Venture Studios – the asset class of this year

Over the past years, Venture studios have emerged as an asset class that is creating the next generations of industry-shaping startups. In the last 8 years, the venture studio market boomed with 625% growth. Previously overlooked investment opportunity for private investors and VCs due to the lack of historical data, now opens up a new view into its progressive state.

Since Idealab, the waves of studios hit the market from Rocket Internet and Betaworks to further Atomic and Efounders till our days with High Alpha, Human Ventures, and Nomu Ventures.

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Matchmaking is one of the core contributors to success of ventures coming from the studios. Instead of looking for a great idea or a great team, both have to be inevitably present. But more importantly the future founders coming to studios to embark on the journey rely on the operational hands on support offered, peer guidance, and connectivity to resources, be those in marketing, legal, further financing, or hiring.  This results in 84% of startups coming out from the studio go ahead to raise seed successfully, 60% make it to series A. Think about the success stories of Snowflake, hims, Aircall, Dollar Shave Club, and Zylo.

Success study: Dollar Shave Club x Science Inc.

“Dollar Shave Club was one of the first big startups wins for studios that caught the world’s attention. After its founding in 2011, it only took until 2016 for Dollar Shave Club to be acquired by Unilever for $1 billion. A major reason why Dollar Shave Club saw the success it did was due to the platform that Science Inc. provides its startups. Science Inc. is laser-focused on finding ways to solve big problems. This is where Science Inc. and Dollar Shave Club CEO Michael Dubin came together to solve both the cost of and buying process for razor blades. Next, Science Inc. surrounded Dollar Shave Club with a team of experts who could help them penetrate a market where 70% of the industry16 was owned by one player. Finally, Science Inc. provided the necessary resources and financing, which resulted in an astounding two-year growth period from 2012 to 2014 in which Dollar Shave Club saw its revenues grow from $4M to $65M”.

The study of GSSN gives us a further understanding of the differences in success rates between traditional VCs and studios. For example, take the case of Idealab that started the movement back in 1996 – with 100 companies they had 70% success rate and out of total 35% of companies IPOed or were acquired, 5% became unicorns.

Let’s compare that with the CB insights data of 1100 tech companies raising seed: the statistics are 33% success rate, 28% companies IPOed or acquired, and 1% became unicorns.

More traditional VCs are starting to invest directly into studios such as FoundryGroup, Hearst, Emergence, Greycroft, and others. And VCs have a lot to acquire from the studio resources when it comes to operational know-how and human capital, expanding the network and outreach of their own existing portfolio and building synergies.

“We’re investing in studios because of their work with corporate innovation: studios’ bench of talent are able to quickly generate new solutions for our corporate partners when there may not be a market-ready technology. Studios make strong innovation partners due to their proven iteration process and speed of development.” 

 Sarah Anderson, Cintrifuse 

The benefits to corporations

Those keen on rapid transformation and gaining the competitive advantage over others are shifting their strategies to working with external studios. The usual challenge of sourcing the right startup to collaborate with the corporate is transformed to the opportunity of staying ahead of the startup marketplace by working hand in hand with the partner studio or forming the studio internally (can be both). Studio model is also drastically different from the accelerator, incubator, and classic VC deals out there (summary below).

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Even in the presence of the internal corporate studio, success oriented teams aim to engage with the external partners, oftentimes enabling them to build quickly and cost-effectively, all while maintaining the connection to the corporate data and insights of the internal teams. This type of cooperation model allows studios to build a multitude of startups at the same time instead of 2-3. Examples of such cases include Goldman Sachs, P&G, SVB, Nike and Amazon.

“Studios are an outperforming asset class because they are able to buy ownership in a capital efficient way and are able to control the growth and scale through a dedicated bench of talent. Due to their high owner- ship and founding roles, we also believe that studios are less likely to be pushed down or washed out in the waterfall.”

– Sarah Anderson, Cintrifuse 

Studios tend to be more successful too, yielding better returns to their investors:

http://gan-7000682.hs-sites.com/disrupting-venture-landscape-white-paper

Aside from faster speed to market, speed to series A, and success rates, studios offer the valuable scalable advantages to the future founders and the corporates that partner with them, namely:

  1. Proven processes that drive success at scale. Having skin in the game gets the interests of the founders and the studio aligned. If the venture is not working, the goal is to get to the “no” decision faster and move on to the next most viable idea (iteration at speed).
  2. Defined focus area (industry/geography). In blue ocean spaces corporations can partner up with studios, presenting the access to the market and the local know how. Geographically focused studios are usually connected with the local communities, making them a go-to partner for the selected region.
  3. Network of professionals accumulated over the years of operations and by continuous trial and error. Being connected and introduced to the relevant individuals each step of the startup journey, perhaps, is often undervalued. Having a pre-selected network of professionals one can rely on allows the studios to put ventures on rails and gain early access to feedback and market intelligence.
  4. Financial support. Offering the funds in the bundle with operational support and in tranches ensures no wasteful activities are present, protecting the investors and the venture itself. Having access to later stage investors allows both parties to pre-qualify the venture idea as well as speed up the due diligence process.
  5. Favourable ownership scenario for future founders and investors. For studios and initial investors the downside risk is mitigated by the level of ownership, with an exponential upside as investors get the first pick at the lowest price of equity. As an example, take a look at Sutter Hill Ventures investment totalling $200m in Snowflake returning $12b and the respective return of the founders of around $4b and $1.2b.

Entering 2022, Studios continue to deliver tremendous value to both the entrepreneurs, investors, and corporates thanks to their ability to work hand in hand on the ventures and utilise the built in knowledge in their selected niche and geography. 

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