There has been consolidation in the venture capital industry especially since 2008, resulting in fewer and larger funds.
As a result, VCs are getting involved with startups at later stages and making larger investments. The metrics that VCs are seeking from a startup for initial funding present a challenge to startups – these metrics are generally not something that two entrepreneurs sitting in a Starbucks for two years can get to. This gap is being addressed by other institutions – incubators, accelerators and seed VCs. A new innovation and equity value creation structure that has more recently emerged is the venture studio.
What Is a venture studio?
The venture studio model is significantly different from the traditional VC model and incubator or accelerator models. The venture studio works actively with entrepreneurs to co-create, fund and launch startups. The venture studio has an in-house team with the entrepreneurial, domain expertise, technology and operating skills for active co-creation, launching and growing of startups.
- Expertise for startup creation Venture studios are involved in a startup early on, often at inception. Venture studios focus on creating a small number of bespoke startups every year that address big market-focused opportunities and challenges. They are thematically focused on specific business domains and verticals so that they can develop deep expertise and ecosystem relationships in the market. The studio has a team of entrepreneurial business builders and deep domain experts that drive a process for ideation, market validation and subsequent creation of startups.
- Active operational involvement Venture studios are operationally hands-on till the startup reaches a stage where it has reduced many risks, is well on the path for commercialisation and ready for traditional VC financing. This period can take up to two years. The venture studio has a dedicated team of operators and technologists to help the company hire engineers, drive development, product management and the overall business. The venture studio significantly accelerates a startup’s journey towards becoming a growth-stage company by super charging leadership recruitment, product development, driving product-market fit, and customer and partner engagements.
- Capital partner Startup entrepreneurs spend an inordinate amount of time at the early stages to raise money. They have a tenuous undercapitalised existence, often unable to hire the right talent to rapidly pursue an opportunity and discouraging experienced business and technology leaders from jumping into the startup. The studio is like a VC entity in that it provides a large amount of capital and even all the capital needed at the seed stage. They often syndicate the series A and subsequent rounds of financing with traditional financial and corporate venture capitalists. A conviction-driven, deep-pocketed capital partner gives the startup time and resources to focus on building a company that has long-term potential.
- Early engagement with corporate customers and partners Venture studios actively engage with an ecosystem of corporate, Big Four and system integration partners to accelerate their company creation process. Early engagement with corporations drives product definition and prioritisation of capabilities. The product is developed in continuous engagement with early customers to drive product market fit and fine-tune go-to-market approaches.
A venture studio at any time maintains two benches – a bench of startup ideas that it is developing and a bench of entrepreneurs who can be founders. Unlike traditional startups where all the founders have to be present at the beginning, the venture studio model allows for the right founders who are synergistic with each other to be brought in over a period of time. The founders in this model often have more experience and top talent can also be recruited from relevant companies. They perceive working with a venture studio to be lower risk because of the built-in capital, active operational expertise to support the startups, and a commercial ecosystem continuously engaging with the venture studio’s portfolio.
Venture studios are high touch, high capital and low volume and in contrast accelerators are low touch, low capital and high volume. Accelerators provide mentorship, training and physical space as their value add to the startup. They have a programmatic approach to support a large volume of startups in a cohort. The capital investment by accelerators is low and often zero. The founders in an accelerator model tend to be younger and often focus on consumer problems. The occasional startup becomes a unicorn, but a large majority end up as zombies that never get to a stage where they are fundable by traditional financial VCs.
Corporate co-creation
Five technology companies now make up almost 20% of the S&P 500 and digital transformation is a top of mind C-level concern. Corporations are looking to significantly reduce the cycle times for innovation in their products and services. The corporate environment however is not well suited for driving internal innovation that is not in adjacenct areas. Quarterly reporting cycles in a corporation drives innovation that delivers short-term results. Corporate organisational structures, financial incentives and a corporate culture that does not encourage risk-taking make fundamental innovation very difficult.
Many corporations are now using every tool in the innovation toolbox to drive digital transformation and business resilience. In addition to internal incubation these include partnering other companies, acquisition, corporate venture capital and internal incubators. Corporations now have also started exploring open innovation models by collaborating with external venture studios.
The Hive is a venture studio focused on data and AI-driven innovation in the enterprise that has been co-creating startups with corporations since 2012. Corporations engage with the Palo Alto-based studio to identify areas that will enable them to either bring rapid innovation to the market or improve operational efficiencies.
- Building new sources of revenue The Hive engages with corporations to co-create startups to build new sources of revenue with specific market focus. Corporations have a deep understanding of problems and opportunities in their markets and share their subject matter expertise with The Hive in the ideation and validation phase of co-creation. Once there is successful validation that a fast growing and independent company opportunity exists The Hive starts, funds and builds the startup using its studio co-creation approach, in-house resources and capital. Corporations work with the startups to build joint solutions that they take to market, giving them a time to market differentiation against their competitors. Over time as the company is moving along different growth stages the corporations may choose to also invest in the startups and potentially even acquire them.
- Business transformation To realise the goals of digital transformation, corporations are driving transformation across business processes, systems and people. Digitally driven enterprises have a significant competitive advantage and have also demonstrated resilience during the pandemic. The Hive has collaborated with corporations to create startups that have addressed specific security needs, revenue operations challenges and business process inefficiencies. These startups have engaged with corporations almost since their inception in understanding the problems faced by the customer and delivering solutions that not only address the corporation’s problem but also generalised to address a broader market.
- Extracting value from assets Corporations often have technology, data and other assets that are underutilised. The Hive collaborates with corporations to develop opportunities to roll the assets into a newly formed company whose longer-term success will realise value from the assets.
Takeaway
Venture studios are a new model for building and growing startups that address big problems and opportunities in the market. Digital transformation and business resilience across different functions is a difficult multi-decade long journey with many challenges. Venture studios with deep domain expertise, operational resources and an entrepreneurial DNA can be a valuable partner to help the corporation embrace and drive innovation with agility.