What any investor needs to know about venture building studios
What any investor needs to know about venture building studios

Written by

Flavius Floare

-

10

min. read

On the event in partnership with Startup Grind, Grai Ventures Diana Florescu, The Heart Tomasz Rudolf, Tar Heel Capital Pathfinder, Michal Wrzolek sat down with Ahmad Piraiee, himself a Startup Grind Chapter Director for a wide-ranging discussion on venture building and the future of collaboration between VCs and these venture studios.

Ahmad Piraiee: How would you define a venture building studio?


Tomasz Rudolf:
Well, most companies either provide services or build products and the product of a venture builder, our company. So you more or less have a factory line and you design new companies who cast stars that could take those companies and build them with you and you provide resources and relationships and reach the finals of those companies to validate and kill many in the process. So you originate and that's the biggest difference versus accelerators or VCs is that you're not actually looking for external ideas. In most cases you were just originating them yourself.

Michal Wrzolek: We have the resources to open new companies every quarter. So we have a couple of ideas and most of the ideas come from our teams. We also invite the founders with their ideas, but mostly the ideas originate internally . First we need validation and then you deal with the product and then facilitate all the growth of the company from the very beginning. From the conceptual phase, up all the way to the exit of that company. That's what the venture builder of a venture studio does: creates companies.

Diana Florescu: I guess it's fair to say there's not a universal definition of a venture studio, and I don't know if this creates a problem or allows you to have more flexibility in terms of what a venture studio actually is.ight now I think there's more than 500 venture studios in the world.

I think for the sake of the conversation about venture capital investment and venture studios, to me, essentially, a venture studio, it's almost a build function with a venture capital source attached to it. So another way of looking at it, it's almost like a VC that creates startups and when I say create startups, you designed that business model, you build a company, but you also go forward to invest in those companies or raise from a close network of investors, as we do at Grai Ventures. It's interesting how much the model has changed in the last decade. We see the first successes of startups coming out of studios. For example,  Snowflake came out of Sutter Hill Ventures. I don't think they will ever call themselves a venture builder. They are VCs. Or you've got the likes of Madrona Venture Labs that raised 8 million USD recently just to create a venture studio.

It is a very exciting space. In the end, our goal at Grai Ventures is to build a systematic,repeatable process of creating businesses and to go  beyond the usual “three months acceleration” to provide the business with the proper resources, fundraising, marketing and all the core functions that a startup needs to grow.


Diana Florescu, Managing Partner at Grai Ventures


Ahmad Piraiee: So let's just agree that venture building is getting a lot of momentum these days. Tomasz, why do you think venture studios are becoming ever more popular

Tomasz: I think the whole startup movement is developing. We more experienced founders people are looking at how to monetize from their past experience and reinvest their earnings from previous exits. So when serial entrepreneurs are looking at such builders, such entrepreneurs, they're asking themselves, why should I just give money to a VC, which is just a picker, it doesn't build anything, just selects spenders. I'd rather give this money to this entrepreneur, to the serial entrepreneur and let him actually build multiple ventures given that now he’s got a process in place.  
The venture building model is a perfect solution for investing in early stage opportunities but with less risk. If you have a goodprocess of selecting them, building them, you may actually have better financial results than a  VC fund investing in startups out in the wild.


Ahmad: Diana, how do you see the ecosystem and the interest in venture capital and how do you feel about it?


Diana:
I think there's been some really interesting trends. One of them it's actually a new type of VCs that are formed to invest in corporate startups. They have this philosophy of investing in corporate startups or companies that are being incubated inside large organisations.

If we talk about the corporate venture building model, corporations have done transformation or innovation for a long time, but they’ve become ever more expensive. In the last decade, there's been a huge trend of corporations starting their own CVC investing in startups. Sometimes they co-fund with, or co-invest with other VCs, or they invest themselves . Some companies do very well. They have a strategic intent to grow the revenue. Some of them, they just do it purely for exploration.

As a venture studio I would challenge that and say “why launch a CVC and stop there?” Most VCs do not even return the fund only, 5% of them would return that fund. I would say that venture studios would be a great complementary function to VCs and corporate funds increasing the chance of success.

The way I would see this in the next decade is that VCs may go back to the early days when they were not only investing in a company, but were actually building those companies alongside founders, helping the company grow throughout its lifetime.

