8 advantages of Venture Studios
Venture studios offer several advantages to startups, entrepreneurs, as well as investors and corporations involved.
Here are some of the key benefits of venture studios:
1. Velocity and Quality of Startups
Velocity is the greatest advantage of a studio. Velocity translates first and foremost into the speed at which studios either pivot or accelerate the growth of their concepts. Due to their unique operational framework, studios are designed to dramatically accelerate the trajectory of their creations (success or failure). The trials and errors occur in a controlled environment, and the timeframes between the birth of an idea and the decision to implement it or discard it are short. Studios operate on the principle that quickly discarding or pivoting a concept even before it becomes a startup improves the quality of startups emerging from the process and significantly reduces the risk of future failures. Sustained and continuous strategic support also accelerates the growth of incubated startups and positions them toward a successful exit strategy from their inception.
Velocity also translates into how quickly startups secure funding and achieve their exits. Several venture studios have dedicated funds to financially support their startups. Additionally, studios generally have close relationships with investors, making it easier for startups to access additional sources of funding and expand their network of potential investors. In Quebec, Dialogue Ventures is a good example of the velocity achieved with a studio. Dialogue was created by Diagram and Cherif Habib in 2016. Its initial public offering (IPO) took place in March 2021, just 5 years after its creation. According to Réseau Capital data, the average time for a Quebec-based life sciences startup to go public is 10.44 years and 9.20 years in Canada. Thus, Dialogue’s IPO happened 50% faster than the Quebec average and 44% faster than the Canadian average.
A recent American study conducted by Max Pog also supports this thesis. One of the findings of this study is that startups from venture studios manage to reach seed funding rounds twice as quickly compared to conventional startups (1.49 years versus 3.03 years). Specifically, they reach Series A funding (2.75 versus 4.68 years) 41% faster than conventional startups, 44% for Series B (3.7 versus 6.65 years), and 47% for Series C (4.59 versus 8.67 years).
As for exits, the findings of Max Pog’s study also support the thesis of faster exits for startups originating from studios compared to conventional startups. Based on a sample of 182 acquisitions of startups from venture studios and 22 initial public offerings (IPOs), the study shows that, on average, startups from venture studios takes 5 years to be acquired, which is 33% faster than conventional startups, and 7.5 years for an IPO, which is 31% less time.
2. Startup Success Rate
A study conducted by the Global Startup Studio Network (GSSN) in 2020, covering 23 leading venture studios, revealed that out of the 415 companies they created, only 9% failed, 3% exited, and the remaining 88% are still active. According to the same study, startups from a venture studio have a success rate 30% higher than traditional startups. Moreover, 84% of startups from a venture studio secure seed funding, and 72% of them reach Series A (compared to 42% of traditional companies). Ultimately, 60% of companies created from studios reach the Series A. It’s important to note that despite promising preliminary results, the model is still young, and research on the subject is limited. It’s therefore too early to draw firm conclusions about the model’s performance.
Venture studios operate on the premise that success attracts talent, and talent leads to more success. Venture studios are typically organized by serial or seasoned entrepreneurs who have had previous success. Offering them an environment where they can focus solely on the initial phases of startup creation while working on a variety of different concepts is a unique aspect of venture studios.
One of the main benefits of a studio is the rapid injection of high-quality talent into an environment where risk-taking and boldness are valued. lies in its ability to quickly introduce top-tier talent into an environment that encourages risk-taking and daring innovation. The studio model somewhat mirrors the phenomenon known as the ‘PayPal mafia’, which is particularly effective in attracting talented individuals to join as founders and managers for the studio’s startup projects. It can also serve as important talent recycling mechanism. Additionally, some studios have a significant impact on ecosystems by retaining and centralizing the most skilled local talent. In Quebec, Diagram Ventures embodies this advantage with an impressive alignment of successful entrepreneurs on its team as partners, such as Pierre Donaldson (nGUVU, Aheeva Technology, Planora), Frederic Latreille (Garda Background Screening Solutions, SkyMotion), and Steve Schultz (Check). Another Quebec example is Michael Mee, General Manager of Pre-Amp, who has five years of experience as an associate at Flagship Pioneering.
The significance of this asset can vary depending on the location, particularly when there is a scarcity of top-tier talent within an ecosystem. Additionally, it can be leveraged to entice and keep talent within specific verticals like FinTech, biotechnology, or DeepTech.
