Determining what is of interest to own
We can facilitate a 2h session to:
■ help co-define the opportunities you are interested in
Venture builders are getting a lot of attention these days. Some even refer to venture building as “the new model for entrepreneurship”. If ten years ago, there were fewer than a handful, today, there are more than 500.
As this model started to grow in prominence on the open innovation scene, we are now seeing different business models and legal structures entering the market and various terminologies used interchangeably when referring to “venture building”.
The more we explore this topic with corporations, investors and startups, we have come to realise that there is a lack of clarity of what a venture builder really is and what makes it different from other models that, while sharing some characteristics, are not venture builders.
Venture building studios are neither accelerators nor software building companies.
This table summarises the main differences:
The venture studio model is different from a traditional startup accelerator. Y Combinator is an example of a leading accelerator, as are Startupbootcamp, Techstars or 500 Startups. Accelerators provide what is typically a 12-week program and initial seed funding ranging from €15,000-€125,000 in capital in exchange for a set amount of equity. The program provides training and guidance to validate the business. At the end of the program, the accelerator has a Demo Day where investors can learn about the latest startup batch and hopefully invest in the accelerator’s portfolio.
Accelerators tend to focus on spreading small amounts of capital across a wide array of startups with the expectation that most will fail. Venture studios take a slightly different approach, focusing more resources around a set of opportunities. Unlike accelerators, venture studios also don’t typically accept applications for new portfolio companies, as the venture studio’s strategic insight and ability to select opportunities is a part of the value it brings to its investors.
These unique companies go beyond financial capital and the usual 3-month of acceleration, to provide founders with full support throughout the lifetime of the venture. So the founders can focus on scaling the business: design, engineering, finance, marketing, HR, IT, and recruiting.
In exchange for human and financial capital, studios retain a portion of the equity in the companies they create.
Product development agencies would help the client define, design or develop a new product or service. They normally follow a consultancy-based model using billable hours to make money. Creating a startup is about being agile, resource-constrained, and putting things onto the market very rapidly.
But if you are an agency with a business model based on billable hours, you are incentivised to seek out larger, complex projects with bigger budgets – both things that run counter to the start-up mentality. You might embrace the idea of lean startups but, in a battle between your ideas and the structures created by your business model, the business model tends to win out.
Through Grai Ventures we are creating the right incentive structure for both Grai and the client. At the heart of the model is the idea that Grai is all about building successful startups, as opposed to offering processes or workshops as its core product. We are looking to co-invest alongside corporate partners and we have invested interest in turning the new venture into a success. If the client makes money, we make money.
A venture studio in a nutshell is the combination of a build function with a source of capital. You might think about it as a venture capital fund that builds companies. As opposed to VCs, we are not only looking to invest in companies through our networking of investors but we're conceiving the ideas too.
We're spotting problems and jobs to be done out in the wild, developing ideas for startups and corporations that could solve those problems, designing the business models recruiting the teams, and then supporting those companies through a network of broader investors in the community that we work with.
Data shows that studio-built startups (compared to traditional, non-studio) have 3x faster path to seed, 2x faster path to Series A, and 30% better likelihood of achieving Series A.
The model is still fairly new and evolving. As more startups get built it will become easier to identify key factors that lead to the success of a venture building studio.
For now, when we assess the performance of a startup studio, there are probably 2-3 key metrics we want to look at such as successful exits, failures, and investment size.
Funding into portfolio companies has been increasing 48% year-over-year since 2010.
Since 2008, studio companies have raised more than $4B venture capital.
More than anything…the process of venture building in itself instills an entrepreneurial mindset. Failure is the likely outcome of launching a new venture, but a well-executed experiment can lead to lots of positive effects regardless.
A big part of the appeal of Grai Ventures is the formula we developed — leveraging the agility of entrepreneurs to develop new radical innovation and move fast, and combining this with the ability of corporations to implement impact at scale.
The key focus is building ventures in collaboration with leading industry corporations. This ensures each solution is validated early (or scrapped) and has rapid market adoption potential.
We also explore spaces where opportunities exist to pursue our own internal solutions around large challenges faced by key industries that can be addressed with proven and emerging tech and business models.
One of our internal ventures which I’m particularly excited about combines roof tiles with cutting-edge technology photovoltaic cells to create a new type of sunroof which can drive significant cost savings.
As current regulatory and policies increasingly focus on climate change and smart cities accelerate opportunities to build and convert buildings into a future city with a net-zero carbon footprint.
If you look at the last 20 years, successful companies who have managed to adapt and gain a competitive edge invested in big transformations. And if you go back over the last several decades, you know that the primary sources of transformation have been M&As, which remain a very valid approach to transforming a company on a large scale. As well as R&D when a technological innovation will come along inside a big company that enables that company to transform its business model and do something different.
Now if you look at the last few decades, both M&A and R&D have become more expensive and harder to execute than they used to be. So the question that people have been grappling with is “what next, what should we be doing?”
Over the last decade, the corporations’ standard response to these challenges has been “Let's take a group of people in our organisation, we'll call them the innovation team. We will set them aside from the core business; we'll put in place some barriers, perhaps we'll give them separate funding and decision rights. And we will let them pursue opportunities that would spin up new ventures or products that could drive innovation within our company.”
Now that approach is a very good thing to do and all scaled enterprises should be doing it because it’s a driver of incremental and adjacent types of innovation.
The problem is that most companies need more than just incremental innovation to transform their business model, and there are not very many, if any good examples of companies that have successfully transformed their fundamental business model by deploying that approach.
We're trying to get an answer to this question, trying to figure this out in the context where you're seeing shrinking lifespans, competition becoming more fierce, life cycles of companies getting shorter. It's harder than ever to compete. It's harder than ever to innovate.
