The Rise of the Venture Studio

While venture studios are not necessarily new, Bill Gross launched the famous Idealab in the mid 90s, they are becoming more relevant given the lowered costs of company creation, global talent pools and the increase in capital availability. In fact recent research shows at least 850 of these studios spread around the globe, some in quite surprising countries. While starting in the Valley still gives you an unfair advantage, it is entirely possible to create category defining companies with local capital injections from anywhere.

When talking about Venture Studios there’s generally still some confusion. People mix them up with accelerators or incubators, sometimes they call them startup studios or other names. Other times people blend in digital agencies or consultancies as Venture Studios. It’s a real wild west.

 

Then there is the business model too.

Commonly we’ve seen three models out in the wild:

The first is the agency slash venture studio. This is a standard digital agency leaning towards startups and founders as customers. They offer a range of services including design, development, marketing and assistance, in exchange they’ll usually discount their rate card for sweat equity. This is one way for the studio to survive but is still a revenue first, equity last approach. Occasionally the studio will also invest a small amount of capital from its balance sheet. It can work well if there is limited financial backing at the studio level but it does tend to create a conflict of interest as the studio relies on income from the startup, and the rate card discounts are usually not significant enough.

The second model is an approach where the venture studio has a fund and it looks for external founders, ideas and startups at a very early stage to invest in. It brings the studio’s knowledge, connections and capabilities to the startup. This is typically a hybrid between a micro VC (1-3 partners) and an agency. They invest a small amount, and provide lots of advice and assistance to help them progress through the initial zero to one phase. They don’t tend to build out their own ideas but rely on externally generated ideas and founders from the start.

Lastly, there is the pure-play venture studio, this is what Ryft is, where there is a dedicated fund, and a dedicated team of builders and creators who explore, validate, launch, get traction, scale and exit the businesses we create. It’s the full cycle. Look ma, no hands!

We believe the pure-play suits us well. We have experience building over 150 products with 15+ concurrently at our last company, we know how to leverage repeatable systems, intellectual property, processes and people to accelerate product time to market and time to revenue. We skip the distraction of trading off agency work (revenue) vs long term wealth (equity) creation. We don’t need to drain the PortCo of its capital by charging excessive rates and we also maximise our equity holding.

Since we are the initial founders of the new portfolio companies (PortCo’s) this means that the studio has significant equity, and we continue to fund and contribute to the business, including placing ‘late co-founders’ right through to it becoming self sustaining.

As an alternative to the typical venture funded capital path where once the fuse is lit its either fly like a rocket or explode, very much do or do not, there is no try. At the lower end there is bootstrapping, scrapping together a small amount of capital, holding down a job and working on the side project and taking years to get to market or abandoning the project. This is a hard path to walk as well, but we believe there is a middle ground.

We call this Venture Strapping. 

Venture Strapping means taking medium amounts of capital from a fund to build a profitable and self sustaining business earlier. Leaning into the lowered cost of company creation made even cheaper with AI tooling. This is trading growth vs capital but leaving you with higher equity ownership. But then we also believe there is an underserved M&A market in the sub 200M space where VC backed companies have been over-funded and have now washed out investors. Russ Hanneman might disagree of course.

Or if needed, and the growth signals are off the charts, we push it on the standard venture capital path and a large Series A to grab the market as fast as possible ahead of generating profit. But the venture capital path is not the default for us like it is for many startups. We can play both games. Russ would approve.

We lean into the shared services of the studio which allows us to leverage, at below cost, an array of exceptional talent, intellectual property, playbooks, legal structures and operational excellence. This ability to take a holistic view of spend and team deployment across the portfolio companies means we can tune the burn up and down with ease. This is great when we need to increase marketing, or do additional design research versus throwing more features to a dev team to keep them busy.

While most entrepreneurs think single serial business creation, we believe in parallel development of new companies and execution. Given the acceleration of AI and the impact it’s having on the creation of companies and what they offer we all need to be far faster. Finding PMF is easier with parallel routes. Bit like how GPU’s work.

Of course out in the world you’ll find a pick’n’mix of the above strategies for studios as many have their own special blend, or develop through one model into another as they grow. There is no right or wrong here. Only what’s right for each studio.

A few great examples are www.hexa.com , www.psl.com, www.science-inc.com and the grandfather of them all www.idealab.com

 

The Structure

Structuring a venture studio was a little bit of a mystery when we started. There was a lot of research, books https://www.venturestudiosdemystified.com, knowledge https://inniches.com out there but it was predominantly US centric even though there are numerous (850+) studios across the globe. Great if you’re setting up Delaware C-Corps but not so useful down here in NZ. So after a lot of investigation, working with www.point16.co.nz and www.avid.legal along with Deloitte and our accountants we figured out what works for us. YMMV.

 

 

The gist of our Venture Studio approach is made up of three main parts. And lots of hats. Oh. So. Many. Hats.

Let’s start with the money. The fund is structured like a traditional Venture Capital fund. Nothing too new here. We setup a Limited Partnership between our investors (LPs) and the General Partner (GP, that is in NZ a Limited Liability company) responsible for decisions and managing the fund. Note that it then contracts out the management of the fund to the Venture Studio. Note there are regulations to follow (FMCA), KYC/AML compliance and all sorts of goodies here.

Next there is the Venture Studio itself, this is where the magic happens and also the management of the fund. Not often you have magic and management co-existing. Exploration and validation phases are run here, churning through a backlog of ideas, market research and signals whittling them down through a step by step guide until we have enough proof signals that a business is worth funding. We then spin up a PortCo ready for investment and the next phase. Note the studio is self funded by the founders initially, then it receives management fees and chargebacks (well below cost) for services to PortCos.

The last entity (or entities over time) is the PortCo. Each portfolio company is a nascent little startup that we invest from the fund into a pre-seed round at a set price. We then use that capital to push further ahead with market validation by investing in customer acquisition, product development, channel development and identifying the right co-founders and team to come on board for the next phase.

Or we kill it.

One of the benefits of the studio is we’re not wedded to each idea. Yes, we experiment and validate them before investing, but we’re also aware that if the signals don’t develop further, or if a market shifts quickly and eliminates the opportunity (ie: "Sherlocking”) then we have more in the pipeline that would optimise the resources of the studio for a better outcome.

Parallel, not series. This is especially critical when there is an inflection point in markets like AI is now creating. We would rather be placing multiple concurrent bets over the coming ten years versus two shots (typically running a startup for five years before yay/nay). We aim for thirty over the next ten years.

In the next post we’ll deep dive further on the benefits of the Venture Studio model, and how when its tailored the right way and structured with all the right ingredients of capital, channel, customers and co-founders it is a powerful way to seize opportunity in a disruptable market.