What do investors think about investing in Startup Studios?

Pleased to announce that I was invited to co-lead a new investment syndicate focused exclusively on venture studios, together with Dmitry Samoylovskikh and Uniborn! We plan to invest 10M+ EUR in the top venture studios and their spinoffs by 2025.

I surveyed nearly 50 investors, primarily from the US and Europe, to gather insights into their perspectives on investing in startup studios. I mentioned earlier a survey of 30 angel investors from the US for my Big Startup Studios Research. Now, I'm not only publishing some of their comments but adding some new thoughts from new investors.

There were several questions for investors including:

  • What do you think are the benefits and disadvantages of this asset class?
  • If you're about to invest in startup studios, what will be important for you to decide?
  • Red flags and green flags of startup studios?
These 5 sections below will help you grasp the investor mindset, which can help secure their investments. Investors' comments:

1. Advantages of investing in startup studios

  • What I like about the studio is you can evaluate the people that are launching the business a lot more as operators/builders as opposed to VC firms and a fund deploying capital investments.

    If a studio is going to pursue an idea, they are putting labor into the mix which is an additional lever of accountability, so it seems a bit safer as an investment compared to a VC fund.

    Early-stage startups are the most risky investments, but could have great returns. Similar fashion to studios, you are investing more in the founders and a little in the product/service at an early stage. I assume startup studio people have more experience than first time startup entrepreneurs (just an assumption).
  • Careful selection and funnel supplemented with significant backup and support functions for the investees. On the financial instrument side, the studios also appear more flexible, minority or majority stakes are seen.
  • You get in early and have the potential to shape the journey and in some cases hypercharge the 0 -> 1 growth with the right partnerships / connects.
  • Startup studios can be more profitable for investors because the studio ends up owning a bigger percentage of the company, and in some cases, they own all of it.

    They also have the infrastructure, resources, capital, and relationships to set up their companies with the best chance to succeed right from the outset.
  • Better and more sustainable longevity of the startups produced within venture studios.
  • Startup studios have a ready team to create a new product, access to investment, and work experience compared to other startups.
  • The theory is that companies that have a strong team backing them up will be less risky than those who have to discover everything themselves.
  • Startup studios are made up of people who have already developed their own successful businesses. They have teams already put together, tools established, partnerships made, and money on hand. All of these resources become the resources of the startups they're working with, to ensure the success of those startups while investing in the same.

    It’s a safe and diversified investment for anyone injecting capital into the studio.
    • Usually, they are very focused and have a large fund behind them. With this focus, they have a team of experts supporting the studio companies. This is very much seen in Biotech companies which need a lot of money for a breakthrough for R&D.

    • Returns are much higher.
    • Access to a team of experienced entrepreneurs and operators,

    • Sharing resources and infrastructure,

    • Access to quick capital, and potentially introductions.
    • Founder equity,

    • Bigger stake in each company,

    • Getting companies that would have never been founded into play,

    • Some ideas require more money in pre-pre-seed and only a studio might be able to achieve them.
    • Major de-risking if the team has learned a lot of lessons and has built-in GTM,

    • Product or other leverageable talent.
  • Tax benefits (depending on the incorporation structure) when investing in a Studio Holding Company.
  • Investing in a VC fund spreads the wealth across multiple companies so the return, while smaller, is more affirmed as opposed to directly into a startup (riskiest).
  • Startup studios sound like less capital investment to begin.
  • The investor receives better terms for the higher risk/reward dynamic of the studio starting ventures from scratch.
  • The startup founder can rely on a broad team to help with Proof of Concept, usually faster than doing so independently, and certainly cheaper.
  • Higher ownership per startup vs VC
    • Better control,

    • More resources,

    • Mature platform,

    • Monitored results,

    • Tested and tried model which lean startup model does not offer.
    • Ownership structure,

    • Growth trajectory.
    • Exposure to more startups,

    • They get access to resources to help them grow and succeed,

    • Sometimes more favorable economic models.
    • Much more concentrated bets,

    • Faster learning loops.
    • Pro vs startups is you only need to vet one team,

    • Pro vs incubator is the studio can be virtual,

    • Pro vs accelerator and vc is higher potential return.

2. Disadvantages & risks of investing in startup studios

  • These models can be less organic and more cookie-cutter than a traditional startup. That's because the ideas are usually born within a think tank and chosen from a range of filtered ideas rather than organically emerging from the core experiences or problems experienced directly by a founder.

    The teams are then formed around the idea and installed for success. It's certainly more structured, but it also is less serendipitous and may lack the "magic" or storytelling power that helps other startups build their culture and attract new investors & customers.

    It's much tougher to build the "lore" around a startup's founding story when it was born in a lab.
    • First risk: a studio that produces more products than it can manage may put investors investing specifically in the business at risk. Because studios, due to the natural flow of life, turn to startups that accelerate faster. Those left behind may remain weak because they are not adequately cared for, and may fail more easily than in a normal startup. In this context, investors should invest in studios that stand behind all their startups, or by investing in all startups of a startup studio at once, they should eliminate the risk of coming across a startup that is irrelevant. Another solution is to invest only in a scaled startup.

    • Second risk: Every ship (startup) should have a captain, and these people should be entrepreneurs, not salaried professionals.
    • The biggest issue is that the diversification is not too big, given the boutique size of a startup studio, and that money at hand is not enough to play at a high risk in the hope for extraordinary returns. In other words, it is harder to find a unicorn through a startup studio.

