In this study, we look into some of the most commonly held beliefs for why venture studios thrive, and compare them with our internal data and the performance of a select group of noteworthy venture studios.
2022.01.28
500 Global Team
Introduction
Startups are the companies rapidly building our future. Take a look at how some of today’s most successful businesses are shaping our daily lives: Dollar Shave club, HelloFresh, and countless other case studies of the fastest booming companies which started in a start-up growth structure that nurtured their success.
Venture studios are a new way to create companies by working on a project from as early as the problem-identification stage to launch, and this greater involvement allows the venture studio to retain more equity and returns. Throughout this paper, we will be referring to venture studios1 (sometimes also known as “startup studios”) based on the following definition:
Companies (mostly built up of experienced entrepreneurs, innovators, and investors) that have the funds, in-house expertise, and patience to build their own startups from scratch.
This new business model for creating startups is becoming increasingly popular across the world. In 2020, Enhance Ventures reported that there are roughly 560 such studios across the globe, representing more than 625% growth in the studio market over the last seven years.2 In our view, venture studios are undoubtedly disrupting the startup world, and many people credit the success of venture studios to several unique attributes of this model, e.g. they provide companies with experienced entrepreneurs and investors, a creative environment, corporate partnerships, and large investors looking to build companies.
In this study, we look into some of the most commonly held beliefs for why venture studios thrive and compare them with our internal data and the performance of a select group of noteworthy venture studios. The results of our study suggest that the ideal environment and location for venture studios may not necessarily be in Silicon Valley, and why the timing of establishing such studios may be more important than existing industry knowledge or investment. A realistic understanding of the advantages of venture studios and how their landscape is developing is crucial for future investments and startup building.
The Best Venture Studios aren’t Always in Silicon ValleyWhile many startups and investors gravitate towards Silicon Valley as a hub of entrepreneurship and innovation, we believe that the best venture studios may not necessarily be based in the San Francisco Bay Area, or even in the United States. This may be because many founders in Silicon Valley have such an abundance of resources that venture studios may not appear as attractive or worthwhile. Instead of relying on ready resources, venture studios seek to cultivate a business ecosystem by building a network and fueling growth in new growing regions. One of the most valuable aspects of venture studios is the critical resources they provide to support a new company, including strong team members, capital, technology, and an entrepreneurship network.
From our experience working with startups and corporate partners, we find that there are several common ingredients of venture studios, namely Team, Technology, Capital, and Network.
What a Venture Studio Brings to each CompanyTeam: Capacity to attract and assemble talented individuals to build and scale ventures and the team that can execute a repeatable, scalable framework for testing, validating, building, and growing ventures. From age to skill, the people on the team can highly influence the startup’s success. Founding teams with previous experience at Amazon, Facebook, etc. built companies that performed 160% better than average.3
Technology: Leveraging new technology to scale quickly and create new value. Technology if leveraged in an advantageous way can greatly elevate the capabilities of any startup.
Capital: Access to seed and growth capital. Corporate partners are investing in venture studios, and have a large incentive to help them succeed. For example, P&G opened its venture studios to partner with startups in the consumer packaged goods space.4
Network: Access to stakeholders such as corporate partners and government agencies to boost specific venture growth. There are also strong shared services to support the ventures, such as legal, finance, recruiting, and platforms to enable knowledge sharing. Venture studios connect startups to the right people with the right answers. This can quickly provide the startup with specialized knowledge and reduce trial and error situations.
When looking at some of the noteworthy venture studios based outside of the U.S., they frequently cite their ability to recruit top entrepreneurial talent and resources as reasons for their success. For instance, eFounders which is based in Paris and Brussels, stated that one of the key components to their success was their ability to scale recruiting efforts, and find the right entrepreneurial talent through their internal connections, as well as leveraging new and growing external entrepreneurial networks.5
These skills would not have been as valuable in established startup communities in Silicon Valley or similar hubs, where entrepreneurial talent can be found nearly around every corner. We believe venture studios to be the leaders of innovation in their cities and regions as they often employ diverse employees to leverage networks across the world. For example, Finleap is leading Europe’s fintech ecosystem and has a diverse team representing 80+ nationalities and engaging in 15 European countries.6
Therefore, some of the top ranked venture studios globally are in growing economies around the world. Venture studios are a great business model to create entrepreneurial hubs and connect valuable resources: knowledgeable entrepreneurs, investors, and a growing economy.
