9 min read · Sep 5, 2023
Determining the winners, and predicting the future of studios
To take a systemic view of who the winners will be, we first have to understand that kinds of problems and businesses that studios are structured to repeatedly win at.
What kinds of businesses do studios do well?
VCs target a wide spread of industries with unicorns being the gold standard. They target visionary problems such as human longevity which often don’t have known solutions, and as well as companies that can deliver known solutions better, cheaper or faster.
Unlike typical VCs, studios have limited capital runway and are distinguished by operational speed to bring practical visions to life. Their economics also mean they can build a few 100M companies and return their funds, vrs needing 1/10 companies to be unicorns. Structurally, they are therefore better suited for known problems with known solutions, and thrive in enterprise verticals considering the high marketing budgets required to win in consumer categories.
More specifically they do well in industries with barriers.
While there are rare number of wildly successful ventures from generalist studios like Atomic, its important to consider the core competency of a studio is in its ability to replicate and create success. As such I believe the enduring studios will focus on industries with natural barriers such as regulated industries like healthcare, and industries where they can develop a deep understanding of a complex customer such as enterprise; its not a surprise then that many top studios target B2B SaaS (see Venture Studio Index). These are also industries where knowledge and relationships compound to build other businesses because you can build on to sell more solutions to the same clients, and leverage a similar follow-on investor pool.
What will determine the studios that win?
Some venture builders actively disassociate with the “venture studio” label because of the proliferation of poorly resourced, poorly structured and sometimes poor performing studios. With the rise of studios, how can we see beyond the noise to identify studios that will win?
The studios that will win have an enduring talent and capital advantage.
Despite the varied claims of studio’s competitive advantage to add value to start ups, the two advantages that truly matter are the ability to attract high caliber talent and bring on follow-on investors; this also applies to university associated studios that have access to proprietary IP. Both are necessary to win.
- On talent, the advantage can come as a result of sector, function and geographic credibility for example PSL dominates in Seattle for product managers at Amazon and Microsoft looking to experiment their way into their next tech venture. Its important to distinguish an enduring strategic talent advantage from a temporary opportunistic advantage where the studio founder’s recent exit or capital access means they have a current personal network to tap into of people they’ve worked with.
- On capital, the best studios are structured as a sister fund to make follow-on investments and a recurring trend I’ve noticed in the successful ones is that the LPs in the studio are often the first co-investors in portfolio venture rounds. Given the natural hesitation of investors to an alternative asset class, it’s a smart move to tap into already educated and exposed investors for follow on funding; this also works in favor of the investors because they are often consulted in the venture build process to determine if the idea is fundable, or at least they have visibility into the venture’s traction before the raise is actually due.
What are the profiles of leaders who tend to create venture builders?
While a number of studios have a blend of profiles, I’ve come across three profiles of studio founders which have varied success and failure modes:
- Operator Founded: Formerly successful founders who have cash from their previous exit and want to continue building a portfolio of companies in industries they are familiar with, have relationships in and credibility with investors. Their primary challenge is learning how to scale themselves as leaders when venture building with professional CEO profiles, to operationalize their visions.
- Advisor Founded: These studio leaders don’t have meaningful startup operational experience, or experience with fundraising from commercial investors. These studios are helpful in outlining spaces to build, and provide generalist accelerator-style support and access to outsourced services like a dev shop. They are well suited for corporate venture studios, agency models, and foundation backed studios as the value add to these clients is external advisory and accountability for innovation, and do this by acting as a liaison and a pathfinder. While this profile can develop a core business around corporate innovation and successfully facilitate brokering tech for new markets, I don’t foresee this profile successfully creating venture scale companies.
- Investor Founded: There’s a natural hubris for investors who repeatedly see market gaps and failures to believe they can create their own pipeline. Multi stage investors are the most likely to have the financial capacity, market visibility and desire to incubate their own companies so they can benefit from reasonably priced cap table access for follow on investment. Because they are first and foremost investors, they approach incubation as an ad hoc vrs a disciplined experimentation and opportunistically when they have founders in their network looking for their next big thing. Ironically they have a high likelihood of success because they provide a high caliber founder cash, time, a powerful network, a relatively hands off engagement, and informal guarantee of more investment if successful.
Side Related Note on Evolution of Venture
In the explosion of capital access under cheap interest rates, each level of capital begun looking to capture an earlier pipeline of opportunity. PE firms toe dipping into VC investments. 2022 saw VC late stage investors funder earlier stage pipeline or start early stage accelerators like Sequoia’s Arc and a16z’s START. While there will always be a need for pure investing, I believe that in 1–3 years, we will see more activity at the intersection of investing-operating models like venture studios and iterations of the studio model.
Of the stakeholders, investors are uniquely positioned to be key contributors in building this future for a few reasons:
- They see patterns in business models, challenges and benchmarks which is valuable birds eye view for operators who are often heads down, focused on a narrow view of the world
- They see multiple articulations of what the future could be, and they get to test rationale for what needs to be true for those futures to be possible.
- They have capital access to make experimental bets
However when this power isn’t tempered with the humility that often comes from operating experience, it will lead to unhealthy and unsubstantiated speculation, which at best leads to temporary market distortions, and at worst customer and societal pain.
How will the venture building industry evolve?
- High Failure Rates: Many studios will fail; primarily because of LP skepticism, leaders wont be able to secure operational funding for the studio to sustain themselves through proof of concept, let alone follow-on investors for their ventures. This is not an unusual progression in the industry’s maturation — many VC funds don’t return their funds either. It’s part of the evolution of the industry as it figures out through experimentation, what opportunities, founders and investors work best with the studio model.
