Venture Studios Vs. Startup Studios: What Founders Need To Know

Venture studios vs. startup studios–what’s the difference? That’s a question you might have asked when scouting around for early-stage funding options. Since both these terms are often used interchangeably in the venture capital (VC) world, they can be confusing.

If you’ve been watching this space, you’ve likely read about venture studios and how they operate. Startup studios share a similar concept, with the underlying factor being that they are essentially “startup manufacturing units.” Their core objective is to drive innovation and back founders who develop it.

Venture studios and startup studios support aspiring entrepreneurs by providing them with the resources to build their companies. They maintain in-house teams comprising experts in finance, research, product development, design, software, human resources, technology, and legal.

Aside from this, the two startup builders employ different strategies–particularly when it comes to sourcing the capital they need.

Let’s Start With a Quick Recap of Venture Studios

Venture studios operate similarly to traditional venture capital (VC) funds, sharing a comparable business model. The general partner (GP) creates the funding by getting capital from several limited partners (LP). VCs receive pitch decks and funding requests from companies at all stages of growth.

GPs assess them for viability and the potential for risks and returns before approving projects. VCs sometimes assign a board member to assist the company with expertise and networks. The member may also shape its decision-making by exercising pre-determined voting rights.

The main objective here is to ensure profits within the fund’s exit horizon, which is typically 10 years. VCs hope to exit the company within this timeframe through an acquisition. Or if the company goes to an initial public offering (IPO).

Venture studios follow the same steps, but with a crucial difference. They not only offer capital and other resources, but are actively involved in building companies from the ground up. They have teams specially equipped with research labs and other resources to develop business concepts.

Once the venture studios have ascertained that the concepts have value and are worth developing, they recruit experienced entrepreneurs. The organizers then match entrepreneurs with suitable projects depending on their expertise and skill sets.

Each founder is tasked with transforming the innovation or idea into a fully operational company using extensive hands-on assistance. Venture studios are also open to accepting applications from founders who have developed new and disruptive ideas.

These founders get all the assistance they need to build a company. Venture studios run multiple projects simultaneously and dabble in different sectors that demonstrate viability.

Similar to conventional venture capitalist funds, their objective is to offer rich profits to the LPs who participate in the fund.

Understanding How Startup Studios Work

To understand how venture studios vs. startup studios work, you’ll first distinguish between the faces behind these initiatives. As described earlier, venture capitalist (VC) firms often organize venture studios, which are essentially investor studios.

Startup studio projects are established by seasoned entrepreneurs who are interested in giving back to the community by supporting innovative new ideas. They are “builder” studios researching for and developing ideas, validating them, and then matching them with the right talent.

Startup studios leverage economies of scale by supporting multiple ventures that run in parallel. Since maintaining specialist teams can be expensive, having them work on multiple projects helps offset the costs. Builder or startup studios are also more likely to back projects within their sector.

Unlike venture studios, though, startup studios do not fund the project. Instead, they partner with their founders, sharing the financial investment. In return, they expect an equity stake in the new company, similar to the venture studios. Recruited founders work for a salary.

The percentage of ownership may not be as high as at venture studios. However, an added advantage is the hard-won experience and expertise veteran entrepreneurs offer to their aspiring partners.

Are they successful? The numbers speak for themselves. Take a look.

• Ventures emerging from the startup studio program are twice as likely to raise seed funding as compared to conventional companies.
• Founders take advantage of ready frameworks for testing and validating their ideas. They can create a minimum viable product (MVP) and launch the product quickly into the market. Since these processes occur at an accelerated rate, founders can exit the company much more rapidly. Ventures receiving the startup studio boost are likely to enter into merger or acquisition (M&A) deals within 5 years. Or, go to an initial public offering (IPO) within 7.5 years. This time frame is 33% higher than in conventional startups.
• Companies that receive conventional venture capital (VC) funding are likely to reach valuations of around $50M. In contrast, a company working with a startup studio is likely to have a valuation of $74M, which raises its chances of securing capital.

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Benefits of Working with Startup Studios

Whether you’re a founder with an innovative concept, looking for assistance with transforming it into an MVP. Or, an aspiring entrepreneur wanting to learn more about company building–signing up at a startup studio has multiple advantages.

• New companies leverage the data and research made available to them by their seasonal partners. This data can center on customer buying preferences and market trends. Analyzing the numbers enables them to make informed decisions when formulating strategies, ultimately leading to a rapid increase in revenues.
• Passing through a startup studio enables founders to derisk their ideas. These organizations test multiple business ideas for viability before picking the most promising options.
• Founders can expect a higher internal rate of return (IRR) thanks to favorable investment terms and conditions.
• They run a lower risk of dilution, which ensures they walk away from a business sale or IPO with higher profits.
• Founders have the exceptional advantage of working within an innovation-centric environment where they can toss around ideas and gain perspectives. Studios are dynamic, buzzing spaces where they can build lasting relationships that open doors for future collaborations.
• Venture studios or startup studios–they lean heavily toward supporting diverse and underrepresented founders who are unable to carry the risks. Particularly, those who don’t get support from typical venture capitalists and other investors–in terms of capital or resources. As a result, these studios aim to level the playing field, giving all classes of founders a fair chance. Other sectors that benefit include impact-driven, sustainable, and circular economy initiatives.