Noteworthy 12 Venture Studios Located Across the World 7
Source: Pitchbook and Don Fontjin’s Startup Studio DatabaseA Successful Venture Studio doesn’t Need to Focus on One Vertical
Perhaps counterintuitively, the noteworthy venture studios we have discovered do not necessarily focus on just one vertical. Among the best performing venture studios, we have learned that the three preferred industries are commercial services, software, and energy equipment, while the greatest preferred verticals are general TMT, Big Data, and Fintech. Meanwhile, the leading four venture studios invest in the greatest diversity of verticals (3-9 preferred verticals). For example, Idealab has created over 150 companies that are in its portfolio now and has (after starting hundreds of startups) more than 45 IPOs and acquisitions, while investing in everything from consumer internet to education with portfolio companies in four preferred verticals: CleanTech, Gaming, SaaS, and general TMT.9
This demonstrates that venture studios are less focused on building the best startups in just one industry. Rather, they specialize in finding the right talent and executing with the best business operations across many industries. Due to their large network and expertise, they create a large collision of ideas and find the top stars to inform their next step. For example, an insight in e-commerce could tell you what you should build in insurance.
By spotting early success and staying ahead of the curve, these venture studios are able to succeed at perhaps the most important factor of all for surviving startups: timing. According to Bill Gross, the founder of Idealab, his research on what factors matter most for company success revealed that the timing of the startup accounted for 42% of the difference between success and failure. For example, AirBnB was started in a recession when people were strapped for cash and were more willing to rent out their homes. Venture studios use their network of ideas to search and support the startups that are best for what consumers want and are ready for in each market. Furthermore, successful studios have a strong foundation to enable a quick succession of testing new ideas. In fact, Idealab’s original vision was to be a modern lab for business ideas in the spirit of Thomas Edison’s original lab.10
Finleap credits its success to having built an ecosystem of platforms that include banking-as-a service, which provides the studio with the ability to create new fintechs that are built on top of APIs.11 If there is strong market product fit and fast traction, companies can always create business models and attract more funding. Timing and having the expertise/skill to research as well as finding rising waves or being ahead of the curve are arguably the strongest skills of some of the best venture studios. After building a strong foundation, resources and investment should be directed towards this ability when building studios.
The Top 12 Venture StudiosIn our study of some of the world’s best venture studios, we filtered through The Startup Ecosystem (Airtable), and created spreadsheets to analyze and compare all data.
At the time of writing, we identified a list of 15 venture studios by filtering for at least 10 investments and calculating their investments to exits ratio. As a result, Idealab, Quasar Builders, Betaworks, and Science were the leading four venture studios. Rocket Internet, a “start-up factory,” was a high-ranking point of comparison that we will explore in further detail.
Top Venture Studios and How they Compare to Rocket Internet
Why innovate? Why not just “copy and paste”?
Rocket Internet (RI) is a venture builder that focuses on strong timing and follows some of the approaches of successful venture studios without having to be particularly novel. The CEO, Oliver Samwer, is known for his repeatable business strategy: finding proven business ideas that can be cloned, and replicating their models in untapped markets around the world.12 Remarkably, we have learned that Rocket Internet’s success in launching new businesses appears to be highly competitive vis-a-vis U.S. venture studios such as Idealab, Betaworks, and Science.
They aggressively emphasize execution over ideation, and successfully grow startups through “market insights and helping them scale internationally.” We are of the view that Rocket Internet is one of the best at finding under tapped markets with low competition. They often look at ideas that are succeeding in niche markets in the U.S., and replicate them in new markets such as Germany and greater Europe. For example, HelloFresh is a breakthrough company that it grew to dominate the meal kit category.14 Soon after, investors flooded the meal kit category and supported competitors such as Blue Apron. But being a first mover, the German upstart HelloFresh posted global sales growth of more than 50 percent last year, and expects sales to increase another 30 percent in coming months, as it pushes past $1.3 billion in global annual revenue.15
Rocket Internet’s other successful startups include German e-commerce firm Zalando and food delivery service Delivery Hero. However, it appears that the public markets have lost some enthusiasm for this model since Delivery Hero’s IPO, dropping its market capitalization to 2.6 billion euros in 2020 from an early valuation of 6.7 billion euros.