4. Technology Transfer and Research Commercialization
The acquisition of intellectual property by foreign firms is a well-known issue in Canada. Commercialization studios based on intellectual properties can be effective channels for technology transfer from public research. Although specific research on the effectiveness of venture studios in commercializing intellectual property is limited, the inherent benefits of the studio model, such as access to resources, expertise, and networks, suggest that commercialization studios can play a positive role in technology transfer. In Quebec, studios can obviously be an effective model for financing and commercializing intellectual property from universities but also from colleges through college technology transfer centers (CCTTs) and research centers.
Moreover, this model not only seems effective for valuing our own intellectual property but can also be used as an importer of promising intellectual properties from other jurisdictions. TandemLaunch is a perfect example, as their search for university intellectual properties knows no boundaries. Indeed, partnerships established over the past decade have not been limited to Quebec and Canadian universities but have also included prestigious institutions in the United States and Europe. It will also be interesting to follow the activities of Sherbrooke’s QV Studio, which aims to import and develop intellectual properties in the quantum sector.
5. Risk Mitigation
According to a 2021 study by CB Insights, here are the top 5 reasons often cited to explain the failure of a startup:
- Lack of capital (38%)
- Lack of market need for their product (35%)
- Superior competition (20%)
- Deficient business model (19%)
- An ill-suited team for the project (14%)
Venture studios provide startups with a support platform that grants them access to a wide range of resources, such as initial funding, infrastructure, administrative support services (back-office), dedicated founder recruitment personnel (founder flow), expert advice, and contact networks. This allows startups to focus on their development and growth while minimizing obstacles related to funding and operational management. Thus, the operational framework of studios is designed to mitigate many of these causes of failure.
6. Collaboration, Networking, and Iteration
Venture studios create a collaborative environment where startups can interact, share ideas, and collaborate with other entrepreneurs. Additionally, many venture studios tend to specialize in a specific sector or vertical. These two elements foster opportunities for collaboration, knowledge sharing, and the exchange of best practices, which can lead to strategic partnerships, synergies, and mutual growth opportunities.
Another asset of studios is that they allow serial entrepreneurs to focus on what they do best: imagining, iterating, prototyping, and testing new products.
In short, studios distinguish themselves by continually formulating and testing hypotheses. This parallel and iterative system of creating startups that operates in the same space allows the studio to reduce the risk of failures, accumulate knowledge, accumulate experience, and pool resources.
Venture studios are well-suited for experienced entrepreneurs looking to develop a new product. The venture studio team has already identified a need, developed a product, identified a market, and often identified initial customers, consequently eliminating a sizable portion of the initial risks of a new startup. In return for this reduced risk, the venture studio occupies a significant place on the capitalization table (cap table).
8. Return on Investment (ROI)
As mentioned in the previous point, having mitigated initial risk typically allows the studio to take a preferred stake on the capitalization table as founders or co-founders of their startups. According to the Global Startup Studio Network (GSSN), venture studios own from 15% to 80% of the initial capital of startups. The average participation of studios stands at 34%. Individual founders typically secure an average of 50% of the capital, with the rest used for employee stock options. The same source states that the average internal rate of return (IRR) is 53% for a startup created in a studio compared to an average of 21.3% for a traditional startup. According to several sources consulted, during Snowflake’s initial public offering (IPO), Sutter Hill Ventures (the venture studio that created Snowflake) held 20.3% of the company’s outstanding shares. In total, Sutter Hill’s participation amounted to 12.6 billion USD, a remarkable return on investment for a total investment of less than 200 million dollars.
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Why did we decide to create a dossier on venture studios?
The concept of venture studio, also known as a startup studio, startup foundry, or venture builder, is rapidly gaining traction in the world of venture capital, and Quebec is no exception. While discussing this concept with members of Réseau Capital, we recognized that this unique model, which combines both startup creation and funding, can contribute, can serve as a complementary force to strengthen critical elements within the financing value chain. These elements include deal flow, talent acquisition, the involvement of corporations in venture capital, talent circulation, and research commercialization. All of which currently significant challenges to Quebec’s funding ecosystem.
Through some research, we discovered that Quebec has a thriving community of studios, many of which, in our humble opinion, are well-kept secrets. Thus, we decided to shed light on these homegrown Québec studios. Over a series of articles, we will delve into the landscape of these organizations, explore the opportunities inherent in this model, and introduce the individuals and entities that have embraced it.
We would like to thank Gilles Duruflé and Sébastian Boisjoly from Station FinTech for their collaboration on this series of articles.