    • A startup studio will most likely not have a long tradition of R&D, data science, and risk analysis, making it harder for it to set dominant designs in the industry, which instead would be useful to improve the general quality of the projects and the whole industry itself.
    • The resources available to the founder are spread thin with other startups and the goals may not be aligned,

    • Typically this format dilutes the CEO from the start leaving them with a lower percentage of equity that might spook investors in later stages.
    • You don't get to choose the startups you invest in,

    • Startup studios tend to attract more first-time founders / less experienced folks.
    • The lack of liquidity,

    • Need of a large corporate backer (pipeline of corporates to transition from PMF -> rev generation for companies),

    • The high mortality rate of companies.
    • Founder risks,

    • Need to put money way earlier than usual, which means higher fail rates that you have to live with. This might also mean looking at bolder opportunities to compensate.
    • Less equity ownership

    • Less control.
  • The shares owned by venture studios in proportion to the ones the founders have.
  • Smaller returns. Selective, smart investing in singular company stock might lead to higher returns.
  • It gives some restrictions when outside capital is needed and the risk of inside rounds.
  • A team might bring distraction to founders / EIRs instead of needed help.
  • I prefer to be on the cap table of a company vs an LP.
  • A venture studio is the earliest stage, heaviest lift, and highest risk.
  • Capital burn is not taken as a serious relative to runway.
  • Studios are a little more difficult to invest in because its unknown what the focus will be.
  • You typically pay higher management fees.
  • Very difficult to find a team that builds well and equally difficult to find a good team to take over once the project is ready to spin off.

3. What is important for investors when considering investments in startup studios?

    • I need a studio to be convincing in creating more IRR than a VC that invests later in those same type of companies (let's say, pre-seed). Especially with current market returns, high IRR is more important than ever. A 15% avg case will not do. I need to be convinced that good execution will be 20-25% at least (without a Google in the portfolio).

    • The other thing I'll be concerned about is the innovation process - it has to be lean for IRR, but also significant value add, and these things contradict, naturally :-)

    • I think the best way to evaluate studio companies is how fast they can raise their next round. For example, if I do a studio deal now, I'd expect to get angels on board within 12 months at most, and a 'proper' and even larger pre-seed round within 18 months. If things take longer than that, the model is not a real shortcut, just putting in a bit more fat for founders - i.e., taking a salary instead of putting yourself in a 12-month risk. And then - I'm not sure it will plan out in the IRR areas I need.
    • I have to be bullish on the niche itself, be it stage, geo, industry or vertical.

    • My personal preference:
    > Industries = large, fragmented, underinnovated but ripe for disruption, where tech can act as a sustainable growth lever.
    > Relatively quick turnaround / clear exit strategy: availability of capital (decent amount of VCs within my network whom I could see they'd invest on the niche; or PEs where they could eventually acquire, or venture debt that could be strategic upon growth stage).

    • Studio founder has to have a tremendous track record for their chosen niche.

    • Founder and team should have countless ideas, talent, and partnerships in their pipeline where capital is the only bottleneck.
    • The ability for independent co-investments into portfolio companies as they mature.

    • Super clear methodology around distributions and aligning the interests of investors and studio founders.
  • My focus is on strong founding teams developing solutions to real, relatable market problems. too often, I find founders reach out with solutions that are in search of the problems. That is too challenging.

    So, I look for the proper depth of customer discovery, and problem/solution validation (or product/market fit), before making investment decisions.
  • Keep an eye on the cap table, making sure the CEO has sufficient equity that will keep him motivated for the long haul and that provides confidence to investors for seed and Series A rounds and beyond, and evaluate the team dynamic and clear expectations regarding the resources provided by the studio.
  • If the studio possesses specific industry domain expertise & if they do, does the studio then have the optimal resource framework to find solutions for real-world business with real-world pain points?
  • What is the amount of shares held by VS, or how it's going to be decreased to a market level?
  • You need the studio owner to either be an amazing salesperson or super connected.
  • I invest when I strongly believe in teams and especially if I can be of help.
  • I'd invest if I have a close relationship with the folks selecting the startups and running the venture studio.
  • I'd want to know they have a great group of follow-on funds that lead the next round when they spin out.
  • When I invest, I like to be actively involved, so I’d be looking to put my own knowledge and skills at work.
  • No focus, diversity is the key in all investments.
    • Their track record

    • Their investment strategy,

    • My relationship with the founding/expert team,

    • Alignment with my investment goals,

    • The fees they charge.

4. Green flags for investors in studios

  • Positioning themselves as VC friendly, and thus creating a clear and transparent ownership structure, from the launch, or creating a way how to get to it without hurting any of the sides involved.
  • Very strong operational experience building companies. A secret sauce creating compounding value in the ideation <> validation process (ultra-niche, strong support network within a specific domain, repeating games with same buyers, strategic partnership with buyers in advance).
  • A strong track record, having previous founders as investors.

5. Red flags for investors in studios

    • First-time studio founders (presumably low network quality on talent, capital, and industry),

    • Predatory terms to founders,

    • Value-add is only tech development.
    • Lack of transparency,

    • Focus on quantity over quality,

    • Lack of expertise in the industries in which the startup studio invests.
  • Thick ownership, without any path to decrease it.

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