Rocket Internet eventually decided to delist, having secured adequate access to capital outside the public markets, and allowing them to focus on long-term bets.16 This coincides with changes in the venture capital environment, as the needs of startups and institutional investors evolve, and more venture studios emerge in regions across the globe that can produce successful startups.
Why Venture Studios Can Be a Useful Way for Corporates to InnovateThere are many reasons why corporations invest in startups: they can provide high returns, innovative solutions, diversification, and growth for the future. However, we are of the view that working closely with startups is risky, and corporations often partner with established accelerators or create in-house startup models to improve their chances of success. That is why we think that understanding all the tools available (including venture studios) and using them well together is important.
As described above, we found that the key elements of venture studios are Team, Technology, Capital, and Network. All these elements can be realized by corporates in their venture studio efforts. However, studios which operate without the benefit of other innovation tools will be at a disadvantage and corporates need to combine tools together to innovate effectively.
So what are some of the best ways for corporations to invest in startups today?
One option is for the corporation to join or acquire a startup. This allows the two companies to take advantage of synergies and leverage economies of scale. A caveat: while M&A can lead to increased market share and large growth, buying can be expensive and carries high stakes. For example, to try and catch up in mobile computing, Hewlett-Packard acquired Palm in 2010 for $1.2 billion.17 It failed to compete with iOS and Android operating systems and was shut down. This shows that acquiring startups is risky for experimentation, but good for growth and expansion. When looking at larger acquisitions, the Biden Administration and the Federal Trade Commission (FTC) are strengthening its review process to block M&As and retain a competitive market to protect American consumers.18 Evidently, M&A sometimes involves big deals, is costly, and can be hard to sustain.
Source: 500 Global, “Unlocking Innovation Through Startup Engagement: Best Practices from Leading Global Corporations” 2017
Corporate venture capital (CVC) can be a better alternative model for corporations to invest in startups. CVCs can directly invest in external startups through joint venture agreements, or acquire equity. In 2018, there were over 800 CVCs, about 4x increase from 2013,19, and today CVCs remain a popular in-house vehicle for investing in startups.20 Key benefits of CVCs include broad exposure to innovative products and new growth opportunities. However, global CVC-backed deals are subject to rapidly rising valuations.21 Beyond initial investment, we are of the view that executing proper strategy in VC is paramount to success. One solution we suggest is for corporations to partner with reputable VC firms such as 500 Global, to execute startup growth. The next in-house solution is to build a venture studio arm.22
The venture studio model is a good way for corporations to invest in promising startups without the high costs of M&A or the risks of stagnant growth and poor company strategy in CVCs. First, early-stage companies no longer require large investments to develop the infrastructure necessary for operating their business: open-source technologies and foundational platforms (such as Finleap’s fintech services) are enough to launch and execute a product. Smaller initial investments have also yielded stronger multiples and returns. Second, through venture studios, corporations can directly build with the startup and provide founder talent and resources.
This allows for agility and greater speed-to-market. The corporate leader can gain direct insight into the startup’s pain points and provide connections to experts with the right answers. To curb risk, if any one startup fails, a venture studio can experiment with 100+ more ideas in a fiscal year. These advantages complement other investment approaches, and corporations should seriously turn to venture studios when considering their next method of investment in innovative startups. However, it is what happens after the venture is created that counts. Is the organization ready to protect, incubate, and scale the new business?
What Venture Studios Might Mean for YouFor Investors
Venture capital investors should find new and different sources of deal flow. Especially at the earliest stages, they need to cultivate networks that include different studios, accelerators (such as 500 Global), and diverse communities of founders. Studios should look for follow-on investment to validate their own bets on the founders and their startups and so collaboration with helpful venture capital investors is essential.
For Startups and Founders23
What’s the difference between an incubator vs. accelerator vs. a venture studio and who should pick what option?
