Innovation of the Venture Studio Model

Buyout funds taking the next step in studio model success

Key Points:

  1. Venture studios blend venture funding with company buildings, typically taking initial ideas from inception to product-market fit by supplying the initial team, setting the strategic direction, and providing capital.
  2. Studio models are shown to produce better outcomes for Seed and Series A companies and provide greater returns for investors and limited partners.
  3. Buyout funds have evolved from the venture studio model, taking advantage of the market to effectively provide an alternative path to success for Seed, Series A, and Series B startups that previously raised a round.

A venture studio is a model for entrepreneurship that combines company building with venture funding. A studio typically creates companies from the ground up by generating new ideas for startups, supplying the team, setting the strategic direction, and providing the capital for the business to reach product-market fit.

“Studio models also provide greater returns for investors. Startups created by studios have higher IRR and TVPI with smaller amounts of time between rounds.”

According to a report from the Global Startup Studio Network, venture studios began in the late 90s with Idealab and grew in the 2000s. Successful, serial entrepreneurs with more than one new startup idea developed the model in order to pursue all their ideas with handpicked, all-star teams. Since 2013, “the venture studio market has seen an incredible 625% growth” with about 560 studios in operation around the world. Given the success and growth of this model, it is expected that the number of venture studios will increase still. What differentiates the venture studio model? And what is the next innovation of the venture studio model?

Venture Studio vs Venture Capital vs Accelerator vs Incubator

Startups coming out of studios have a reported 30% better result over traditionally-funded startups, with 72% of seeded, studio startups raising a Series A round as opposed to only 42% of venture-funded startups. In total, about 60% of all studio startups reach Series A. Many attribute the success of studio startups to the model, which allows venture studios to provide the financial support as well as the operational, day-to-day support that continues as the company grows through Seed to Series A, Series B, and beyond. 

Venture studios are able to provide value-add services and personnel, unlike most venture capital firms. While incubators also grow startups from scratch, venture studios are able to grow, hatch, nurture, and develop a company over time. Accelerators typically provide training, guidance, and seed funding over a set period of time to a wide array of startups. They generate hype and provide a platform for the companies with the hope that a handful will receive investments from Demo Day presentations to venture capitalists. 

However, the nature of these early-stage investment strategies means that investors spread their funds among many companies, betting that one or two of their Seed & Series A startups will hit unicorn status and return enough to make up for the rest of the portfolio. VC, accelerators, and incubators “take as many swings as possible in hopes of getting those few home runs.” 

Whereas, venture studios leverage their experience and resources to focus on a handful of companies to the greatest extent. By providing shared services like back office functions, we free up time for founders to focus on sales and marketing, which is more sought after in the growth stages.

Studio Model Success & Growth Innovation

Venture studios have historically found outsized success for their startups and investors. A study of 100 Idealab companies showed a 70% company success rate with 5% becoming unicorns, topping the 33% success rate and 1% of unicorns in traditional venture startups.

Other venture studios have followed the success of this model and augmented it in many ways, given their operational expertise and theses. For example, High Alpha builds B2B SaaS companies, Science Studio focuses on mobile, marketplaces and select e-commerce investments, Obvious Ventures invests in technology to solve systemic problems, and corporate venture studios like P&G Ventures buy majority ownership stakes in startups that relate to the larger enterprise. Stage Fund differs from other venture studios by looking at B2B and CPG companies in the Series A stage and beyond. 

Studio models also provide greater returns for investors. Startups created by studios have higher IRR and TVPI with smaller amounts of time between rounds. Investors are able to achieve low cost for high ownership and, as Douglas Beyer of Radianx Capital has said, “the downside risk is mitigated by the level of ownership; and the upside is exponentially increased also by the level of ownership.” 

These trends continue for the next step in studio models — buyout funds. While typical studios build from the Pre-Seed & Seed stages, we identify and acquire majority ownership of previously venture-backed companies with existing revenue that need momentum to reach meaningful profitability. Given the funding boom after the COVID-19 pandemic — $200 billion across 8,000 startups in 2021 — and subsequent cooling of the venture capital spigot, more and more Series A and Series B companies will need an alternative path forward. Because Stage portfolio companies already have revenue, product-market fit, and an established customer base, the momentum and experience we bring helps startups find their success. 

Venture studios are a relatively-recent, fast-growing, and successful model that benefits startups, investors, and LPs. Studio models are shown to produce better outcomes for Seed and Series A companies and provide greater ROI for investors and limited partners. Venture studios are able to provide key team members, operational management, and shared resources to not just invest in, but also build & nurture startup companies. As the market reacts to the pandemic, buyout studio models like Stage are taking advantage of the situation to help Seed, Series A, and Series B startups create success outside of traditional venture capital funding.

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Innovation of the Venture Studio Model

A venture studio is a model for entrepreneurship that combines company building with venture funding. Given the success of venture studios for startups and investors, the number of studios has grown to over 560 worldwide. What differentiates the venture studio model? And what is the next innovation of the venture studio model?