Determining what is of interest to own
We can facilitate a 2h session to:
■ help co-define the opportunities you are interested in
On the event in partnership with Startup Grind, Grai Ventures Diana Florescu, The Heart Tomasz Rudolf, Tar Heel Capital Pathfinder, Michal Wrzolek sat down with Ahmad Piraiee, himself a Startup Grind Chapter Director for a wide-ranging discussion on venture building and the future of collaboration between VCs and these venture studios.
Tomasz Rudolf: Well, most companies either provide services or build products and the product of a venture builder, our company. So you more or less have a factory line and you design new companies who cast stars that could take those companies and build them with you and you provide resources and relationships and reach the finals of those companies to validate and kill many in the process. So you originate and that's the biggest difference versus accelerators or VCs is that you're not actually looking for external ideas. In most cases you were just originating them yourself.
Michal Wrzolek: We have the resources to open new companies every quarter. So we have a couple of ideas and most of the ideas come from our teams. We also invite the founders with their ideas, but mostly the ideas originate internally . First we need validation and then you deal with the product and then facilitate all the growth of the company from the very beginning. From the conceptual phase, up all the way to the exit of that company. That's what the venture builder of a venture studio does: creates companies.
Diana Florescu: I guess it's fair to say there's not a universal definition of a venture studio, and I don't know if this creates a problem or allows you to have more flexibility in terms of what a venture studio actually is.ight now I think there's more than 500 venture studios in the world.
I think for the sake of the conversation about venture capital investment and venture studios, to me, essentially, a venture studio, it's almost a build function with a venture capital source attached to it. So another way of looking at it, it's almost like a VC that creates startups and when I say create startups, you designed that business model, you build a company, but you also go forward to invest in those companies or raise from a close network of investors, as we do at Grai Ventures. It's interesting how much the model has changed in the last decade. We see the first successes of startups coming out of studios. For example, Snowflake came out of Sutter Hill Ventures. I don't think they will ever call themselves a venture builder. They are VCs. Or you've got the likes of Madrona Venture Labs that raised 8 million USD recently just to create a venture studio.
It is a very exciting space. In the end, our goal at Grai Ventures is to build a systematic,repeatable process of creating businesses and to go beyond the usual “three months acceleration” to provide the business with the proper resources, fundraising, marketing and all the core functions that a startup needs to grow.
Tomasz: I think the whole startup movement is developing. We more experienced founders people are looking at how to monetize from their past experience and reinvest their earnings from previous exits. So when serial entrepreneurs are looking at such builders, such entrepreneurs, they're asking themselves, why should I just give money to a VC, which is just a picker, it doesn't build anything, just selects spenders. I'd rather give this money to this entrepreneur, to the serial entrepreneur and let him actually build multiple ventures given that now he’s got a process in place.
The venture building model is a perfect solution for investing in early stage opportunities but with less risk. If you have a goodprocess of selecting them, building them, you may actually have better financial results than a VC fund investing in startups out in the wild.
Diana: I think there's been some really interesting trends. One of them it's actually a new type of VCs that are formed to invest in corporate startups. They have this philosophy of investing in corporate startups or companies that are being incubated inside large organisations.
If we talk about the corporate venture building model, corporations have done transformation or innovation for a long time, but they’ve become ever more expensive. In the last decade, there's been a huge trend of corporations starting their own CVC investing in startups. Sometimes they co-fund with, or co-invest with other VCs, or they invest themselves . Some companies do very well. They have a strategic intent to grow the revenue. Some of them, they just do it purely for exploration.
As a venture studio I would challenge that and say “why launch a CVC and stop there?” Most VCs do not even return the fund only, 5% of them would return that fund. I would say that venture studios would be a great complementary function to VCs and corporate funds increasing the chance of success.
The way I would see this in the next decade is that VCs may go back to the early days when they were not only investing in a company, but were actually building those companies alongside founders, helping the company grow throughout its lifetime.
