What Are Venture Studios? Inside The Startup-Building Powerhouse

Entrepreneurs with innovative business ideas can now approach a fast-growing class of investors and builders–venture studios. These organizations essentially build startups from the ground up, helping them with funding and other resources.

Venture studios create a low-risk environment for aspiring founders, allowing them to develop and test their ideas. They not only provide valuable pre-seed funding and early capital but also assist in other aspects of building the business.

Isn’t that what accelerators and incubators do? To answer the obvious question–yes, the venture studio model is similar. But with a key difference. The application and approval process is a lot less complicated. Unlike accelerators and incubators, the acceptance rate exceeds 1%.

Understanding What Venture Studios Are

Considering that 90% of startups are likely to fail eventually, venture studios are changing the rules of the game. They use unique approaches to transform the startup ecosystem by helping founders overcome the initial structural challenges they face.

The venture studio model emerged in 1996 with the creation of Idealab. However, it has gained rapid traction since the early 2010s. An estimated over 720 studios now operate worldwide, building young companies. You’ll think of them as startup manufacturing units offering proven business models.

Venture studios can be standalone organizations or innovation arms established by large companies or corporations. These corporations allocate internal resources to develop viable ideas and concepts. Next, they invite seasoned entrepreneurs to run with the ideas and launch products.

The resources made available go beyond just capital; they include sales expertise, top-notch talent, software, marketing know-how, and legal advice. You can also look to them for access to their human resources infrastructure and external network to build strategic partnerships.

The trade-off is a high amount of equity. Venture studios are known to expect equity stakes ranging from 15% to 80% in the startup. Despite this factor, venture studios are quickly gaining interest in the business landscape, and their success track record is impressive.

Let’s consider some stats:

• An astounding 84% of startups emerging from a venture studio successfully raise a seed round.
• Traditionally, just 42% of startups progress to the series A funding round. In contrast, 72% of the startups that make it to the Series A round are from the 84% venture studio “graduates.”
• Typically, startups demonstrate an internal rate of return (IRR) of 21.3%. However, a venture studio-backed company has an IRR of 53%.
• Traditional startups typically take around 56 months to progress from the pre-seed to the Series A stage. This is in stark contrast to the average 25.2 months that venture studio startups will need.
• The success rate of venture studio startups is at least 30% higher than that of conventional startups.

Key Aspects of Venture Studios: What You Need to Know

Venture studios are different from your standard accelerator and incubator programs in many ways. They have essentially leveled the playing field by giving upcoming startups a fair and fighting chance. Particularly in an ecosystem with cutthroat competition. Here’s what you need to know about them:

• Venture studios are an excellent platform for aspiring entrepreneurs to hone their skills and learn how to structure a company.
• Although they welcome innovative ideas, they also have a portfolio of new projects you can dive into. That is, if you can demonstrate expertise and business acumen.
• A venture studio is both–a builder and an investor. To qualify as a venture studio, the organization must provide funding to startups.
• Some of the early examples of venture studios include Idealab, Rocket Internet, Colab, Betaworks, and Founders Factory.
• These investors don’t guarantee success, but they run the startup’s concepts, products, and business models through exhaustive testing and screening. The validation received from completing the program helps propel the company forward.
• You’ll get extensive experience and insights working in the domain, and build valuable networks and connections. Mentoring, a founding team, and capital are just a few of the additional benefits that venture studios provide. By the time you exit, you’ll have a workable business model to build on.

Setting up and running a venture studio requires much more capital than an accelerator or incubator. That’s because they work with bigger teams, leveraging multiple business models to ensure success. They also need funding to cover operating costs.

This is why they raise high amounts of funding and may also require startups to repay them with revenue shares. For instance, their investment terms may include a $50 payout for every $100 they invest in the company. Partnering with large corporations is another strategy that venture studios employ.

How Venture Studios Operate

Venture studios welcome founders bringing disruptive and viable concepts to the organization. Here, they incubate and nurture the idea, transforming it into a product prototype or Minimum Viable Product (MVP). You’ll also get the assistance of an in-house team to develop the prototype.

Aside from developing the product, you’ll receive hands-on training in structuring the company and prepping for sales. Think: ideating product features, researching the market to understand demand, analyzing the customer base, strategizing distribution, and building marketing channels.

Venture studios may also develop ideas in-house and invite founders to work on them. However, they must meet specific investment criteria. Since organizers work within the industry, they understand changing trends and customer buying preferences.

Accordingly, you’ll get valuable updated guidance to ensure your product and company align with market changes. Venture studios themselves are consistently growing, adapting, and learning from past successes and failures. You’ll tap into these hard-won lessons to scale your startup.

Typically, incubators and accelerators work with a single startup at a time, investing their capital and resources to ensure success. However, venture studios launch multiple companies in a shorter interval, thanks to their larger funding. This strategy has several advantages.

Venture studios can leverage economies of scale, cost efficiency, and the opportunity to share ideas among participants. As a result, they successfully open doors for future collaboration and enduring partnerships, not to mention exchanging data and expertise.

