Startup Studios have evolved so much over this past decade. Some find them compelling because of their high unicorn potential and others are interested in the exciting innovation they unleash. But personally, I love them because their business models are so unique.
I have always been fascinated by the “big picture” of things. Just as the oxygen produced by plants in the deepest depths of the ocean power the ozone layer that floats above the Earth shielding us from attacks by the sun- every tiny element of a startup is uniquely connected to every other element within its ecosystem.
Business models are tricky to define but easy to differentiate. For example, you may not know how to describe Amazon’s business model or know the inner workings of Costco’s business model- but you can say without a doubt that they operate in two different ways. One sells only online, the other sells only offline. One sells individual items, one sells items in bulk. People impulse shop on Amazon, people purpose shop at Costco.
There are more specific differences but for the most part, business models are a pretty straightforward way to answer the question of "what do you do and how do you do it?"
Startup Studio Business Models
Startup Studios, which are also called Venture Builders, are fascinating because they are all similar in what they do at their core, but almost every single entity has a unique "how they do it" process. You would be hard pressed to find two studios with the same business model.
Some of the differences are major, like studios operating in one specific space rather than taking an industry-agnostic approach- but other differences are minor. For example, some studios designate a specific amount of money per milestone reached or and others simply set a total value on the funds they will invest into any one venture.
In thinking about Startup Studio business models, I find it extremely helpful to use a “lever system” model. The categories used in this lever system model are borrowed from one of the most influential papers written on Startup Studios (called Startup Studios- Innovating Innovation by Enhance founding team Alper Celen & Ritesh Tialani). Their game-changing paper breaks down the elements of the “Formula of Success” for Startup Studios.
I’ve charted these factors and their definitions on the graph below:
Knowing which ingredients are necessary to make a successful startup studio is only the first step in the mix. The real challenge is combining these elements in a unique way to produce results at the speed and depth that the studio prefers.
For an example of this, think about baking for a moment. If you mix 5 ingredients in a certain way, you’ll get a cake. If you mix the same 5 ingredients in a different way, you’ll get a cookie.
The same applies for Startup Studios.
If you put in a lot of one element you’ll get a different entity than if you withdrew a significant portion of that element or added a lot of another.
Taking a look back at the chart above, let’s suppose a startup studio is heavy on “The Guild” element and low on “The Funding” factor- this studio is going to be super hands-on but not supplying much in terms of financial capital. Conversely, if the studio is heavy on “The Funding” factor but weak on “The Guild” element they’ll look more like a Venture Capital firm than a startup studio- huge amount of funding but not involved much in the growth of ventures beyond the spin-out process.
The following is a visual demonstration of this lever system at work:
Once you have a visual understanding of the "ingredients" that go into developing a venture builder you can begin messing around with the studio model's measurements. From the chart above, you get sense of how different each Startup Studio model is from one another.
Some Studios source ideas from the internal team only. This means, if you’re a startup founder with an idea you want to validate, you can’t knock on the door of these types of studios and expect them to help you test your hypothesis. On the other hand, some studios do allow outside entrepreneurs to submit their ideas. This changes the business model because there are differences in equity stake, focus, and volume of projects level.
Another example of differentiation is investment. Some studios invest in the first round of funding raised by the outside team once they've taken the venture over. These "holding company + VC fund" studios have to operate differently than those who spin out a venture and let it the new team run it on their own. From one model to the other there are major differences in resource assignment, human capital availability, and time resources spent.
Knowing the differences between startup studio business models is important so that you don’t waste your time or theirs. Finding the best fit for your needs is the result of research but in order to conduct useful research, you have to know what you’re looking for. The above criteria for Startup Studio foundation elements coupled with the lever system model help make it clear where you should be investing your time as an entrepreneur.