Four Things Investors Should Consider About Venture Studios

Nick McEvily and Don DeLoach
Mar 14, 2022
Four Things Investors Should Consider About Venture Studios

Venture studios are cropping up inside Fortune 100s and venture capital firms more and more. The big companies that start them are agile and innovative. The VCs that have them are founder-focused and highly successful. The basic definition of a venture studio is a team of experienced entrepreneurs who help avoid critical and common pitfalls early in a company’s founding.

That seems straightforward enough, but there are four things you should know about Venture Studios today:

  1. There are variations in the model
  2. Studios are ideal early execution partners
  3. They optimize probability for success
  4. They’re the next evolution in venture investing

Taking notes

One: There are variations in the model.

Each venture studio will vary in their breadth of expertise (marketing, design, development), and equity/ capital arrangement. Some venture studios curate their own ideas and build from there.. Others are designed to help existing startups get through the execution stage, into funding, and scaling. Consider it as a "launch factory." Companies leave with a few customers, a Minimum Viable Product (MVP), a business plan, but are far from scalable and repeatable commercialization. 

Others are aligned with specific corporations and are designed to bring intrapreneurial ideas forward as a viable business unit or a spin-out. Then there are ones that combine various elements of these. The critical links are the experienced entrepreneurs and the increased likelihood of success.

Two: Studios are ideal execution partners.

An interesting lens looks at the stats of startups associated with a given accelerator. You are likely to see something like "60% of our startups are still (producing or operating or thriving)" or whatever. Sure. But what percentage of those "graduates" have reached scalable, repeatable commercialization? The 80% of the startups that left accelerator XYZ are still statistically likely to fall short in reality. Does that mean accelerators are bad? Absolutely not. Accelerators play a crucial educational role in the entrepreneurial ecosystem. Education can only go so far though.  

Startups need their MVP ready to put in customers' hands. They need an operating plan and a weekly check in to reprioritize it. They need an investor deck for raising capital and introductions to those investors. But while 90% of startups fail, 70% fail in the execution phase. For instance, they hire the wrong management team. Why? Because when they do, the discipline, proven methods, and best practices they heard about in a lecture are now a distant memory. So, they hired Bill as VP of Sales because Bill was a star at IBM, and he's friends with one of the investors and is a great guy. Nope. Wrong criteria. Bill may be great, but the role in the startup is likely going to be a far cry from the position at IBM, and the methodology for hiring should drive the startup to find the very best person for the job. The same idea applies to how product management is established, the customer feedback loop, the product roadmap, the associated engineering schedule, and on and on.

Three: Studios optimize the probability for success.

The impact on seed-stage portfolios is to increase returns by mitigating execution risk. How contracts are written, how the sales model is constructed and adapted, how the board is selected and run, how the patent or trade secrets decisions are made, how cash is managed, and many other things contribute to execution risk. Most get it wrong at some point, and as a result, most fail. But failure happens most after year two, as the startup moves from launch through the execution phase. So, the experienced entrepreneurs supporting the founder do so by "doing it with them" and not "telling them how." Studies show experiential learning is the most effective form of learning, especially if combined with didactic (classroom) learning. That's why aspiring surgeons go through residency. 

We've probably all seen or read (or both) Moneyball. At this stage of the game, almost every MLB team is data-driven. "Pete, do we care how he gets on base?" asked Billy Beane. "We do not," replied Pete. The thesis is to understand what works. What does the data suggest? In the startup world, that means applying the value of experience to address execution risk with proven methods and best practices. According to Global Startup Studio Network, startups that launch from venture studios have a 30% higher success rate. According to Santiago Perez at Polymath Ventures, the average investor returns in the venture industry are 21%, but it goes all up to 55% when we look at studios.

Four: Studios are the next evolution in venture investing.

Most investors, especially early stage, like to "invest in innovation,” but ironically forget to innovate their own models. . Venture capital has slowly been evolving as operators became investors in the early 2000’s and EIRs became commonplace. Since that shift, the Venture Studio model has emerged as the newest way to create high alpha. Venture studios are not a complex concept to understand; They just don't fit easily in an existing box for investors. But just like Billy Beane in Oakland, then Theo Epstein at the Red Sox, then basically the rest of the league, maybe the time for investing in venture studios has come.