Unveiling The Era Of Venture Studios: Can They Outshine Incubators?

March 5, 2024


This article first appeared in February’s print edition of Business Monthly.

The government is betting entrepreneurs and startups can lower youth unemployment, position Egypt as a regional business innovation hub and grow the country’s GDP. “Entrepreneurship can provide innovative and realistic solutions to economic challenges,” said Minister of Planning and Economic Development Hala El Said during the One Million Entrepreneurs campaign launch in April 2021. That strategy” will stimulate the economy with new small projects for young people to become a productive social force that effectively contributes to efforts to achieve development.”

The steps to transform ideas into a stable company are well-known. “The path to building and funding a company [are almost always] come up with an idea, form a team, start testing minimal viable products, raise seed funds, then obtain venture capital,” noted Steve Blank, an adjunct professor at Stanford University, in January 2023. Accelerators or incubators drive that process, converting ideas into startups that seek venture capital investments.

That model is becoming increasingly unsuitable. In December, CNN reported that “[more] startups have shut down in the third quarter of 2023 since Carta [an equity management company] began tracking the data almost five years ago.”

That has put the venture studio model in the spotlight. They “create startups by incubating their own ideas or ideas from their partners,” said Blank. By developing everything in-house, success metrics are higher than market averages. Yi Minig K of Krux Asia, a Singapore-based venture studio, said in a LinkedIn blog in February 2023 that venture studios have an exit success rate of 34%. “That is almost twice that of accelerators (19%) and multiple times higher than startups themselves,” he noted.

Venture studios

The venture studio business model first appeared about 15 years ago “after a handful of seasoned tech entrepreneurs with successful exits had a lot more than one single new startup idea to pursue,” Alex Moazed, founding Partner and CEO of Applico, a business consultancy, explained on his company’s blog. “They wanted to apply their startup expertise in pursuing multiple business opportunities [simultaneously] rather than only one. Enter the venture studio.”

Compared to accelerators, venture studios “focus more resources around opportunities they identify as ripe for a startup,” said Moazed. They “don’t typically accept [incubation request] applications … as the venture studio’s strategic insight and ability to select opportunities is a part of the value it brings to its investors.” Unlike accelerators, venture studios don’t have a predefined time or cash ceiling to support their startups.

Meanwhile, venture capital firms “specialize in giving capital to [existing] startups,” Kuber Ventures, a venture capital company, posted on Linkedin in March 2023. “They typically give higher sums of capital [than venture studios] in exchange for a [25% to 50%] stake in the company.” They also let the founders manage the companies. That contrasts with venture studios’ 100% or majority stake ownership in the startup from the idea phase. That means they control day-to-day operations and decision-making.

Despite less funding and more control, venture studios are growing increasingly popular. Ming K says venture studios are set up “to allow for a more efficient and effective startup creation process.” He also noted that when entrepreneurs “work on multiple startups at the same time, venture studios can leverage their expertise and resources to create and launch new businesses more quickly and cost-effectively.”

Venture studios also help entrepreneurs working for them to diversify their startups, reducing exposure risks. Moritz Von Raczeck, a senior venture architect at MVP Factory, a consultancy, estimates that startups created by venture studios are 44% more likely to succeed compared to those using conventional approaches — 84% make it to the seed funding round and 72% reach Series A funding. Ming K estimates venture studio startups secure seed and series-A funding twice to three times earlier than startups that use traditional partners or go at it alone.

That likely translates to sustained success. “The average startup created by a venture studio returns an average [internal rate of return] of 53% vs. 21.3% for a traditional startup,” Ming K said.

Independent studios

Over the years, two categories of venture studios have emerged. “Independent” venture studios hire a team of entrepreneurs full-time, raise their own capital and develop their own strategic direction. Its entrepreneur employees’ job is to create startups using the venture studio’s capital and resources and align with the studio’s strategic direction.

“The principal of the venture studio makes the final decision on what startups to spin out and the amount of resources to allocate as these new businesses gain traction,” Moazed explained. “Independent venture studios are, in essence, a more vertically integrated approach to the traditional venture capital model of starting a business from scratch.”

Blank of Stanford University noted that independent venture studios might be “niche venture studios .. generating their own ideas and [intellectual property] in a specific industry and domain.” Another sub-category is “industry agnostic studios,” which don’t focus on a specific industry.

Affiliated studios

The other type is the corporate or government-affiliated venture studio. The parent organization “will often provide initial capital and strategic direction. The venture studio … brings the talent, process and know-how to build a startup,” said Moazed. “It helps [large and mid-sized] companies harness the big advantages they have in starting new businesses while helping to address some of the challenges and risks that new ventures bring.”

For established corporations, the importance of having access to venture studios is rising in response to fast-paced changes in the tech world. “Large companies excel at incremental innovation that grows the core business,” said Moazed. “They have long struggled … to capitalize on industry disruption and embrace new business models.”