Our team has worked with many startups so this got us thinking about the lean startup principles and the value that they're able to create. I think a lot of us are looking at the market now and we see more mature startups creating tremendous amounts of value, and doing so very quickly.
You have a lot of CEOs of big companies thinking that the answer to these challenges is that they should act more like a startup. For most skilled enterprises, this is actually a huge strategic error, because skilled enterprises are very good at certain things, they're not good at pretending to be a startup. And on top of that most startups fail, so you don't want your scaled enterprise to fail, you can't afford to do that.
So there ought to be a way where we could combine the best of both worlds.
We leverage the abilities of entrepreneurs and the Lean Startup learnings to develop new radical innovation and move fast and combine this with the ability of corporations to implement impact at scale.
We came together because we had a common purpose and that is to build new startups. But we also have a lot of organisations and corporations that are starting to see the value of this innovation model and wish to get involved.
As most venture studios, ours has evolved too. Today we partner with corporations to co-build, co-invest and scale new ventures with entrepreneurs. We continue to explore spaces where opportunities exist to build our own ventures. Since Q3 2020, we have validated 4 internal ventures and we are planning to launch two of the MVPs by the end of 2021.
We’re taking a top-down, bottom-up approach to sourcing ideas. We map a comprehensive picture of industry movements and emerging trends (top-down). Then we identify new solutions and potential areas of disruption (bottom-up). In some cases we're starting with a broad strategic theme agreed with the partner generating 50+ business ideas, evaluating those ideas quickly and launching an MVP within three to four months in the best case scenario. We can go from a blank whiteboard with no idea to a launched startup with a team starting building an MVP product and customers.
Our focus is primarily on software, that's a business model we know well and we can scale fast and more efficiently. Now we benefit from the fact that I think every large company is thinking about digital transformation. Almost every business is becoming more of a software company than ever before. We think there's an opportunity to go build startups to solve some of these digital challenges that companies face.
We are industry-agnostic, however, we have some focus sectors including financial services, retail, Telcos and Media, automotive and renewable energy.
We also encountered situations where some of the ideas can address operational efficiency or could represent a new product line. These concepts don’t fit the external venture building model, in fact, a small number of ideas we generate fit this model. The majority of them are potential opportunities that companies should be doing internally or there are existing startups that they might partner with to execute those on.
Corporations are trying to innovate from their P&L and that's a real impediment. There’s an unrealistic expectation to produce a return quickly to get to capital efficiency very quickly.
Tesla could not have been built by GM. It required $19bn investment over 16 years of losses – it would have been shut down in Y1, Y2, Y3. Perhaps this is not your usual startup, but most “disruptive distractions” are almost always shut down for the same reasons; leadership moves on, strategy changes, budgets are reallocated.
Ultimately the core always (rightly) takes precedence in decision making, strategic focus, budgeting, careers etc. This happens in all large corporations.
And it’s becoming very difficult to compete against venture backed startups that don't have to be capital efficient in the near term. Eventually they need to become capital efficient but they don't have near term. Large corporations are trying to innovate from their P&L with all the implied metrics and governance that comes from that venture backed startups not worrying about capital efficiency.
Our model enables these large corporations to play the same game that these venture backed startups are by setting up the new venture externally, as a separate legal entity. This innovation now is funded in the way that venture backed startups are.
This startup that we've created doesn't have to be capital efficient in the near term. It can focus on learning, and finding product market fit and getting there quickly. This unlocks the opportunity to pursue innovation that's more transformative.
As far as we can tell in the last count there are more than 560 Venture studios, or startup studios around the world. So there's been an explosion, and we've just learned so much in the last decade about how to create and design startup companies and to support those companies through scaling.
We've seen some recent success stories coming out of the venture studio approach, certainly it's been a model that's been applied for many years now in life sciences and biotech, with a high degree of success. I expect to see more industry-specific venture studios and there are quite a few focussing on software.
For example the Snowflake IPO, this was a company that was incubated inside a venture fund and they wouldn't call themselves a venture studio, of course, but it's a very similar model to what we do, that combination of coming up with the ideas building, and then funding them internally, that's what a venture studio is.
We expect to see the model refined in some important ways such as legal structures, and to be a more familiar part of the overall venture ecosystem.
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We can facilitate a 2h session to:
■ help co-define the opportunities you are interested in
■ Identity high-relevance opportunity spaces
■ Assessment of emerging business models and technology trends
■ Recommended portfolio of strategic growth opportunities through co-creation with startups, and building new ventures
■ Validation and launch new initiatives
■ Invest in non-core business models that you can own
■ De-risk the process of building new ventures
Some corporations, including Google, Cisco or Axa have successfully developed their own “venture studios”, launching numerous new businesses over the course of several years. However, most of these ventures once validated are spun-out and not developed internally. Netflix spun out its “Netflix Box” division, which became Roku -- a company that now has a $4 billion-plus market cap. Fog Creek Software (now Glitch) spun out Trello and Stack Overflow. Cisco spun out -- and subsequently acquired -- three different startups from the same group of founders. However many more had tried but failed to deliver the expected results and had their units closed.↗
In this article, we’ll explore the first phase of the venture building process - a 2-3 months venture validation sprint covering the building blocks of start-up creation: idea generation, validation and pre-launch execution. This process is designed to quickly identify, validate and test new concepts and de-risk the chances of failure when scaling the business further.↗
Venture builders are getting a lot of attention these days. Some even refer to venture building as “the new model for entrepreneurship”. So what is a startup studio? How does a venture building studio compare to accelerators and product development agencies? What are the different types of startup studios?↗