- Investor Incubation: VCs will continue to incubate companies but ad hoc nature based on Partner sponsorship vrs the discipline a studio brings. This ad hoc approach will likely lead to frustration and or internal ambivalence about the approach. VC incubation is happening publicly by firms like Greylock on Tome and SutterHill on Snowflake, and a number of multi billion dollar VCs I’ve interviewed but can’t yet name publicly. I expect to see more top decile multi-stage VCs quietly experimenting in this regard with iterations of their Entrepreneurs in Residence programs.
- Superior Hybrid Investor-Operator Teams: This will be additionally accelerated by a now mainstream trend of investment firms (VC & PE) courting more operators to join them. This trend will also change the venture investing landscape by enabling these diverse hybrid teams to: 1/ Find deals in verticals earlier than investors because skilled operators are sought after for practical insights on building companies in markets and sectors they are familiar with 2/ Secure deals because operators bring credibility as value adding and have social clout and empathy with entrepreneurs 3/ Secure higher quality deals in the long term because operators are better positioned to ascertain the reality of company timing and team fit for a market.
- Permanent Capital/Long Hold Investors + Studio Collabos: Studios are currently associated with VC funds and venture scale businesses. As alternative types of capital search for experiments and proprietary deal flow, I expect this decade will see early examples of family offices and long hold investors that see opportunities to build and hold companies (especially as add ons and complements to their current portfolio) that are not fits venture, but can become great cash flow generative and enduring businesses. I’m currently researching this type of capital and related investee profiles to publish insights a few months.
- Corporate venture builders — which help corporates build new companies typically for a fee for service - will experience cyclical trends; this is a distinctly different profile and incentives from corporate venture builders who build ventures with joint equity investments from corporates. BCG X and other consulting firms have versions of venture building for a fee. They will eventually form niches as partners to corporates, assisting them with the digitization of their products especially as we see advancements in new frontier technologies such as web3 and AI, that don’t easily fit legacy systems and org cultures. This aligns with large corporations’ needs, risk profile and political structure — they dedicate budget to innovation and can afford to experiment with corporate studios in addition to accelerators.
- Top 100 STEM Universities are the Next Frontier for studios to support with commercializing their IP and talent advantages — check out MIT’s studio called Proto, and University of Notre Dame-High Alpha’s partnership as examples. As they get under increasing pressure to return entrepreneurial academic talent in frontier science who will be otherwise poached by industry, and better structure their commercial relationships and feedback loops with industry.
- While studios are often known to work on ventures from scratch, there will be increasing integration of “Acceleration Support”, leveraging their shared services to deliver more personalized support to early stage ventures than accelerators offer, as they diversify their portfolios. Some context for why I think this — an inherent challenge in the studio model is raising enough capital or generating enough revenue in the early days to fund a team and founders to deliver a proof of concept, upon which they can raise money for the studio’s operating expenses. Many smaller or underfunded studios are therefore on the look out for ways to diversify revenues early on, such as through fee based consulting for corporates, which can be distracting from their core business. An extension into acceleration support may align better with core value add, and get them closer to having ventures that successfully raise, which gives them proof points of value for investors, and potential for earlier liquidity events.
- Explosion of Studios in Emerging Markets + New Verticals like climate: For the aforementioned reasons, climate and emerging markets will be a hotbed for studios. There is already a rise of studios created in the past 2 years focused on climate solutions for emerging markets. This is a unique and fortuitous intersection of a trending vertical and underserved geographies for VC. In part, this is driven by increasing global demand for carbon credits which will increasingly chase quality verifiable sources (relevant climate tech can help here), as well as driven by the need to verifiably reduce carbon footprints across supply chains, many of which touch developing markets as commodity and labour sources. Western capital allocators and corporates will increasingly look to the Global South to offset carbon — as it has 85% of world’s population, some of the largest natural reserves for carbon sequestering, and yet is the least prepared for climate risks. Studios setup in emerging markets will likely be anchored by philanthropic capital and where anchored by private investors, the studios will be founded by Western founders who have access to the capital needed to launch a proof of concept. As has happened in VC, this will eventually raise a conversation in the next decade about climate justice, and who is empowered to solve climate issues in the Global South.
- Emerging Market Studios will increasingly focus on Exiting to Strategics: Given the systemic limitations of VCs in emerging markets such as in Africa to return funds because of limited exit opportunities, LPs will start to be open to studios that build companies in conjunction with known strategic buyers eg telcos and banks which control significant distribution and have cash on hand to invest in innovation. This will be a great step for all stakeholders as it will mature the approach to partnerships, co-building, and facilitating exits at realistic valuations.
Conclusion:
We do not yet have macro quantitative insights about the success of studios relative to other models are not yet available; or where they are published, they have not yet have objective credibility by having the validation of dispassionate researchers.
That said, the studio space is exciting to engage because like any frontier industry it attracts genuine thinkers, unfettered by common troupes of entrepreneurship (who, what, where, how), and are on a joint mission to find replicable ways to build scalable ventures whose time has come; additionally exciting to me is that they often to work with more mature and diverse founders, bringing undervalued talent into the fold.
Through my interviews, work with studios and attending GSSN, I’ve found this studio builder community to be deeply collaborative, optimistic and humble enough to ask itself the hard questions.
I’m excited for the evolution of this emerging addition to the venture ecosystem. I hope this “white paper” contributes to drawing out valuable macro trends for those operating in and observing the studio landscape.
Thank you to all the amazing studio Partners who’ve shared insights with me. Onwards in the arena.
