple years of operating history and clear trends visible in their financial statements, it can be challenging with early-stage investments. Pre-seed and seed-stage companies have limited financial history, are typically changing rapidly, and often haven’t fully reached product-market-fit. Evaluating these types of companies can be extremely difficult for people that haven’t led or worked for an early-stage startup. Appreciating the challenges of rapid iterations, building the right team, balancing the need for standardization with the need for flexibility, etc., and then making accurate judgments of an entrepreneur’s ability to execute is hard. The studio’s intimate knowledge of the successes and failures of multiple early-stage companies can be a huge advantage.
3. Funding Availability
Despite venture studios’ rapid growth and demonstrated results, they are still a relatively unknown business model, especially in emerging markets. Raising funds for a Studio model can be hard, very hard.
When you raise through a more traditional fund structure, you are offering investors a vehicle that they already know and can handle more easily. This allows the Studio + Fund combination to raise and deploy more capital. Not only does this help the Studio + Fund scale, but it also helps portfolio companies by having better access to capital for potential follow-on investments.
4. Access to more talent & bigger networks
When studio + fund combinations simultaneously create companies from scratch and invest in external companies, it creates a larger and more diverse pool of entrepreneurs, co-investors, customers, and talent in general.
This creates exponentially more opportunities to transfer knowledge from one company to another. Also, the larger portfolio should create more (and more predictable) demand for the studio’s services, which will allow the Studio + Fund to afford more team members and continue concentrating talent within the firm to support portfolio companies.
An individual’s skills, growth, network, etc. tend to increase as she works with more team members with diverse perspectives and skill sets (so the output from 5 smart people working together should be greater than the sum of the outputs of 5 smart people working individually). This, along with economies of scale and a better ability to predict demand and staffing needs, should make the Studio + Fund team more efficient, creative, and productive overall.