Downsides of Working with Startup Studios

Venture studios vs. startup studios–although both models have several benefits, you should be aware of the downsides, too. Here’s what you need to know:

• Startup studios select candidates based on their previous experience in building and exiting ventures. The organizers may also look for talent, business acumen, and expertise in specific fields before assigning projects. Experienced founders may not have the autonomy they desire to run their companies. Further, the studio may expect to retain a high equity stake, which they may be unwilling to agree to.
• Startup studios typically develop multiple projects simultaneously to benefit from economies of scale. This factor can prove to be a downside if the resources and specialists’ bandwidth are stretched too thin. Without some kind of structure, studios can become chaotic spaces where little work gets done.
• From the organizers’ perspective, building a startup studio requires significant investment. Statistics released by the GSSN Data Report 2022 reveal that their average annual budget is $2.49M and the median is $1.36M. Organizers must initially invest anywhere from $1M to $2M or even $10M and above to start a studio.
• Providing founders with unlimited finance and resources to flesh out ideas and build companies has its pitfalls. For a company to be successful, adopting a lean approach early on can be a crucial edge they should learn.

As a workaround for the reduced autonomy and decision-making rights, startup studios offer other perks to entrepreneurs. They structure compensation in the form of incentives such as extended equity vesting schedules and milestone-driven bonuses.

Deserving candidates who have demonstrated remarkable performance may also get the opportunity to lead new projects that the studio organizes.

How Studios Differ from Accelerators and Incubators

Venture studios vs. startup studios–when considering your options, you’ll also evaluate their merits vis-a-vis incubators and accelerators. Underscoring the fundamental difference, incubators “incubate” viable ideas by assisting entrepreneurs in developing them and building a prototype.

Startups receive assistance with refining ideas, building a team, and accessing the necessary resources to secure funding from accredited investors. Incubator programs typically don’t have a fixed timeline, but they do offer basic financing.

Accelerators work with entrepreneurs who have a minimum viable product (MVP) and need help with building the company infrastructure. Their assistance goes toward “accelerating” development and gets the company up and running within a fixed time frame.

Accelerators also present entrepreneurs with the tools to create a compelling pitch deck, which they can present to potential investors. If the MVP has value and the investors see potential, they may write checks to support the company.

The most significant advantage of incubators and accelerators is the credibility and validation they provide. Brands carry a reputation for having passed through programs that are incredibly challenging to get into. When they are ready to serve customers, their products are received better.

Next, in the startup lifecycle is venture capital. But these investors only support startups that have demonstrated traction. Their pitch deck must have projected or historical financials dating back three years. Several other factors come into play that influence whether the company will secure capital.

Studios address the main downside of accelerators and incubators–the incredibly low acceptance rate. They also bridge the gap that conventional VCs leave, thanks to their internal approval processes, which are dictated by the fund’s investment criteria.

This is how studios–venture or startup–are reshaping the business landscape.

Additional Information to be Aware of: Venture Studios vs. Startup Studios

From the entrepreneur’s perspective, know that startup studios, venture studios, and venture builders are relatively new concepts. There isn’t adequate data to demonstrate their efficacy on a long-term basis. The terms are often used interchangeably, which can be confusing.

When looking for the right program to enter, you’ll take your time researching their terms and conditions–particularly equity stake–before making the best choice. If you offer a high equity stake, raising further funding rounds could become challenging.

Both venture studios and startup studios run multiple projects, dabbling in diverse sectors without really specializing in any. They may also have different business models and frameworks for building startups. This approach enables organizers to diversify risk, which works well for them.

However, as a participant, you may find it challenging to attract future investment. Investors may not see adequate value in graduating from a studio due to the lack of specialization.

Additionally, it is essential to recognize that while venture studios and startup studios are relatively new concepts, their disruptive nature could actually be an advantage. Organizers are exploring the benefits and shortfalls, and the model is consistently evolving. And, of course, the initial success numbers look promising.

Studios are attempting to combine the advantages of accelerator and incubator programs, which are notoriously difficult to enter. Most importantly, they are eliminating the downsides of traditional venture capital investment and evaluation criteria and models.

Following in the tracks of venture studios and startup studios is another category of startup studios sponsored by large corporations. Corporate-backed venture studios enable major players to test and spin out new concepts within their respective sectors.

Similar to other studios, entrepreneurs get access to the established infrastructure, supply chains for inventory, technical expertise, and resources. Having a ready customer base to serve is another crucial advantage.

In Conclusion

The startup landscape is undergoing drastic transformations in the last few years as a result of rapid innovations. Entrepreneurs prefer to derisk their ventures and ensure success by signing up for studio models. Venture studios vs. startup studios–both models have distinct benefits they can tap into.

The underlying advantages include an operational infrastructure, preconceived business models, and a pre-selected team of specialists offering guidance and mentoring. Initial pre-seed funding is another key advantage that can give the budding company a valuable launch pad.

As a result, entrepreneurs in North America and Europe are increasingly turning to studios to kick-start their companies. These are better options than the traditional pathways of venture capital funds.

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