A venture studio is an organization that creates startups, typically by providing the initial team, strategic direction and capital for the startup to reach product-market fit.
Distinct from the venture capital approach, venture studios are closely involved in the day-to-day operations and strategic decisions of growing the new business. After the startup shows traction, it can seek to raise capital from outside investors, including VC’s. The venture studio’s employees can decide to stay in the portfolio company or return to the studio to work on a new startup.
The venture studio model is also different than a traditional startup accelerator. Y Combinator is an example of a leading accelerator, as are Techstars or 500 Startups. Accelerators provide what is typically a 12-week program and initial seed funding ranging from $25,000-$125,000 in capital in exchange for a set amount of equity. The program provides training and guidance to validate the business. At the end of the program, the accelerator has a Demo Day where investors can learn about the latest startup batch and hopefully invest in the accelerator’s portfolio.
Accelerators tend to focus on spreading small amounts of capital across a wide array of startups with the expectation that most will fail. Venture studios take a slightly different approach, focusing more resources around opportunities that they identify as ripe for a startup to capture. Unlike accelerators, venture studios also don’t typically accept applications for new portfolio companies, as the venture studio’s strategic insight and ability to select opportunities is a part of the value it brings to its investors.
Venture studios came into existence in the late 00’s after a handful seasoned tech entrepreneurs with successful exits had a lot more than one single new startup idea to pursue. Building a company from scratch is hard and many entrepreneurs view founding a new company as a minimum ten-year commitment. Many of these same entrepreneurs also particularly enjoy the early stage of this process – that of discovering and proving out a new business model and building out a new organization – more than the process of growing a proven business with established processes.
This select breed of entrepreneurs tends to thrive in highly uncertain environments. Once they’ve built the business model and repeatable systems that will enable the business to scale, they often crave new challenges. Many of them are serial entrepreneurs, who have started multiple companies in their career. So rather than focusing all their time on one initiative, instead, they wanted a way to apply their startup expertise in pursuing multiple new business opportunities rather than only one. Enter the venture studio.
Today there are two main types of venture studios: independent venture studios and corporate venture studios.
Independent venture studios provide all the resources needed to launch a new startup including the team, strategic direction and capital from their own balance sheets. They may have raised outside funds and have LP’s (outside investors), but usually the principal of the venture studio makes the final decision on what startups to spin-out and the amount resources to allocate as these new businesses gain traction.
Examples of independent venture studios would be Expa, founded by Garrett Camp, one of the co-founders of Uber, or Rocket Internet in Europe. Rocket is famous for founding and spinning out a number of startup “clones” based upon popular tech companies that started either in the US or China. Delivery Hero, a restaurant delivery marketplace in the model of GrubHub, is a well-known Rocket Internet success.
Independent venture studios are, in essence, a more vertically integrated approach to the traditional venture capital model of starting a new business from scratch.
Compared to the independent model, corporate venture studios provide a hybrid mix of talent, capital and strategic direction in cooperation with a mid to large size enterprise. Corporate venture arms will often provide initial capital and strategic direction to a corporate venture studio who brings the talent, process and know-how to build a startup.
This model differs from a corporate venture group’s traditional focus: to invest in startups.
Instead, the corporate venture studio model allows the enterprise to have a majority ownership stake in the new startup business. As a result, the risk-reward balance is much different. Instead of investing in a business that already has initial traction and has been vetted by an institutional venture-capital investor, this model allows the enterprise to take on additional risk in exchange for more upside, an increased ownership stake and more control.
While large companies excel at incremental innovation that grows the core business, they have long struggled with how to capitalize on industry disruption and embrace new business models.
This innovator’s dilemma is not new, but over the last few years these corporate venture studios have emerged to help big companies harness the big advantages they have in starting new businesses while helping to address some of the challenges and risks that any new venture brings.
Another reason for this shift has been the increasing competition of big platform monopolies with traditional enterprises. Over the last ten years, dominant platform companies – like Google, Facebook, Amazon and Alibaba – have become new business creation engines, using their existing networks and assets to spin out new businesses. They have, in effect, created their own internal venture studios focused on building new business models.
Google X, Alphabet’s startup studio for “moon-shots,” is one example of this, having created new companies like Waymo, Verily, Google Health and others. Other large tech companies like Amazon, Facebook, Uber and Alibaba have likewise setup entire divisions for entrepreneurial teams to create new startups.
Some success stories would be Google Video which helped validate the acquisition of YouTube, Uber creating Uber Eats entirely from scratch, and Amazon creating Amazon Web Services as well as Amazon Business, its B2B marketplace. Facebook has also launched Facebook Pages, Facebook Messenger, Facebook Marketplace and many other new “businesses” within Facebook.
This increasing competition between tech monopolies and incumbents has also contributed to the decline in early stage venture capital funding. VCs are hesitant to invest in new startups in an area that might compete directly with a big tech monopoly, as competing with these big tech monopolies can limit the upside potential of a new startup business.
