Startup Studios or Venture Building: What It Is and How It Works

For more than five years, our team has been engaged in creating Internet businesses from scratch and implementing various business ideas. We tried a lot of ways and approaches. At the moment, evolutionary development has led us to the startup studio model. What are its special features? That’s what we’re going to talk about.

Over the past year, our work was based on the principle of venture building (synonym for startup studio). We have created eight projects that have passed our customers’ investment committee approval and attracted over 2.5 million dollars of investments for further growth. This year, our main objective is to maximize the revenue of our portfolio companies while continuing to create and attract investments in new projects.

To save your time, let’s assume that you know and understand why you need startups (whether commercial or strategic goals). It’s a topic worthy of a separate article. Now, let’s suppose that you have already decided on having new businesses. The question is where to get them.

When talking about projects at the initial stage, you have two main ways to get new startups. Option 1: you find them at the market and execute a buy-out. Option 2: you create them internally. If you want to found a start-up yourself, this article is what you need.

Venture building allows for the quick creation and testing of businesses, as well as inhibiting projects’ “childhood diseases”. It helps to layout the right track and prevent some problems in the future. This model creates a great foundation on which you can build a scalable business.

It’s important to understand the expectations of this method and learn what you can or can’t make out of it.

There is no guarantee that having mastered the approach, you will only generate successful and profitable businesses, but you could still reduce the risks. 

In our experience, the model of corporate venture building is 10-15% less risky than the classic venture or even corporate venture.

At the early stages, there’s a very high mortality rate among projects. So with large figures, even a small reduction is worth it.

Part 1. Background. Stages of Our Evolution to Startup Studio

Five years have passed since we started our systematic work on transforming ideas into businesses. Now, we can make a general conclusion. In this industry, the whole process is focused on creating projects and making ideas come into reality. So it all comes down to finding the best way to do it the cheapest.

How do you turn an idea into an operating business with the best chance of success?

By the time we started looking for the answer, we already had a core business (Admitad). So we got the opportunity to test different options.

Let’s suppose there is an intention to create a business project. We’ll take some kind of a common idea; the next step is to find the best way to implement it. First, we tried to use the resources of our core company. But it didn’t work out, and you could find quite a lot of reasons why. If we get to untangling them, one way or another, the question of priorities comes up. 

Let’s have a closer look at what was wrong with that.

Why is creating a startup within a corporation almost always a bad idea?

So you’ve started a project. Taking into account current trends, let it be the delivery of designer ottomans made of unicorn figurines. The production uses green technologies.

We’ve got the idea. The next step depends on how experienced the team is. If advanced specialists have taken up the case, then the development of a website will follow. They’ll purchase advertising and sign a couple of contracts with potential partners. In the worst-case scenario and with no experience, the team will immediately begin to develop expensive software and build a factory to produce ottomans.

Before it all takes off, you’ll need to go through a couple of departments in your company and then wait till they process applications. Given that they receive applications from the main business as well, which are clearly more important and profitable, the priority decreases.

What’s the bottom line? Tasks that an ordinary startup can complete in two hours will take up to two days at the best. Thus, you lose the main weapon of the startup: speed.

The story is not new. Almost all corporations have gone through the same. 99% failed. That’s why incubators, accelerators, project offices, and other tools for creating new businesses have blossomed.

It’s quite normal that nothing innovative survives inside a company, especially when it is not related to the core business. The task of the corporation is to work steadily, with minimal risks’ it might not be fast, but it’s reliable. Therefore, a large company needs a separate reserve, some kind of a nutritious greenhouse for everything new and untested.

We also passed the same route and moved to stage No. 2.

Part 2. Birth of a Project Office

The second stage meant creating a separate project office with its own departments such as lawyers, accountants, and other cross-functional teams.

Here, new problems were revealed:

• The very approach where business tells you where to dig is not great, really, as everyone makes mistakes. But the top managers’ mistake is always more expensive.
• If the core business is not involved in project office processes, it begins questioning its importance at some point.

Most of the initial arguments and assumptions get forgotten. From an R&D, something that generates promising ideas, the project office turns into a black hole that devours the resources of the core business.

What are the risks of having a project office and how one can avoid them?

The sorry fate can be avoided. But the project office should become a standalone business as soon as possible. It has to be on its own not in terms of not only services it receives but also financing. As soon as it comes into life, it moves from a “poor relation” to partner, market insider, a driver of growth. Plus, it contributes to the diversification of the core business (which leads to the risk reduction that the core business loves so much).

Also, a project office remains a source of information about new markets and segments (marketing research is good, but a startup that operates in a new market and learns its pain points is much better). It generates new ideas and directions for developing the core business. 

Another mission of a project office is to unite motivated people who care about what they do. The office then becomes a source of entrepreneurial minds, a home to people needed for new projects. This energy is vital for a corporation that gradually slows down. You could call it a cure for old age.

While we were studying the figures for past years and thinking about how we could return money to our investor (the core business), we realized that our format has a name. On the international market, it’s called a startup studio or venture building (these terms are synonymous).

