Venture studios have become an increasingly popular way for investors and operators to build startups from the ground up. But what exactly are they, and how do they work? What are their legal structures, and how can you build or get involved in one? This article will cover some of the key elements of venture studios.
What Are Venture Studios?
Unlike accelerators or incubators, which require startups to already be incorporated upon joining, venture studios work with ideas from inception. More specifically, they have in-house operators to develop ideas into startups and then take those startups to exit. While venture studios may onboard founding teams for their portfolio startups, there is usually significant, ongoing involvement by the in-house operators. This means that venture studios retain a lot of control over their portfolio startups for a far longer period of time than standard accelerators or incubators.
There are no restrictions as to who can create venture studios. Venture studios that are founded by investors need to hire or rely on a network of operators, and venture studios that are founded by operators need to partner with or be funded by investors. In most cases, the founders are mixed: investors who enjoy being hands-on in investing in or managing portfolio companies working with operators who enjoy dabbling in venture capital or private equity. Entrepreneurs onboarded as part of the founding teams of portfolio startups should expect to have less freedom than if they were to launch startups on their own.
How Do Venture Studios Work?
Many venture studios are run like a giant laboratory experiment. An idea is tested on various hypothetical metrics, and if it is deemed viable, then a founding team is assembled to test it in real life. This founding team can be sourced internally or externally. Venture studios can either have in-house operators run the startup, or tap into their broader network to find people to work on the startup in a variety of roles.
If the startup looks promising, then venture studios will begin to devote more and more resources to scaling the business. This ongoing operational and financial support can last for years and is continuously fine-tuned according to the startup’s needs. In exchange for this support, venture studios may receive up to 80% of the equity of the startup. When the startup exits, as the supermajority shareholder, venture studios often end up reaping massive rewards.
Legal Structure of Venture Studios
Because venture studios require large cash inflows to operate, they tend to be organized under venture capital funds or special purpose vehicles (SPVs). Funds are often the majority equity owner of venture studios, either managing them directly or bringing on external managers. To ensure a continuous stream of capital while separating the fundraising activities from the operational activities of venture studios, funds are sometimes created for the sole purpose of investing in venture studios. This is so that any investment raised by funds is dedicated only to venture studios and not to other projects.
Venture studios then invest in portfolio startups directly or through special purpose vehicles (SPVs). Why might venture studios want to add a layer of SPVs? When resources are limited, venture studios may work more efficiently if they separate their operating functions from their investment functions. For example, if financial resources are limited, venture studios may want to devote their core budget to assisting portfolio startups with operational needs. Meanwhile, they can assemble external teams of fund managers and investment professionals through SPVs to raise capital from sources other than the venture studios themselves.
Investors or operators interested in building venture studios may consider a multi-layer structure consisting of a fund at the top, the venture studio in the middle, and SPVs underneath. They may also consider how a network of industry experts and investors would mesh with the fund, venture studio, SPVs, and portfolio startups.
Is a Venture Studio For You?
If you are looking to start a venture studio, keep in mind that you will need to be actively engaged with it at every layer. If you are more of a passive investor or operator, this may end up being too much work for you. On the reverse, if you are an entrepreneur looking to join a venture studio, keep in mind that you may not have much say in the major business decisions of the startup. Nonetheless, you may have heard of the saying that entrepreneurs fly solo. Venture studios are a fantastic way to bring all the players together, pool their resources, and grow startups efficiently.
