In 2016 we spent around $107.000 on building 10 startups. One year later the companies were valued at over $1,3 million. And now we’re closing in on our first Series-A rounds, pushing overall valuation above $7 million. Here’s how we did it…
In early 2015 we started to transform Drukka, a software development and online marketing agency into a factory of startups. “Let’s build startups by the dozen!” was the main mantra we had in front of us. In that year we started 11 initiatives, now 6 of them are already seed-funded and independent. And we are already nurturing the next dozen.But maintaining this growth requires us to push our limits. Every step of the way we are encountering new challenges.
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This story began when serial entrepreneur Tamás Bohner, founder of Drukka tried his hands at angel investing in the late 2000’s. Some of his investments went quite well, the companies landing spots in top accelerator programs. But most of the time, after investing the money, he had to stand by while the teams didn’t take on his advice, money got burned and startups failed.
He wanted to have a much more hands-on role in building new innovative businesses, that can have a role in shaping our future. As first step, he started to assemble a team of developers and marketers in 2011, which became Drukka Marketing. The goal was to build up a solid team and cash flow, so he can figure out later how to turn this into an innovation engine.
When we met in early 2015, the company already had 15 team members, a solid customer base and some Bitcoin startup experiments — the first startup initiatives created in-house. At that time, I just had my first startup failure. After a quick recovery I was ready to build my next venture. But I wanted to find a smarter way of building startups. One that doesn’t require me as cofounder to sacrifice everything for a slim chance of success.
Laying the foundation of our startup studio
We looked at the examples of Betaworks and Rocket Internet — successful, well funded entities that mass-produce companies. Fueled by our ambition, we said that if they can do it, then we can do it also! We wanted to turn Drukka into an organization that produces startups by the dozen and through this, we wanted to become the largest and fastest growing startup builder platform between Berlin and Moscow. We just had to figure out, how…
While Tamás started to source startup ideas and approach potential co-investors, I joined the team as leader of a new in-house initiative. I also began my research into the world of startup studios which to gather best practices on how to build and operate such an organization. By July we had around a dozen ideas just waiting to take off. We just needed people who can take charge of these initiatives, acting as co-founders and CEO-s.
Fortunately, even in a developing startup hub like Budapest there are a lot of young, talented and driven entrepreneurs, who heard about the success stories of startup studios abroad. And among these people, we could easily find the first few, who were happy to join our team and pioneer this new startup building approach. We are talking here about young entrepreneurs, who already tried their hands at building a startup or lifestyle business. They already experienced how challenging it is to get all components right. And they were ready to test a new concept. One, that enables them to focus on building the business side, instead of wasting time on the basics.
From our initial talks with local investors, it was clear, that we can not count on outside investments in the short term. Fortunately, Tamás decided that what human and financial resources Drukka had, we could use to experiment. This was approximately $107.000. We estimated that this might be enough for a one-year long runway and a close to a dozen experiments.
This meant that whatever we do, had to be extremely cost-efficient. We could spend around 10–15.000 USD on each startup initiative until we had to decide on killing it or growing it further. For this reason, the most viable option was to start experiments in a relatively easy space, where product development didn’t require us to burn through the company’s money.
Because Drukka had expertise in B2C marketing campaigns, and we had a potent web and mobile app development team, we decided on initiating half a dozen sharing-economy-like startups. Some of them were copycat ideas — taking an already successful model and implement it in the CEE region. This allowed us to further reduce risk of experimentation, by only taking on concepts that have proven themselves in Western markets.
Startup studio recipe v1.0 — the assembly line for $10k startups
Our first dozen or so experiments included a platform for home cleaning, washing and ironing, finding the right attorney, an office management app, a Bitcoin payment gateway, a second-screen application for TV channels and some more. We organized people into a core team — one sub-team for development, design, marketing, back-office. And we recruited people with entrepreneurial attitude and experience to act as CEO-s of the startup initiatives we start. The initial recipe was simple: spend a few hours on market research and if the idea seemed legit, quickly build a functioning Minimum Viable Product, aggressively push towards traction. When that happened, build a business plan and investor deck and quickly find seed money that the growing startup could use to become independent from Drukka, and grow fast on it’s own.
In some cases, this approach worked like a charm. Rendi.hu, a home cleaning portal for Central Europe, our first sharing economy company went from idea in end of July to first revenue around middle of August. In other cases, we got bogged down with an initial product that was functioning, but we got the market or timing parts wrong. Letting go of these was not hard, but seeing the money we spent on the product go down the drain was painful.
Also we were juggling around 6–7 startups in parallel at any given time. Because each of the initiatives had a dedicated CEO, the studio management had a relatively easy time. We wanted to be the guides to the CEO-s, giving them free hand in how they are building their startups. But we also felt, that if we want to scale up our operations, we will need to change how we manage our portfolio. There is a reason why traditional investors don’t like to handle small-sized investments.The effort in managing a small and early-stage startup is almost as much as managing a growing successful one. But we wanted to be the studio that fills up the “startup funnel”. And that meant learning how to manage a lot of small bets at the same time.