In startup studios, ideas are the fuel. When testing less than 80 ideas per year, chances of founding a business and starting to recover the costs are minimal. There are two ways for the project office: 

• either you set the task to earn more money and expand your performance;
• or you turn into a burden for the core business. So it gets rid of you or leaves you just for reports and PR (with zero budget and engagement).

Businesses are different. It’s hard to predict how profitable successful products are potentially, or how quickly they will grow. You might get into a situation when the products are ready, but the return on investment (ROI) is expected in ten years if expected at all. 

What ROI an investor should expect from a startup studio?

For a corporation, it’s better to look at it this way: “As part of our business, it’s unlikely to quickly become a giant source of income. But it will pay off at the end.” There’s a very low chance that 100% of funds will be wasted. You’ll return all the money, the only question is how soon. 

It’s also quite possible that this greenhouse will deliver a unicorn that will multiply the value of the core business massively. This will cover your spendings on all the attempts and experiments. And we’re only talking about money here. The startup studio offers so many advantages that it’s difficult to name them all.

You can relax and never aim for that. Then consider the chance to create something fresh and large to be missed. That’s what Honore de Balzac meant in his quote:

The one who seeks millions very rarely finds them, but the one who does not seek them never finds them.

Part 3. What is a Startup Studio and Where Did It Come From?

We define a startup studio as a business that runs other startups. It’s a digital factory that produces digital businesses. The more projects our factory creates per unit of time while investing the same amount of resources, the better. This means that projects will earn more, or sell more expensive, or simply cover all the production costs.

The pioneer of venture building, the Idealab, was founded in 1996 by American businessman Bill Gross. Idealab developed several companies that were sold with a good profit or had an IPO, so it was a success.

Venture builders vary in the frequency of project launches. Some take 2-3 years to launch a company; others create dozens of startups each month. That said, venture builders share common defining features. For instance:

• They are in a constant and systematic search for new business ideas;
• They develop and launch multiple projects at the same time;
• Venture builders have a developed infrastructure and sufficient human resources;
• They take money for implementing business ideas either from their own fund or from investors. Combined funding is quite common;
• Their resources and experience are shared between founders. Each entrepreneur within a startup studio gets support from other studio departments: accounting, HR, marketing, sales, development, etc.

Difference between venture builders and venture funds, incubators, accelerators

Venture builders are investors and interest holders of the startups they develop. The main difference from traditional funds is that it’s not just about investing. They are actively involved in all processes from design to strategic management.

Startup studios are often mistaken for business incubators. The difference is that the first ones implement their own ideas, while incubators take custody of existing companies or founders. Incubators also provide them with consulting, legal, accounting, and rental services.

Operation and main objectives of venture builders

Compared to a classic entrepreneur-investor partnership, the main advantage for start-up studio members is resources. Apart from financial support, the startup receives technical help and expertise. As a result, an entrepreneur can focus on the main problem of testing hypotheses and creating a product. There’s no need in overcoming unnecessary bureaucratic obstacles, which helps get ahead of competitors.

As services are centralized, it can reduce staff and costs per project. Imagine ten startups; each of them needs HR managers and accountants. The staff across all projects might amount to a hundred people. Now, a startup studio will succeed with three. As the studio attracts more qualified personnel, the work will often be done with higher quality.

All this affects the final cost. It’s cheaper than jam-packing each startup with personnel.

Venture builders: who do they collaborate with?

Venture builders are interested in different fields from software to healthcare. But the main focus is tech. With an established work process, the methods of project development won’t be much different, and a well-organized startup studio can create projects for everyone’s needs, both for corporations and individual customers.

GSSN analysts associate the boom of venture building with the economic crisis of 2007. Since then, more than a decade has passed; the industry growth is estimated at a thousand percent. Back in 2013, there were dozens of successful startup studios. In the next five years, they would be numbered in hundreds. It seems that by 2023, the industry will double its growth rate.

Part 4. Founders. What Can They Choose From?

For startup founders, the choice is quite simple. Option 1: They do everything themselves, using their own funds, building their team and processes. When 1 out of 10 attempts turns out well, founders approach venture funds and, if they are lucky enough, raise an investment round in exchange for a smaller share.

Option 2: Founders cooperate with a studio and offer a bigger share for an opportunity to go all the way faster. They are provided with good infrastructure and the support of experts interested in their startup’s success. If it fails, nothing stops founders to try again.

It’s a solid option, and the choice is all yours. Sure, there is no magic pill that helps you get the best of both worlds. To put it simply, it’s either “big risk, big reward” or “less risk, less reward”.

In our experience, most founders cooperating with startup studios find a possibility to become a large company 2-4 faster quite nice, but it’s not even the point. The main thing is that they get to do what’s interesting to them without being distracted by boring necessities: financial documentation, HR records keeping, and things alike.

P.S. If you have any suggestions and questions regarding this topic, you can always reach us by email at blog@admitadinvest.com.