Venture builders are companies that take the creation of startups to the assembly line. After launching several projects at a time, they invest their funds, help raise capital, and develop startups into full-fledged businesses for their commercial gain.
In exchange for human and financial capital, venture builders receive a share in the company. Afterwards, they strive to gain profit as a result of a startup’s activity or after selling their startup share.
Introduction to venture building
Venture builders work with startups in their early stages of development (before MVP). Their usual set of functions is:
- providing financial, technical, and human resources,
- improving business processes,
- attracting external investment rounds and/or selling to corporations.
Before fully diving into venture building, let’s figure out which terms directly apply to it and which do not.
Understanding different terms
There is lots of confusion because corporations use several words to describe the same phenomenon:
- company builder
- venture studio
- startup factory
- startup studio
- startup foundry
- startup nursery
- parallel entrepreneurship, etc.
The three most common words are startup factory, venture builder, and startup studio. However, there are also terms such as accelerator, venture capital fund, and business incubator — they describe completely different types of organizations. Here are the key differences.
- Incubators help startups build a solid foundation for growth. Their functions include mentoring, technical support, finding customers, market promotion, and so on.
- Accelerators tend to get involved with almost-finished products. They help teams grow over a short period of time just enough to get a big investment.
- Venture capital funds are usually looking for ready-made projects with sales and potential. To avoid mistakes in choosing investment assets (i.e. startups to finance), they often go through a long process of due diligence.
- A venture builder does not just support startups — instead, it creates them. Venture builders take full responsibility for their businesses, from idea to sale and/or profit.
A venture builder combines the functions of an entrepreneur and an investor. The capital received from selling previous companies gets reinvested in new startups. By accompanying the project at all stages, the venture builder helps it avoid stereotypical mistakes.
Characteristics of venture builders
Venture builders constantly test new concepts and products. The internal expertise of the team and cross-funding from partners significantly reduces the cost of testing hypotheses and product development.
Usually, a venture builder has a central team with expertise in key areas, resources to develop multiple projects simultaneously, and tools to validate working ideas. Studios provide a small number of projects (3–5 per year) with dedicated teams and financial and human resources, as well as a powerful platform in the form of tools, connections, and knowledge.
Some studios come up with business ideas on their own. Others prefer to work with external founders at the earliest stages. Studio support can last for several years and in some cases never ends, depending on the circumstances.
Pros and cons of venture studio model
Now, let’s review the advantages and disadvantages of a business whose main goal is to generate innovation.
Advantages and positive sides
The main advantage of a venture studio is resources. In addition to finances, startups receive comprehensive expert and technical support. As a result, an entrepreneur can focus on solving the main task — testing hypotheses, creating a product, etc. Without unnecessary bureaucratic obstacles, startups can get ahead of competitors quicker.
Venture studios typically build a strong team to manage several projects at the same time. If some startup fails, they would redistribute their forces, considering the unfortunate experience in debugging other startups’ business processes.
All services in a venture builder are centralized, so startups can shorten staff and reduce costs. It’s cheaper than trying to solve many issues on their own.
A well-organized startup studio can create projects for different requests and customer needs (both corporate and individual clients). This is a very appealing model for investment, since investors are looking forward to maintaining control over a project's development and getting a share in a full-fledged company.
According to experts, the venture studio model is expected to be 10–15% less risky than the classic venture or even corporate-venture model. In the early stages, the startup mortality rates are very high, so even a small decrease would be worth it.
Shortcomings of running a startup builder
Although the number of startup studios is growing rapidly, they have serious obstacles which few can overcome. It's hard enough to create and lead a single startup to success — how much harder could it be to lead a team that has to repeatedly create profitable businesses?
Another thing is, every new startup needs its own leader. Venture builders often have to find and nurture talented people to later make them into startup CEOs, which adds a certain strain on HR processes. Funding is an equally difficult question since most institutional investors are not familiar with investing in startup studios at an early stage.
In order for venture builders to prosper, the very economic landscape of the country of operation has to adopt new thinking, new investment calculations, and a new legal and organizational structure. These measures will enable studios to become high-performing startup factories while also ensuring that investors’ money is in safe hands.
History of startup studios
According to various sources, the probability that a startup achieves success ranges from 1 to 10%. Young companies do not have enough resources to scale up. On the other hand, corporations that might be interested in growing startups within their structures lack entrepreneurial spirit and speed.
The way out of this paradox was found in 1996, when the world’s first startup studio Idealab appeared in the USA. Brothers Larry Gross and Bill Gross created it in Pasadena. They were running it on their own, coming up with most ideas, hiring teams, financing them, and then helping to attract additional investments.
In the 90s, there were no technologies for creating startup factories. The Internet was not the same as today. No server farms for distributed data processing, no MVPs — the Gross brothers were far ahead of their time. However, the early studios provided powerful computing resources as well as cutting-edge talent and investment.
The boom of venture builders began in 2011–2013, when technologies matured along with the market. Today, venture builders are experiencing another wave. Now they stick to the Lean startup model, are mobile-oriented, and can bring virtually any idea to life.
According to the Global Startup Studio Network (GSSN), each month there are several new studios created around the globe. The industry growth rates skyrocketed: there were more than 200 venture builders in 2018, but in 2020, according to Enhance Ventures, there are already more than 560 studios worldwide. Over the past seven years, the growth is over 625%.
Perspectives of venture building
Overall, most countries are still looking for ways to fit startup studios into their ecosystem of innovation. But there is no doubt that in 3–7 years, venture builders will become the new norm, making it possible to create innovative businesses with a more rational approach.
There are three drivers for the success of the venture studio model.
- Venture studio founders are far more accurate in targeting market segments with good growth potential.
- There is a certain economy of scale. Services within the venture studio are provided to all its portfolio startups in a centralized way. On the one hand, it reduces the founders’ obligations and to-dos. On the other hand, it improves the quality of these services.
- A venture studio improves interaction both with the labor market (by hiring the best talents for its portfolio projects) and with the investment market (by helping to attract investments).
Seeing the growth that startups are capable of, investors are looking for exciting new ways to invest in early-stage companies. We are seeing a dramatic shift towards research on startup studios. This will not only identify best practices and approaches, but also highlight the value of studios for investors, founders, and the global economy as a whole.
The collaboration between studios is also increasing, so they are building networks that create a prolific environment for startups to exchange expertise, skills, and knowledge. On the other hand, venture builders become more competitive in terms of attracting specialists and financing.
Venture studios are both investors and owners of shares. They help their partially-owned enterprises develop and grow in order to sell the business later or gain profit from a startup’s activity.
The main difference from traditional funds is that venture builders do not simply invest capital. They are actively involved in all operational processes, from design to strategic management.
The key characteristics of a venture builder:
- Constant and systematic search for new ideas.
- Development and launch of several projects at a time.
- Developed infrastructure and sufficient human resources.
- Capital taken either from an organization’s own fund or from partners.
- Shared access to resources and expertise.
Each entrepreneur within a startup studio receives support from other members, as well as general services — lawyers, accountants, HRs, marketing and sales experts, developers, and so on.