Tomasz Rudolf, Executive Chairman at The Heart


Tomasz: I would add one more point. I think the question isn't about whether VCs will start collaborating with venture studios or building their own. It takes two to tango, right? I think the LPs will start investing alongside a  VC, rather than a VC investing more in venture studios. They normally go to a VC because they can pick better deals for them. The question for people who are ready to deploy risk capital  is whether l they would get better returns by investing in a VC or they would make more money if they invested in a studio surrounded by entrepreneurs that can build for them multiple ventures and get the founder economics right from the beginning.

Ahmed: So let's just say that right now I have a startup and I'm just going to give you 10% equity in exchange for 1 million euro. If I, as a startup come to you - a venture builder, then can I just give you 10% and then you build on that?


Michal:
No, because we co-create the business from the very beginning. So from the very beginning, there is no company to invest in. e do offer much added value to the founder in the form of  financing for the first year then the development of the software and opening the doors to  corporations that may be partners so that it will help the startup grow from the very beginning. We calculated this, for example, in the marketplace, we shorten the time to market by half a year to a year in comparison to regular processes where founders start searching for the tech team and the finance.

Diana:
Just to build on what Michal said, I believe software development houses have extensive potential to become the next generation of venture builders. Only if they would rethink their business model to move away from billable hours. It’s in contradiction to the lean startup principles of building and iterating fast.  

Tomasz: Yeah, the challenge is that the capability to build a product or technology isn't enough to build a great venture. And that's why there are not enough startups that can build in this region because we might have great technology capabilities, or marketing budget but we don't have the product owner and the investor relations and scaling and sales and so on.

If I look back at all the mistakes I’ve made as a first time founder, you realise how useful venture builders could be to the new ventures especially in its early days if you build a venture with a venture studio, or with a very much operational VC, you have experts in each function. You have HR experts, you have legal experts, you have fundraising experts that save you time and save you from making mistakes. So it actually makes sense in some cases to give 30% to the venture builder as an extra third co-founder. Also they might actually help you validate the idea or pivot and maybe work on another idea. But as a founder, you fall in love with your idea. On the other hand, venture studios are not that emotional about ideas. They kill ideas every week. You don't have venture builders going around and pitching them at every startup event. Because they just try it and if it doesn't work, they kill it. Then they work on a different idea. They are recycling the team with those experiences. They have professional teams pitching developing business cases that are looking for prototypes and so on.

Michal Wrzolek, Senior Investment Director at Tar Heel Capital Pathfinder


Ahmed: As an investor, can I invest directly in your portfolio of startups?


Michal:
In our business model, investors invest in our industry not in the startup directly.

Diana: It depends on your studio’s business model. ou can be a single studio like ourselves where investors would invest directly in the studio.aSome investors, have preferential rights to further invest in some of our startups. You can also structure the fund in different ways, for example to form a syndicate. This model takes the idea of the Single Studio Model but mitigates some of the negatives of that model with the addition of a syndicate. The studio is creating NewCos and when these NewCos need additional investment you create single-purpose vehicles (SPVs) to enable LP’s or a syndicate of angel investors to invest through or alongside the studio.

Ahmad Piraiee, Chapter Director Startup Grind Warsaw

Ahmed: What do we need to do to see more ventures coming to the market? Is the venture studio model working?


Diana:
The model is still fairly new and evolving. As more startups get built it will become easier to identify key factors that lead to the success of a venture building studio.

When we assess the performance of a startup studio, there are probably 2-3 key metrics we want to look at such as successful exits, failures, and investment size. Data shows that studio-built startups (compared to traditional, non-studio) have 3x faster path to seed, 2x faster path to Series A, and 30% better likelihood of achieving Series A.

So why invest in a startup studio? I can think of three reasons...

First, studios get much more equity in each new venture than early stage Angels/ VCs thanks to the significant ‘sweat equity’ they put in. This results in significantly more equity upside for the studio investors. Due to our investment structure, one investment decision will result in equity in multiple startups through indirect ownership of every Grai Ventures company.

Another reason is less execution risk. Diversification is expensive (deal sourcing, due diligence, legal etc). To de-risk the process, VCs place multiple bets across a wide range of startups. Our proven processes, access to expertise, seasoned entrepreneurs and willingness to kill underperforming concepts early mean that a studio built venture uses capital more efficiently and has a higher chance of scaling successfully than a ‘startup in the wild’.

Lastly, better returns. 75% of VC funds do not return the fund. 5% provide a relatively modest risk adjusted return on capital to LPs. But these top 5% are not accessible (their funds are oversubscribed). LPs looking for venture exposure can achieve higher returns risk adjusted by investing in Studios than in VC funds.

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This was an excerpt from the panel discussion “What any investor needs to know about venture building studios”. The full discussion is now available to listen on Spotify or to watch on Youtube.

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