Tomasz: I would add one more point. I think the question isn't about whether VCs will start collaborating with venture studios or building their own. It takes two to tango, right? I think the LPs will start investing alongside a VC, rather than a VC investing more in venture studios. They normally go to a VC because they can pick better deals for them. The question for people who are ready to deploy risk capital is whether l they would get better returns by investing in a VC or they would make more money if they invested in a studio surrounded by entrepreneurs that can build for them multiple ventures and get the founder economics right from the beginning.
Michal: No, because we co-create the business from the very beginning. So from the very beginning, there is no company to invest in. e do offer much added value to the founder in the form of financing for the first year then the development of the software and opening the doors to corporations that may be partners so that it will help the startup grow from the very beginning. We calculated this, for example, in the marketplace, we shorten the time to market by half a year to a year in comparison to regular processes where founders start searching for the tech team and the finance.
Diana: Just to build on what Michal said, I believe software development houses have extensive potential to become the next generation of venture builders. Only if they would rethink their business model to move away from billable hours. It’s in contradiction to the lean startup principles of building and iterating fast.
Tomasz: Yeah, the challenge is that the capability to build a product or technology isn't enough to build a great venture. And that's why there are not enough startups that can build in this region because we might have great technology capabilities, or marketing budget but we don't have the product owner and the investor relations and scaling and sales and so on.
If I look back at all the mistakes I’ve made as a first time founder, you realise how useful venture builders could be to the new ventures especially in its early days if you build a venture with a venture studio, or with a very much operational VC, you have experts in each function. You have HR experts, you have legal experts, you have fundraising experts that save you time and save you from making mistakes. So it actually makes sense in some cases to give 30% to the venture builder as an extra third co-founder. Also they might actually help you validate the idea or pivot and maybe work on another idea. But as a founder, you fall in love with your idea. On the other hand, venture studios are not that emotional about ideas. They kill ideas every week. You don't have venture builders going around and pitching them at every startup event. Because they just try it and if it doesn't work, they kill it. Then they work on a different idea. They are recycling the team with those experiences. They have professional teams pitching developing business cases that are looking for prototypes and so on.
Michal: In our business model, investors invest in our industry not in the startup directly.
Diana: It depends on your studio’s business model. ou can be a single studio like ourselves where investors would invest directly in the studio.aSome investors, have preferential rights to further invest in some of our startups. You can also structure the fund in different ways, for example to form a syndicate. This model takes the idea of the Single Studio Model but mitigates some of the negatives of that model with the addition of a syndicate. The studio is creating NewCos and when these NewCos need additional investment you create single-purpose vehicles (SPVs) to enable LP’s or a syndicate of angel investors to invest through or alongside the studio.
Ahmad Piraiee, Chapter Director Startup Grind Warsaw
Diana: 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.
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. 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.
So why invest in a startup studio? I can think of three reasons...
First, studios get much more equity in each new venture than early stage Angels/ VCs thanks to the significant ‘sweat equity’ they put in. This results in significantly more equity upside for the studio investors. Due to our investment structure, one investment decision will result in equity in multiple startups through indirect ownership of every Grai Ventures company.
Another reason is less execution risk. Diversification is expensive (deal sourcing, due diligence, legal etc). To de-risk the process, VCs place multiple bets across a wide range of startups. Our proven processes, access to expertise, seasoned entrepreneurs and willingness to kill underperforming concepts early mean that a studio built venture uses capital more efficiently and has a higher chance of scaling successfully than a ‘startup in the wild’.
Lastly, better returns. 75% of VC funds do not return the fund. 5% provide a relatively modest risk adjusted return on capital to LPs. But these top 5% are not accessible (their funds are oversubscribed). LPs looking for venture exposure can achieve higher returns risk adjusted by investing in Studios than in VC funds.
This was an excerpt from the panel discussion “What any investor needs to know about venture building studios”. The full discussion is now available to listen on Spotify or to watch on Youtube.
■ What is media for equity?
■ The evolution of this model across different European hubs
■ How media for equity emerged as a solution to combat startup failures and diversify revenue for media holdings
■ Media funds structures, challenges and opportunities for broadcasters and media agencies
■ A 5-step guide for CEOs to get started with Media for Equity investments
■ Tapping into new opportunity spaces - Media for Equity in Central Eastern Europe
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?↗