The Explosion & Evolution of Venture Studios (Part 1)
How studios fit into the venture ecosystem and how they’ll evolve
I’ve spent the last year at HBS learning all about investor-operator models from search funds to growth equity, that bring the strategic market view and capital access of investors, and the execution speed of operators, to build great companies.
Of the models, the venture studio was the most unconventional and least understood. There are also VCs incubating ventures that are generally secretive, not wanting to send mixed signals to LPs and the market.
So from my interviews with studio and VC Partners, I’ve penned this crash intro to studios, a synthesis of the differentiators of studio models that will win and why, and predictions of how the studio model will evolve.
This post will focus on venture studios 101 so you can skip to the second post (which I’ll publish shortly) for analysis and predictions if you’re already familiar with the basics.
What are studios?
Studios effectively position themselves as institutional co-founders of startups. Many of the well performing studios are typically setup as dual entities — a studio and a fund that makes follow on investments into the studio’s ventures.
There is a growing spectrum of studios so I will only describe the extremes to situate new readers:
1/ a pure studio which builds its own companies from scratch by leveraging it’s own ideas or concepts from founders it recruits, and
2/ studios which build for clients for a fee and or equity — clients be corporates, foundations, governments etc.
Here is a skeletal overview of how studios positioned themselves in the venture building ecosystem:
Resources that get into further nuance on studio models and nomenclature are included below.
There has been an explosion of the studio model in the past 5 years.
Whats driving the recent explosion of studios?
- Underserved Cities: Studios are starting up in second tier cities where VC presence isn’t as deep and valuations are more reasonable. (Aspiring) founders in top tier cities for VC have enough cash access to fund their mistakes so studio value add for equity is not as attractive. In second tier cities, founders have less funding options, and need to be more capital efficient which studios can theoretically help them with.
- Lack of Quality or Reasonably Valued Pipeline: Studios are also growing in themes where funders struggle to find quality or cheap enough pipeline, and hence are incentivized to invest in experiments like studios to build their future pipeline. This includes vertical specific VCs who believe they’ve seen market gaps and can put the pieces together themselves; foundations investing in new verticals like climate; and governments looking to seed entrepreneurship in third tier cities.
Myth busting
Two recurring but outdated myths about studios are:
- The first myth is that studios attract non venture founders because high calibre founders will always go into it alone. The reality is that the best studios actually attract serial founders and high calibre venture founders. First, studios don’t need to build billion dollar companies to return their funds; therefore the profile of founders don’t need to look the same as traditional 1st tier VC. Second, for reasons we will tap into later, their industry focus means they typically work with more mature founders (30s and 40s) who have meaningful and relevant industry experience, and or relationships which enable rapid customer traction. Here are some examples of founders who have chosen to build with studios:
- The second myth is that studios take majority equity. While true in the early days of studios, the studio equity split has shifted from 50% 20 yrs ago to closer to 30% now, such that founder equity is the same in most studio agreements as it is if they did it on their own. Studios that still take ~ 50% equity in a venture are unusually positioned e.g. they can almost effectively guarantee a series A+ raise themselves if venture is successful, they do deep internal research for idea generation and are effectively hiring a professional CEO, and or they broker access to proprietary technology.
Who are the top studios?
I’ve included a sample of companies and venture raises to give you a sense of what they build and relative success.
- Juxtapose has the most disciplined venture building process I’ve come across from research, to finding serial founders, and providing the largest follow-on capital rounds themselves. Juxtapose built Kite, a consumer goods rollup, which raised $200M from Blackstone.
- PSL and High Alpha: Both do pure studio builds and corporate builds — equity + fee per service; I particularly like PSL’ s thoughtful approach to incorporating investors into the venture building process. High Alpha built Zylo, a SaaS spend management tool, which recently raised $5M. PSL built JetClosing, a proptech, which raised ~$10M.
- Redesign Health is a great example of a vertical focused studio that builds only in healthcare. Portfolio companies include Intrinsic Brands ($115M raised), Jasper Health ($32M raised), Medhealth ($30M raised).
- Buildr Studio which has documented playbooks for everything from recruiting to GTM — a great muscle for building repeatable ventures and for knowledge sharing. They built IPS, a managed cloud platform for the creative industry, which was acquired by Savii.
How do I determine if a studio is actually successful?
Studio ventures which have successfully fundraised from the market (not just sister VCs) is a proof point that speaks to three important proxies 1/ ability to attract fundable founders 2/ ability to narrow down fundable ideas 3/ ability to attract willing investors
Additional Resources
- Venture Studio Index (no longer active) tracks raises by studios and their portfolios
- Venture Studios Demystified is the best short book read to get up to speed on the origin and evolution of studios
- Global Start up Studio Network is the association of studios which periodically publishes reports, and hosts education events and convenings
