The 3 pillars needed to create a startup studio

Idealab, Betaworks, Science… Just a few of the wildly successful companies that follow the so-called startup studio approach. You can also call them venture builders, startup factories. These are organizations that –a bit similar to Hollywood movie studios –  produce multiple startups in parallel, with in-house resources, in a sustainable way.

The big promise of this methodology is that it provides a cost-efficient and low-risk platform for building innovative new companies. Because studios have most startup-building capabilities (like development, design, marketing… and of course cash) in-house, they allow entrepreneurs to focus on what matters most: product, customer, growth.

The number of startup studios more than doubled from 2015 to 2016 (now counting 120+). The funding into portfolio companies has been increasing 48% year-over-year since 2010, now exceeding $7B. And 2016 is a great year for direct investment into the studios themselves.

Expa, the San Francisco-based startup studio raised $100 million. Spanish startup studio Antai strengthened its operations with €25 million investment fund. German fintech company builder FinLeap raised €21M at €121M valuation. There have been  about 19 portfolio companies acquired, on average three years after their launch. Biggest exit so far was Dollar Shave Club’s $1 billion exit. The company was nurtured by Los Angeles-based the Science-Inc, lead by ex-Myspace CEO Mike Jones.

There are many building blocks of a thriving startup studio. Here are the three most important pillars:

Core Team

Building the founding team of a studio is even bigger challenge than building the founding team of a startup. In the latter case, people will have to focus on one product, one business. In the case of a studio, people will build multiple startups at the same time. Often lines will get blurred between these startup initiatives. There will be prioritization and resource issues.

To succeed, it’s best of the founders of a studio are already established entrepreneurs with a strong track record of growing companies. The Core Team (the developers, designers, marketers) also need a mindset that enables them to work on multiple startups in parallel.

Processes

The bread and butter of a studio is to launch one startup after another. Common practices like Lean Startup, Design Thinking, agile development frameworks come handy, but you need to tailor them to work in a mass-production mode.

1. Ideation – monitor trends, do internal brainstorming, look for copy-cat opportunities to have enough ideas to choose from.
2. Resource allocation – Depending on your team structure, you might have a dedicated CEO for the new startup and your core team split between projects. Or you could have only a thin core team, let’s say for market research and investor relations. And you assign a dedicated CEO and CTO for the startup…
3. Validation and initial build phases – Next, let’s build something that users can fall in love with. Start with landing pages, then mockups then MVP, with strong checkpoints in-between. This should be quick. Build time of 1–2 weeks max. One core feature, nice and smooth design. Just enough to make some initial marketing campaigns to test user acquisition and to be able to do user tests, assuming we are building something commercial. Better to trash an idea early if the market doesn’t want it. Use whichever prototyping tool your people prefer (we love pen & paper, Invisio, Photoshop…)
4. Spin-off and exit – Once you get investment and can spinoff your startup, what do you do? Cutting the support immediately seems like a harsh step since the new company has to build up a dedicated team. So it’s wise to continue the support and transition out smoothly. Also, decide what role you will take after follow-on investments. Many studios will delegate board members for example, and also remain active co-founders who continue building the startup.

Initial funding

Startup studios are very efficient venture builders. With a large enough core team, you start to see economies of scale in building products and businesses. But to build up and operate the core team demands a large amount of cash. To get this initial money, there are different ways:

1. Founder cash – If the studio founders already had exits, they can finance their studio in the beginning.
2. Agency work – doing regular agency work enables some studios to build up cash reserves that they can spend on their internal initiatives.
3. Corporate funding – creating startups for a large corporate client is an approach that is becoming more popular on both startup studio and corporate side. Take this as a kind of outsourced innovation.
4. VC funding – Rarely does a VC invest into a new studio. But this is how Argentina-based Quasar Builders started their studio.
5. Family offices, angels and private investors – Some investors are exploring ways into investing directly into a startup studio as the holding company and not just the individual ventures. This might seem attractive because it offers the chance for the investor to simply invest in a diversified portfolio of new startups, it offers better equity than a regular angel investment, and because of the startup studio model, the risk of failure on a portfolio level is low.

Guest post by Attila Szigeti, author of  Startup Studio Playbook, based on interviews, case studies, best practices of the most successful startup studios. You can get the book with a 53% discount using the “150sec1215” code.

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