Challenges and limitations of Venture Studios

October 2023

While venture studios offer advantages, they also face certain challenges.


Here is the list of challenges and limitations they face.


1. Funding

As mentioned in the section outlining the advantages of venture studios, in exchange for the risks they assume, studios take a notable ownership stake in the startups they create, typically averaging around 34% of the capital[1]. Studios that handle more of the groundwork before bringing in a founder, such as builders, usually take a larger share of the initial capital. Consequently, it leaves the founders holding a smaller proportion of ownership than founders of traditionally funded startups. This distribution of initial capital can make some investors hesitant to invest, as some might considers that the founders’ stake in the company (excluding that of the studio) as potentially insufficient to sustain their motivation in the face of future dilution[2]. Also, depending on the equity held by the studio, and several other factors, can be viewed as a deterrent for some investors who perceive the studio’s equity as “dead equity” on the capitalization table (cap table). The perception of the studio’s added value plays a significant role in this regard.

Another factor that can affect the funding of venture studio startups is that some VCs prefer to invest in startups whose original idea comes from the founders themselves. They may see the source of the initial idea being the studio as a risk to the motivation and retention of the founder(s), potentially leading to a flight risk.

However, it’s worth noting that startups emerging from well-known studios are often highly sought after by venture capital investors. Since these startups don’t emerge from traditional channels, the challenge for investors, in this case, lies in identifying and connecting with them.


2. Business Model

Running a studio is notably more complex thana traditional venture capital funds, and studios frequently design their fundraising structures outside of the of standard parameters (2% management fees and 20% carried interest)[1]. Consequently, securing funds for a studio from Limited Partners (LPs) can prove more demanding compared to the process for a traditional venture capital fund, especially for emerging studios.

They also deviate from commonly agreed patterns in the venture capital universe. Given their distinctive operational framework, the operating costs (OPEX) associated with this model tend to be substantially higher than those of a typical venture capital fund. The business model must not only absorb significant operating costs but also generate returns that match or surpass  those of traditional investors, all while dealing with a limited number of startups. As a result, finding the appropriate financial model can pose a significant challenge.


3. Acquisition and Retention of Talent

Recruiting and retaining top-tier founders can prove challenging due to the intense competition within the startup and investment ecosystem. Attracting individuals with the right combination of skills and entrepreneurial experience can be difficult.

Internally, studios require a diverse in-house team whit member possessing skills and expertise that are often in high demand. To retain a high-quality in-house team, studios must provide competitive incentives and working conditions.


4. Resource Allocation and Scalability

Studios often work with several startups in parallel, which can pose challenges in terms of resource allocation. Ensuring each startup receives the required support demands meticulous planning and management to balance time and capital allocation. This complexity arises because the needs of each startup can differ based on factors such as their development stage, industry, and specific objectives.

Moreover, it’s important to reconize that the studio model is not designed to generate a large volume of startups. Typically, studios produce anywhere from 1 to 8 startups per year. The operational framework of a studio demands a substantial and continuous infusion of both human and financial resources, making it challenging for studios to simultaneously create, support, and finance a large number of startups.


5. Managing Expectations

Studios collaborate with founders and experienced entrepreneurs who typically have high expectations for the success of their companies. Effectively managing and harmonizing these expectations with achievable outcomes can be a sensitive task.


6. Maintaining the Network

Studios often rely on a network of external actors such as investors, business partners, and sector experts. Building and maintaining this network requires effective relationship management, negotiation skills, and the ability to navigate complex networks.


7. Balancing Control and Autonomy

Studios maintain a certain level of control and influence over the startups they support. Finding the right balance between providing support and allowing entrepreneurial autonomy is crucial. Determining the appropriate level of involvement without stifling the creative and innovative spirit of startups can be a challenge.


8. Exit Strategies

Similar to any venture capital investor, studios seek to yield returns on their investments by means of exits, whether through acquisitions or initial public offerings (IPOs). Nonetheless, orchestrating and attaining successful exits can prove to be a complex undertaking in a constantly evolving market. This necessitates meticulous strategic planning, comprehensive market analysis, and the continuous monitoring of investor trends and preferences. Strong connections with the downstream of the funding chain are therefore necessary. In essence, studios are not exempt from the inherent challenges that come with venture capital endeavors.


9. Culture and Integration

The founding of a corporate venture studio (CVS) can pose challenges such as corporate culture and collaboration between stakeholders. It is important to mention that the challenges faced by corporate venture studios are not exclusive to this model. An accelerator or incubator collaborating with a corporation may encounter the same challenges.

Corporate venture studios work with startups that often have a different culture than corporations. Harmonizing these cultures can be challenging, especially regarding risk-taking, decision speed, and agility. Aligning a corporate culture that must manage its balance sheet on a quarterly basis with that of startups aiming for exponential growth is not always straightforward. Studios must find ways to promote a culture of innovation and collaboration while respecting existing cultural differences.

Corporate venture studios must often integrate harmoniously into the operations and organizational structure of the parent companies. This can involve challenges such as adapting internal processes, aligning the interests of various stakeholders, and coordinating efforts between internal teams and startups.




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 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.