Startup founders often turn to incubators and accelerators to help them find a suitable product/market and raise seed capital. But there is another option for entrepreneurial founders who want to start on their own, but may not have the right idea or team. Venture studies don’t fund an existing idea: they incubate their own ideas, build a minimum viable product, find product/market fit and the first customers, and then recruit entrepreneurial founders to run and scale the business. Examples of companies that have emerged from venture studies include Overture, Twilio, Taboola, Bitly, Aircall, and the most famous alumnus, Moderna. However, in exchange for reducing risk from much of the early-stage start-up process, risk studies take between 30% and 80% of a start-up’s capital. The author explains how venture studies work, why they may be an attractive option for some entrepreneurs, and what questions to ask if you’re considering joining one.
Outside a small college in the Midwest, I was having coffee with Carlos, a rising star at a midsize manufacturing company. He had a history of taking small teams and turning them into successful product lines. However, after a decade working for others, Carlos was interested in building and growing his own company. I asked him how much he knew about getting started. He said that from what he read, the way to build and finance a company seemed to be: 1) have an idea, 2) build a team, 3) start testing minimally viable products, 4) raise initial funds, 5) then get risk capital.
Describing his work in additive manufacturing and 3D printing, Carlos said he knew there were early investors in his city, but venture capital was still mostly on the coasts and it was hard to get their attention. He, too, wasn’t sure his idea was great. But he still wanted to turn something small into a big business.
As we ate dessert, Carlos asked, “Besides raising money, are there other ways to start a business?”
I pointed out that there was
Reduce startup risk
Over the past two decades, three types of organizations—incubators, accelerators, and venture studios—have emerged to reduce the risk of failure in the early stages of startup by helping teams find the right product or market and increase the initial capital. Most are founded and run by experienced entrepreneurs who have built businesses before and who understand the difference between theory and practice.
I pointed out to Carlos that accelerators like Y combiner, tech starsY 500 startups Offer a cohort of startups a six to 12 week bootcamp. But they are looking for founders who have technical or business model knowledge and a team. Accelerators provide these teams with technical and business expertise and connect them with a network of other founders and advisors. The culmination of this boot camp is a “demo day” in which all startups in the cohort have a few minutes to pitch their companies to venture capitalists and angel investors. (In some cases, the accelerator provides the seed funding itself.) In exchange for attending an accelerator, startups give up 5-10% of their company’s equity.
There are thousands of accelerators around the world. The business model for most is to select startups that can generate risk class returns, that is, grow into companies that can potentially be worth billions of dollars. For most accelerators, admission is by application and interview. Some, like Y-Combinator, Techstars, and 500 Startups, are open to all kinds of startups in any market, while others, like SOSV, IndieBio, HAX, OrbitY dLab they are more specialized.
incubators They are similar to accelerators in that they provide startups with shared space and resources, but typically very little or no capital. Their financial models are based on membership fees that grant access to a shared coworking space, resources, and access to other founders and operational expertise.
Carlos stirred his coffee. “The accelerators don’t sound like a good fit for where I am in my career,” he offered. “I don’t have a great idea, nor a technical team, but I know how to build, grow and manage teams.”
The Alternative: Venture Studios
I pointed out that there were organizations that might be a better fit for his skills and passion to undertake on his own: risk studies. Unlike an accelerator, a venture study does not fund existing start-ups.
Venture studios create new companies by incubating their own ideas or the ideas of their partners. The internal study team builds the minimum viable product, then validates the idea by finding the product/market fit and the first customers. If the idea passes a series of “Go/No Go” decisions based on customer discovery and validation milestones, the studio recruits entrepreneurial founders to execute and scale those startups. Examples of companies that have emerged from risk studies include OvertureTwilio, Taboola, Bitly, Aircall and the most famous alumnus, modern.
I suggested to Carlos that he think of a venture study as an “idea factory” with its own full-time employees dedicated to finding a suitable product/market and a repeatable and scalable business model.
Most venture studios create and launch several new companies each year. These have a higher success rate than those that come out of accelerators or traditional venture capital firms. That’s because, unlike accelerators, which operate on a cadence of six to 12 weeks, studies don’t have a set time frame. Instead, they search and pivot until the product/market fit is found. Unlike an accelerator or a venture capital firm, a venture study kill most of your ideas that they can’t find traction and won’t launch a startup if they can’t find evidence that it can be a scalable and profitable venture.
There are four main types of risk studies:
- Technology transfer studiesWhat United States border background, work with companies and/or government laboratories to obtain ideas and intellectual property. They then transfer the IP and build the startup within the risk study.
- corporate studiesWhat applied materials, source ideas and intellectual property within your own company. They then build the startup within a separate corporate risk study within the company.
- A niche study is an independent venture studio generating its own ideas and IP in a specific industry and domain; for instance, pioneer flagshipwhich is focused on health care and incubated LS18, The company that became Modern.
- A industry agnostic studyWhat internet rocketis an independent venture firm that generates its own ideas and IP and is industry and market agnostic.
Today there is about 720+ risk studies worldwide – half are in Europe. In both North America and Europe, many risk studies in non-major cities are funded by government agencies to stimulate local growth, sometimes with matching donations from companies. These studios have different metrics than startup studios whose limited partners are private family offices or venture capitalists.
Why would an entrepreneur join a Venture Studio?
Over our second cup of coffee, I told Carlos about the downsides of joining a venture firm: how much capital/ownership they take.
In contrast to an accelerator that takes 5% to 10% of the capital of a startuprisk studies lead anywhere from 30% to 80%. This is because companies that come out of a risk study have received a start-up that has removed risk from much of the early-stage start-up process. (There’s a direct correlation between the amount of capital a venture studio takes and their belief in how much they want their founding CEO to be an entrepreneur versus an enforcer.)
Why would an entrepreneur join a venture firm and give up most of his company instead of going to an accelerator? Most accelerators tend to look for a “founder type” – a stereotypical techie, fresh out of college, already with an idea and co-founders.
Most people don’t fit that pattern. However, many are more than capable of taking an idea that has been tested and validated and building on it.
What to look for in a Venture Studio
As we got up to leave, Carlos asked, “How do I know if the risk study is good?”
It was a great question. While there are no hard and fast rules, I advise entrepreneurs to ask these four questions:
- Is the studio run by a former founder and does he have former founders as full-time employees? The most successful venture firms are founded by entrepreneurs who previously built companies with more than $10 million in revenue and had more than 100 employees.
- What percentage of capital are they asking for? The response will be directly proportional to what they believe your value is. Companies that apply for more than 60% are actually hiring an employee instead of a founder.
- Do you want a study with specific experience? Studios that focus on specific niches and industries can create a large bank of domain experts—for example, a founder, advisors, and mentors—who are experts in this field.
- Do they have enough funding? Beware of zombie studios. If you’ve given away most of your company to a studio, it would be helpful to have them around to support you once you’ve started. If they don’t have enough funds to keep the lights on for several years, you’re on your own. Make sure your studio has raised more than $10 million in funding.
A few weeks later I received a note from Carlos informing me that he discovered that there was a risk study in his city, another one administered by the state and a third one in his region focused on manufacturing. It had applied to all of them.