Startup Studios On The Rise

Building startups is notoriously hard. Often, entrepreneurs have to spend too much time on scraping together the basics. A few people who can hack together an initial product. Some funding so they don’t have to starve for their big idea. If you ever tried to build a startup, you know the feeling.

And from the investor’s point of view? Every time they want to invest in a new company, they have to search for new people, go through all the basics again and again.

And the result? Nine out of ten times startups fail. The team scatters, founders face downtime, sometimes even depression.

Put your hand on your heart, and tell me: is this really the over-romanticized world of startups you so much desire?

A More Efficient Way Of Building A Startup?

Pioneered by Idealab in 1996, a new model emerged. You can call it startup studio, startup factory, venture builder model. The goal is to build an organization that builds startups in a repeatable fashion. The definition and criteria of what constitutes a startup studio are vague. But the recipe is similar. Here are the 7 basic steps to build a startup studio:

1. Take a core team & entrepreneurs in residence;
2. Add a shared infrastructure & in-house funding;
3. Generate ideas internally (or in some cases, act as a cofounder);
4. Build multiple startups in parallel;
5. Trash what doesn’t work, reassign team;
6. Spin off what works and get follow-on funding;
7. Grow. Exit. Repeat.

The big promise of the model is this: the studio provides an ideal base for entrepreneurs to quickly dish out new concepts. Because there are resources available in-house, the team can focus on the product and the customer. And for the investor it can be a steady deal flow source.

Since Idealab kicked it off, more and more studios have been emerging. Some founded by successful entrepreneurs, some by investors or investment firms. The more famous ones include Rocket Internet, Betaworks, Science, eFounders. There are studios focused on monetizing university research. One example is New Mexico Angels Startup Factory. Another is Italeaf. South Africa has one. So does Hungary…

There is already some great material on studios:

• Makeshift has an intriguing blog on how a studio works;
• eFounders carefully curates all news related to studios here;
• Nesta is doing some research on the subject too.

There are approximately a hundred studios out there, and this number is rapidly growing. Strangely, the model seems to be more wide-spread outside Silicon Valley. For now, we don’t know why. Maybe the studio model shines where there is no critical mass of talent and funding opportunities?

Startup Studios And The Hockey Stick Curve

What we know for certain is that studios are on the rise. Take a look at publicly available data (like CrunchBase), and you find exciting insight.

• Startup studios create more and more companies, +15% year over year;
• On average, each studio creates 1 company per year, and this number is steadily increasing;
• Portfolio companies employ almost 16.000 people;
• There is a wide range of models and verticals represented;
• Since 2008, studio companies have raised more than $4B;
• Funding into portfolio companies has been increasing 48% year over year since 2010;
• 14 portfolio companies were acquired, on average 3 years after their launch.

If the trend continues, we could have around 10 new studios and 60 new, funded portfolio companies by the end of 2015. This number might jump to 15 new studios and around 80-90 new portfolio companies in 2016… You’ve gotta love the hockey stick curve!

But there is still much to do to make the startup studio model mainstream. There are concerns both from entrepreneurs and investors.

• Cap tables make follow on funding seem impossible — there is too much equity in the hands of the studio, and there is not enough left for the team;
• Startups within a studio have to fight for resources, often one winner takes it all;
• Studios are copy-cats, only good for ecommerce;
• There is less authenticity and passion in companies created by a studio.

Is any of this true? For now, we can neither confirm nor dismiss any of these claims.

Making The Studio Model More Transparent

When it comes to discussion about startup studios, too often the answer is “it’s too early to tell”. I beg to differ. There are enough companies out there that show us the good, the bad and the ugly side of the model. We just have to observe.

In the following months, we will be looking at different aspects of these studios. We will try to decode the “genome” of a successful startup studio:

• The people behind the wheels: background, motivation, culture, compensation, etc.
• Exploring startup studio funding in detail: investors, terms, valuation, ROI, etc.
• How to build a successful studio: opportunities, risks & mitigation, best practices, etc.

It is in our common interest to make this model more transparent and better understood. For entrepreneurs, studios can offer a more efficient way of building startups. For investors, studios can become a much more reliable deal flow source. For already existing studios, making the model transparent might help recruit talent and raise more funds for expansion.

Let’s make this happen!

_______________

Thanks to David Asztalos and Soma Arnold Toth for reading drafts of this post.

Sharing is caring so please share this post. Thank you!