A venture studio (also called venture builder or start-up builder), such as Glowfish Ventures, is an organization that creates start-ups, typically onboarding a founding team, creating the initial MVP and providing office space and support functions to the start-up. Moreover, it usually provides the starting capital required for the venture to launch and show initial product-market fit. Once mature enough, the venture studio will then help the start-up raise external capital for a Series A or B and support it in becoming a fully independent company.
A lot has been written about the benefits and challenges of venture studios. However, as the model matures and some of the existing venture studios have entered the ‘harvesting’ mode, it is becoming increasingly apparent that venture studios have the potential to create superior returns to the classical VC model.
According to the Global Startup Studio Network (GSSN)’s 2020 Disrupting the Venture Landscape report, startups that launch from studios see 30 percent higher company success rates. Almost every company launched from a venture studio raises a seed round, and 72 percent of those that raise a seed round go on to raise Series A financing. Venture studio High Alpha’s states that ‘start-ups created by studios have a 53% IRR on average, versus 21% for non studio start-ups; this is consistent with our own experience at Glowfish Ventures where we have seen a 50%+ IRR from our portfolio.
Below are the five key reasons behind this superior returns profile delivered by the venture studios:
- Lower cost of equity as investors: Venture studios typically own a higher equity percentage at a much lower cost. There’s a wide range in equity stakes that a studio typically retains, ranging from 20-95%, but on average, venture studios are estimated to have 40-50% of the equity at the time the start up starts raising external capital from the market. Moreover, since they (co)-found the venture, they don’t have to pay a premium for the equity (versus a VC).
- Faster time to market: Venture studios can help launch a new start-up much faster than the average founding team. Successful venture studios will be able to help build MVPs quickly, help on company formation, help with access to talent and share experience on business models. Often, venture studios are also able to provide highly experienced talent that most early stage start-ups can not afford in their early days.
- Accelerated scale-up: Once the start-up has launched, and initial traction is positive, venture studios can accelerate the start-up’s traction by providing more funds quickly, more resources or even by creating quick partnerships with the other ventures. The most important advantage is that the management team can focus on growing the business quickly rather than focus on admin and / or fundraising.
- Lower risk profile of the start-up: the additional experience, access to funds, access to extra people and know-how collectively lower the risk profile for a start-up. Moreover, with a normal start-up, there’s a real possibility that the founders throw in the towel as the going gets rough. With venture studios, this risk is also reduced as the founders are part of a larger group, but even when it happens, the venture studio can help bring in a new founding team.
- Better access to experienced talent: One of the most challenging parts of building a start-up is finding and onboarding the right people. Joining a start-up is often a big step for an experienced individual and is often perceived as a high-risk career move. However, this risk perception is significantly lower when an individual joins a venture studio backed start-up as there are other opportunities within a venture studio’s portfolio that can open up even if the current start-up does not succeed. In our own experience, this value proposition has been super helpful in attracting top talent who would have otherwise not joined our portfolio companies.
As a venture studio, we have first hand witnessed the advantages of the model and the superior returns it can provide to investors. More and more studios are now also entering the GCC as it is still a largely untapped market with lots of upside potential. Venture studios in the region may very well have a bright future ahead of them.