Corporate venture studios spare their parent firms from seeking startups to acquire. “The lack of acquisition opportunities … has led more enterprises to embrace the co-creation model of corporate venture studios,” said Moazed. “This model enables large enterprises to capitalize on [their advantages] in building new business while helping mitigate many of the challenges.”

He also noted how “over the past 10 years, dominant platform companies — like Google, Facebook and Amazon — have become new business creation engines, using their existing networks and assets to spin out new businesses. They have, in effect, created their own internal venture studios focusing on building new business models.”

Changing the mindset is essential to benefiting from corporate venture studios. “Instead of investing in a business that already has initial traction and has been vetted by institutional venture-capital investors, [a corporate venture studio] allows the enterprise to take on additional risk in exchange for … an increased ownership stake and more control,” Moazed explained. “The risk-reward balance is much different.”

Governments in advanced nations also benefit significantly from having venture studios. “In North America and Europe, many venture studios in non-major cities are funded by government agencies to stimulate local growth,” Blank said.

Blank said one type of affiliated venture studios is “tech transfer studios,” which work with governments or partner companies to “source ideas and intellectual property.” Other venture studios are part of the company or government hierarchy rather than an offshoot, wholly owned, or majority stake subsidiary, making the venture studios’ work all in-house.

Building the studio

The top challenge facing venture studios is “finding great founders,” Gary Coover, COO of SuperLayer, a venture studio, said in a blog published in September on Medium, a digital platform. They “are the lifeblood of a successful venture studio.”

“The most successful venture studios are founded by entrepreneurs that have previously built companies with [over] $10 million in revenue and [over] 100 employees,” said Moazed.

Coover said great founders have a “relentlessness to solve any problem and the ability to act decisively. They are the discoverers of the problem, the architects of the initial solution” and make the hard call on allocating resources to attack a problem.

Additionally, great founders “set the mission and then create pathways to achieve where none previously existed,” said Coover. “They thrive in ambiguity. They make decisions on the fly … armed with limited data, fueled by instinct and vision.” That is unlike leaders or managers who “typically operate within a predefined problem set with clear guidelines … accustomed to data-driven decision-making.”

Another critical aspect of building a venture studio is how it’s structured. Igor Pertsiya, the managing partner at Hypra Fund, a joint-venture fund, stressed, “The studio must have a well-defined strategy that outlines the prioritized activities, allocated resources and targeted markets. All studios have different approaches, but one common thread is the need for focus.”

He also noted the importance of “cultivating a robust network of partners and advisers who can offer valuable assistance and information,” which is essential to ensure successful execution. “We leverage our network of connections to attract advisers who can mentor … companies, particularly in setting up and scaling sales, marketing and operations,” said Pertsiya.

Studios’ limitations

Réseau Capital, a venture capital and private equity association based in Montreal, noted in October that venture studios could be less attractive to high-risk entrepreneurs, given the studios’ increased control over the startup.

Another issue facing independent and corporate venture studios is they are “notably more complex [to establish and manage] than traditional venture capital funds,” Réseau Capital said. “They also deviate from commonly agreed [funding] patterns in the venture capital universe.”

The lack of funding conformity is an issue for independent venture studios, who must generate their own funds. “Securing funds … can prove more demanding compared to the process for a traditional venture capital fund,” Réseau Capital said.

Additionally, corporate and individual funds might find “recruiting and retaining top-tier founders … challenging due to intense competition within the startup and investment ecosystem,” Réseau Capital said. “Studios require a diverse in-house team with members possessing skills and expertise that are often high in demand.”

Studios also could find themselves stretched too thin. They “work on several startups in parallel, which can pose challenges in terms of resource allocation,” Réseau Capital noted. “This complexity arises because the needs of each startup can differ based on factors such as their development stage, industry and specific objectives.”

Corporate venture studios face additional limitations due to “their limited tolerance for uncertainty, risk and failure, and with that the inability to move quickly,” Moazed said. That is mainly because large companies will likely question the value of having a venture studio, as it requires upfront investment and offers no guarantee that ideas and startups would immediately improve the parent organization’s bottom line.

Réseau Capital also noted that corporate and individual venture studios face the same problems as venture capitalists and incubators, including finding the correct exit strategy, having a conducive culture, and managing founder expectations and the funding network.

Here to stay?

There is no “right way to do innovation,” Moazed said. “As the constraints and competitive demands of the market have changed over the last decade, new models of business creation and value capture have grown to meet them.”

Venture studios are a case in point. Their “model grew organically out of the changing needs of venture investors and large corporations, as well as the evolving market for entrepreneurial talent,” Moazed said.

Kuber Ventures sees venture studios as essential to building a sustained and thriving entrepreneurship ecosystem in any country. Their high ownership stake, more structure and targeted approach to innovation are “especially helpful for first-time entrepreneurs, who may not have the experience or expertise to launch a successful business on their own.”