Venture Studio Models and Structure

Venture studios can be structured in three different ways:

• A “holding company” is the most basic structure in which the general partner (GP) creates a fund. They invite limited partners (LPs) to invest capital in the holding company for a stake. This capital is diverted toward funding startups in exchange for an equity share.
• Alternatively, the GP may structure the fund as a “startup studio.” In this case, the GP earns a management fee and a carry, which is a portion of the profits. These profits are the amount left over after returning the capital to the investors. The fund’s capital is the sum total of the money contributed by LPs, the founders’ investment, and the startup shares.
• A third option is the “dual-entity model,” which combines the holding company and startup studio structures. The general partner starts the fund as a holding company. However, as the fund gains traction and sees successful startups, it may transition to the dual-entity model.

Keep in mind that storytelling is everything in fundraising. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that founders worldwide are using to raise millions below.

How Startups Progress Through Venture Studios

Ideating Concepts

The initial phase of the program is about developing ideas, testing them, and analyzing their viability. Teams conduct extensive market research to identify their potential for product-market fit. They also scrutinize market readiness and competing products, as well as their features.

The objective here is to identify a real problem and determine whether the concept can solve it. Know that venture studio teams may work on multiple concepts across different sectors simultaneously. They also develop intellectual property (IP), which will form the foundation for a new company.

Even if the founders bring in their ideas, they go through the validation and verification process. This phase typically takes around 12 weeks to complete.

Creating Pitch Decks for Approval

Once the teams verify that the concepts have viability, they create a detailed pitch deck for each of them. An investment panel evaluates the pitches and their merits before approving the most promising ones.

This panel comprises senior team members and expert partners who assess and approve the ideas. Founders entering the program are also encouraged to present a pitch to the investment panel. Those that don’t make the cut return to the drawing board or explore new concepts.

Regardless of the pathways they choose for building and funding their startups, entrepreneurs should know how to create a pitch deck. If you’re not quite sure how it’s done, check out the video I’ve made.

Business Development

Having received approval from the investment panel, the teams are ready to transform the concepts into a company. The venture studio invests time and resources into building the business. It also brings aboard entrepreneurs interested in leading the company.

Typically, a senior member from the management team with extensive experience and expertise oversees the program and the founder-candidates. This professional startup builder and a team of specialists provide the hands-on training you need in areas like:

• Marketing and advertising strategies to acquire and build a customer base
• Scaling the business by streamlining manufacturing processes
• Hiring the initial members of the founding team and/or a co-founder
• Leveraging AI and software tools for market research and compiling and analyzing data
• Developing a brand and market presence, and running public relations (PR) programs on social media and other channels
• Working out the legal aspects of building a company under the guidance of expert legal counsel
• Training with financial analysts and experts to understand how to organize company financials
• Interacting with investor networks as a prelude to future fundraising approaches
• Showcasing the business and its initial product to the community at formal networking events

Understand that the business development phase is dynamic and concepts often undergo refining to ensure product-market fit. If needed, the supervisor may suggest pivoting from the original concept to adopt a more suitable idea. Research and analyzing data play a crucial role here.

Further, incoming entrepreneurs are encouraged to contribute their experience and know-how. The venture studio budget allocation also allows for hiring founding team members and covers their salaries.

The venture studio environment is essentially about collaboration and brainstorming ideas to identify the ones most likely to succeed.

Bringing in Experts to Assess the Business

Halfway through the program, an expert panel reviews the progress made so far. They analyze the prototypes and provide feedback for improvements if needed. Depending on their findings, they may choose to scrap the project or advance it to the next level–accelerator programs.

Experts evaluate the progress and workflows based on criteria such as the founder’s vision and the product they’ve developed. They also analyze the founding team, targeted customer base, and revenue projections.

The expert panel also determines if the company is ready for investment. And the amount of funding they are open to providing. These estimates hinge on the returns the organization expects to earn. This capital is the pre-seed money the company needs.

Graduation to the Acceleration Phase

Similar to conventional accelerator programs, venture studios have a six-month program. Founders and business ideas that successfully make the cut receive the additional capital and support they need. They are now ready to progress to the next level.

Entrepreneurs receive a term sheet from the venture studio, outlining the terms and conditions of the investment. They can sign the document and prepare for the final definitive agreement. At this stage, the rights over the concept and intellectual property (IP) formally transfer to the company.

Investors deploy capital, and the business is ready to take off as an independent entity. It now operates according to the entrepreneur’s direction and delivers pre-determined returns to the venture studio.

Before We Sign Off!

Do you have an exciting business concept but lack the resources and expertise to develop it into a company? Or, you could be an aspiring entrepreneur interested in learning about how startups are born and scaled. Approaching an accelerator or incubator program is, undoubtedly, very challenging.

Your next option could be a venture studio, which offers an excellent training ground for aspiring founders. You’ll walk away with the desired funding and expertise to accelerate the company quickly.

The trade-off is the high equity that these programs expect. Are there any additional benefits and drawbacks you should be aware of? Watch this space and we’ll bring you more information about how these programs work.

You may also find our free library of business templates interesting. There, you will find every single template you need to build and scale your business completely, all for free. See it here.