Breaking the ice — getting our first seed investments
Before boosting our startup output, we had to break the fundraising ice. Already having 3–4 startups with initial traction, we started to go to investors again, showing them that yes, we can indeed build multiple businesses at the same time. Gaining their trust and understanding of the studio model was a long game of patience. The main concerns centered around the cap table. Will our CEO-s and dedicated startup teams be motivated enough? It was not enough to say that we recruited people who have just the right attitude for this model. It was not enough to say that we as the studio will do everything for our startups’ success. We had to show them traction, consistent growth over a longer time period.
We had to wait until early 2016 to close our first deal. Back in 2015, before our startup studio ambitions, we joined a startup as cofounders. The founders of Keparuhaz.hu — an e-commerce site for customized wall-pictures — had amazing growth in Hungary, but they had challenges with entering new markets, and with handling investor relations. So we as akind of institutionalized cofounder joined, for a small equity stake. Our job was to plan the international growth strategy, and get the money to execute on it.
Couple months later we negotiated a $450.000 investment deal for them. Few months later in Spring 2016, our first in-house startup, Rendi.hu got a seed investment of $170.000. Before summer was there, three more companies, Neatly.hu, Tickething.com and EzExpress.hu closed their seed round and “graduated” from Drukka.
So we could finally say that yes, it works! Burning through most of the initial capital, Drukka managed to launch a dozen initiatives, getting almost half of them to a seed-ready stage, where the startups already have a working product, growing user base and revenue, and a sustainable growth engine.
And even after the seed investment and spin-off happened, we remain active participants in our startups. This way they could leverage the network and expertise of Tamás and Drukka.
But this was only the first layer of ice we had to break. Now our challenge is to build up even more traction so we can reach out to private investors. Which is a challenge, because in Hungary we don’t yet have a well developed culture for angel investment. And those private investors who have the liquid capital to invest seem uncomfortable doing so into a startup studio. One reason might be that such investing is like putting your money into a black box, without the desired control. Of course, if you look closely, you might see it otherwise. Investing in earliest-stage startup studio portfolio enables you to invest in dozens of startups. These companies will be built in a very disciplined way, from small amounts of money. So you can make many small bets from which several will grow into fast-growing ventures.
Nowadays we are setting up a new pre-seed investment fund called Studioone.hu, co-financed by Drukka and outside investors. The base idea is that this new fund will invest $20.000 into new ideas, and Drukka will provide all other resources, keeping the overhead at a minimum. Following our aspirations, we plan to build around 30–40 new startups in the coming years. If this plan works, we’ll have another challenge on our hand. For the investors, this will mean deep insight into all these startups. So once those reach seed-ready stage, the investors can easily decide if they want to participate in those seed rounds or not. They are buying investment opportunities “for the penny”.
Shifting gears — optimizing our startup-build processes for mass-production
Most startup studios are comfortable building 2–3 new ventures per year. This enables the studio founders to be hands-on with each of their new companies. But after this point, things get complicated. And expensive. So how can we reach the desired dozen plus startups per year volumen?
At the moment we have 6 spun-off companies and a new batch of 12+ startups. And we can already feel that our studio management capabilities are stretched thin among all these ventures. The first thing we do to scale is we are batching together the startups. Until now we focused on sharing economy. This time we are aiming at the VR/AR industry. Batching together our initiatives per industry or market, having joint mentoring and management sessions with the affected startup CEO-s enables us to reach a higher level of management efficiency.
Sell First, Build Later
Another challenge is to keep initial validation cost at a minimum. Last years we wasted to much development effort on prototypes for startup initiatives that were just not right. This year we shifted our approach. When we want to launch a startup, first we onboard a new CEO / cofounder and together we come up with 3–5 ideas. The CEO will then take all these and do a bare-minimum validation. No product, only the offering. Sell first, build later. In parallel with this we are showing the concept to our investor network and ask “if this concept takes off, will you be interested in investing?”. In this process most of the ideas are trashed, and usually one remains where we can check both the market and the investor sides. Then we start the build process.
In the meantime, our initial batch of seed-funded companies are getting ready to take on second round investments. Because we optimized our startup building processes around cost efficiency and risk mitigation, we are seeing insane growth in our portfolio valuation. The companies we spun-off had an average 13x valuation increase at Seed-stage — often in less than 12 months after initiation. And now during Series-A negotiations we are seeing another 5x increase in pre-money valuation. After figuring out their market-dynamics and business logic, having a much higher Customer Lifetime Value than Acquisition Cost these companies are getting ready to ignite their growth-rockets. And while they do that, we at Drukka continue to build startups by the dozen.
And if we could do it from a place far-away from well-funded and developed startup hubs, then really anyone can do it. At least that’s the potential in a well-executed startup studio strategy. And to explore how the startup studio approach can benefit you, have a look at the book.
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