For an example, just witness how Facebook’s copycat tactics have hampered the growth of Snap over the last few years. So in an environment of increased competitive uncertainty, VCs have shied away from funding opportunities with too much competition.
Incumbents, then, face a double-edged sword of competing with these large tech monopolies. Unlike VCs, they don’t have the luxury of ignoring the problem and deploying their capital elsewhere. These incumbents have to grapple with the threat of platform businesses entering their industry.
At the same time, the traditional way that incumbents have dealt with these types of challenges – acquisitions – is being closed off. The lack of investable startups in industries that compete with dominant platform companies leads to a lack of acquisition targets for incumbents.
One example of this dynamic is in B2B distribution in the US, where Amazon, Alibaba, eBay and Walmart all have B2B marketplaces actively in the market that are growing quickly. Traditional B2B distributors face a sparse landscape of B2B marketplace startups that they could invest in or acquire because venture capital firms are reticent to invest in startups that will directly compete with multiple large tech monopolies.
For the few startups that do remain, incumbents are faced with greater competition for deals and soaring valuations of unproven companies.
It’s no wonder then, that they have begun to look for an alternative.
Large enterprises have long favored investments and acquisitions as their approaches to new business model innovation because, quite simply, building a new business is really hard.
It also requires a different set of skills and a different mindset than it takes to operate a large, successful business. There’s nothing wrong with this – it’s just that each activity requires a different set of mental muscles and skills. It’s a rare executive that excels at both, the same way few athletes excel at multiple sports. When you’ve trained to do one thing most of your life, it’s hard to embrace something completely different.
In the past, large corporates have also tried to create internal incubators for new businesses. These incubators have done well when it comes to producing incremental innovations that add to the core business, but they have typically struggled with business model change and transformation, as the innovator’s dilemma would predict. Even within a corporate incubator, disruptive initiatives are often stifled by the constraints and conflicting demands of the core business.
Again, there is nothing inherently wrong with this. When you have a large, successful business, you have a lot to lose. It is natural and healthy that a large enterprise builds up antibodies that protect its core business from risk and change. When someone, even within a corporate-sponsored incubator, threatens that core business, those antibodies naturally kick in and respond to the threat.
In times of sustained growth, this reaction is beneficial. However, when an industry is experiencing a period of major change, as more and more are when the big platform monopolies suddenly enter their market, then large enterprises need an injection of different antibodies to fight the threat.
Combined with the lack of acquisition opportunities, this reality has led more enterprises to embrace the co-creation model of corporate venture studios. This model enables large enterprises to capitalize on the advantages they have in building new business while helping mitigate many of the challenges.
And when it comes to creating new businesses, large enterprises do have a lot of advantages, including not just capital or hard assets, but also soft assets like established brands, data, customer relationships and industry knowledge. Their challenge is their limited tolerance for uncertainty, risk and failure, and with that the inability to move quickly.
Working with corporate venture studios can introduce some added upfront costs for large enterprises compared to creating a business from scratch on your own. But with that cost comes a number of benefits, from attracting entrepreneurial talent, cultivating a startup culture and delivering agile execution.
Corporate venture studios can help structure new businesses in a way that gives them enough separation from the core business to thrive. This separation lets the new startup take the risks it needs to find product-market fit in an uncertain environment and enables it to move quickly and fail fast so that it can get there. This co-creation gives large enterprises the ability to try new things without having to tie them too closely to their core business and brand. Only once the new startup reaches a level of maturity do you then need to worry about integrating it with the core business publicly.
At the same time, corporate venture studios also bring an injection of entrepreneurial talent that large enterprises struggle to attract. Having been burned by corporate innovation projects making big promises in the past, many entrepreneurs are hesitant to join projects built out of corporate incubators. These serial entrepreneurs love big challenges and figuring out new business opportunities, but they typically are hesitant to trust large enterprises.
The venture studio model gives them a way to get the best of both worlds, working alongside other seasoned entrepreneurs to build new businesses without making the same sacrifices of a startup founder.
Lastly, any seasoned entrepreneur will tell you that culture is an important part of building a successful startup, and the corporate venture studio enables the new business to benefit from the experience of established entrepreneurs who can create a strong entrepreneurial culture before having to worry about dealing with the antibodies and process of the corporate.
There is no “right way” to do innovation. Building new businesses is always hard, no matter the context. And there are several ways to go about capturing new business opportunities. The venture capital approach that has dominated for the last couple of decades is only one way. Acquisitions of established businesses or successful startups is another.
But as the constraints and competitive demands of the market have changed over the last decade, new models of business creation and value capture have grown to meet them. The venture studio model grew organically out of the changing needs of venture investors and large corporates, as well as the evolving market for entrepreneurial talent.
At a time when these investors and large corporates alike are faced with the new specter of competing with large platform monopolies, the rapidly growing venture studio industry has a lot to offer.
Filed under: Innovation Leadership | Topics: enterprise hacks
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