There are more and more new startup studios opening up shop across the Globe. Among the typical questions they ask me, fundraising is on the number one spot. “We are working on the valuation and financial planning of the startup studio. We were wondering if you have some info and or tips about studio fundraising?”
Startup studios are extremely efficient in producing multiple startups in parallel. With a large enough core team, you start to see economies of scale. You can build products and businesses with less risk and impact of failure, faster build times...
But to achieve this, you need to keep a large team on payroll, which means a high burn rate.
Economy of scale has a high price tag
We turned Drukka from an agency into a startup studio in 2015. Our goal was to create a factory that produces 12-15 startups every year. We concluded that to achieve this we’ll need at least 12–15 people in our core team. This would enable us to lower the price of each startup (from idea to seed-ready stage) to below 20k USD. Our hypothesis turned out to be true. Two years later, from about 25 startup initiatives, five are already seed funded and spun-off. Our team is now 50+ people altogether.
This costs a lot of money, as you can imagine. And initial fundraising is one of the biggest challenges for an emerging studio. Because the model is not yet widely spread, few investors have the experience of investing into a studio. And their pockets open slowly. But even now, you have many options to get the cash needed to kickstart your venture builder.
Money is pouring into startup studios - if done right
First of all, the trends are looking great. In 2015 I created the first Startup Studio Trends report. I looked at publicly available data for 51 studios and 212 of their portfolio companies. Based on that, studios attract more and more capital:
And 2016 was an extraordinary year in terms of startup studio fundraising. Expa, the San Francisco-based startup studio founded by Garrett Camp raised $100 million. Spanish startup studio Antai strengthened its operations with €25 million investment fund. German fintech company builder FinLeap raised €21M at €121M valuation. Just to name a few.
Number of exits is also on the rise. A giant success for the startup studio model is the $1 billion exit of Dollar Shave Club, which was one of three exits that Los Angeles based Science-Inc. scored in 2016.
If the examples above inspire you, and commit yourself to start a new studio, then consider the following ways for getting the money needed:
I. Founder cash
Most successful startup studios were founded by entrepreneurs who already made their fortune. These include Betaworks, Science, eFounders, Rocket Internet. And if you are also someone who made a considerable exit, then you can easily fund your studio in the early days, to reach a level of self-sufficiency.
II. Agency work
Some studios use part of their resources to do agency work. And they use the cash flow from these activities to build their internal startups. The main challenge with this method is that the studio will have to figure out how to balance short term and long term goals.
III. VC fund
Some studios, thanks to their experienced and well-connected founders are able to raise VC money early on. For example, this is how Quasar Builders was able to raise venture capital from San Mateo-based Emergence Capital Partners.
IV. Corporate funding
More and more large companies discover the studio model. In this model, the corporation dedicates funds to a startup studio. And they let them build startups that harmonize with the company’s long-term goals.
Axa launched a studio called Kamet with a 100 mil EUR funding to build insurance tech companies. Jaguar Land Rover launched InMotion, to build mobility startups. Then there is InnoHub Mexico, founded by three large Mexican companies to build solutions for their SMB clients. Once InnoHub builds a new startup, the corporate founders provide access to their customers to the startups.
We are also seeing examples of what I call “Startup-as-a-Service” - where a large company works with an independent startup studio to create new ventures.
V. Family offices, angels and private investors
More often investors are exploring ways into investing directly into a startup studio as the holding company and not just into the individual ventures. This might seem attractive because it offers the chance for the investor to simply invest in a diversified portfolio of new startups. And because of the startup studio approach, the risk of failure on a portfolio level is low. However, startup studio as a new investment class yet has to find its investor base.
Pave the funding way by building trust
A good way to build long lasting investor relations is to approach new investors centrally as a studio. Talk about the studio concept, current portfolio, traction of your startups and so on. You will need time to build trust, but once you get an investment for one of your companies, the second investment might be much easier. To improve your chances, provide quality deals and make sure your startups live up to the promise.
If your studio takes majority stake in startups, then there will almost always be questions about team motivation. Investors will be concerned that the teams don’t have enough shares to give the best they can. Let the investors talk to your team and CEOs so they can make sure that you have people with the right attitude. But sometimes it’s better to send each CEO separately to some investors. Especially if that startup already has a separate corporate entity, dedicated team and cash flow.
During these negotiations, you can dramatically improve your chances if you are aware of the pros and cons of the startup studio approach, and you can clearly articulate these. People keep telling me that after reading the Startup Studio Playbook, they had a much easier task with such negotiations. You might want to give it a read, or send it to your investor contacts ahead of your meetings. One or the other way will improve your chances to get the investment your new studio needs.
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