Incubators provide startups with a workspace, with team rooms, and a community for collaboration. They also offer a network of mentors and experts to help with different stages in startup building. These connections (and sometimes capital) help the small startup teams to test and validate their product in the market.
Accelerators offer startup founders a structured curriculum and program. Instructors usually have deep expertise on different topics (ex. pitching, sales acceleration, funding) and can draw from years of startup experience. Finally, accelerators can help startups reach product market fit, secure seed funding, and build marketing and customer acquisition channels. They identify the cost to acquire each customer (CAC), lifetime value (LTV), churn rate, and more metrics necessary for demonstrating to investors.
Startups that join venture studios are in their earliest stage compared to incubators or accelerators. Companies usually draw from talents within their network or recruit a founder to test and validate a new idea, while taking equity and deciding the strategic direction. Venture studios often provide the equipment, tools, designs, and team to support the startup.
For Corporates
Many large corporates have, either independently or with consultants, established venture studios or venture building activities. Many times, these focus on ideation and forming teams. This is necessary, but not sufficient. The true test of whether the idea becomes a business lies in the hands of future customers and consumers. Thus, efforts to validate the business are critical. But what happens after the validation?
500 Global has worked with a number of early-stage technology companies over the last 10 years and we know there is no substitute for rapid acceleration at the right time. It is what all startups need to reach escape velocity. This can take many forms and there are different tools available to corporate innovation leaders. 500 Global has recently partnered with one of the largest industrial firms in Europe and one of the largest conglomerates in Korea to create internal venture accelerators for rapid traction or growth for their intrapreneurs. We have seen similar needs around the world. In our opinion, it is up to the corporate leaders to choose what to build in challenging times, such as those that we are living in today.
This article is co-authored by Molly Zhou, a Corporate Growth Analyst at 500 Global.
Glossary of Common Terms
Venture Studio
Companies (mostly built up of experienced entrepreneurs, innovators, and investors) that have the funds, in-house expertise and patience to build their own startups from scratch. (sometimes also known as Startup Studios).24
Startup Accelerator
Fixed-term, cohort-based programs, that include mentorship and educational components that culminate in a public pitch event or demo day.25 e.g. Petronas Futuretech Accelerator
Startup Incubator
Ongoing, often non-profit initiative to build companies by working with them from the idea stage to graduation when they reach a significant milestone.26 e.g. 500 Ignition Singapore
Internal Venture Accelerator
Internal accelerators (or corporate accelerators) are acceleration programs funded and run by corporations. Team members develop internal ideas in a given time and are selected by management to be funded by the company or a select pool of funds, sometimes in exchange of equity.27 Ex. Siemens Next47 Accelerator
Platform or Partnerships Accelerator:
More advanced startups work with corporates to build new products on their platforms or networks. e.g. Visa Accelerator
Venture Creation
Designing, incubating, and scaling a wholly-owned new business from inside out. This business is not just a new product or service, rather it includes its own revenue model, theme, and more., e.g. Citi D10X or Alphabet’s X, the Moonshot Factory (sometimes called Venture Building or a Venture Builder or a Startup Factory).
This is different from a more outside-in exercise such as a venture studio, where outside entrepreneurs are building an independent startup at arms-length from the parent company.
Venture Capital
Capital invested in a business in which there is a substantial element of risk, typically a new or expanding business.
Startups
A newly established business intended to grow rapidly and gain scale of operations quickly.
Appendix
1 Ben Lamm, “The venture studio is the model we need right now” Venture Beat August, 2019
2 GSSN, Disrupting the Venture Landscape, 2020
3 First Round, First Round 10 Year Project, 2015
5 GSSN, Disrupting the Venture Landscape, 2020
6 Finleap
7 Based on PitchBook Data as of June 29, 2021. PitchBook Data, Inc.*
8 Based on Pitchbook Data and Startup Studio Database as of June 29, 2021. PitchBook Data, Inc.*
9 Based on PitchBook Data as of June 29, 2021. PitchBook Data, Inc.*
10 Bill Gross, “My 25 lessons learned” 2021
11 Finleap
12 Markus Maier, Rocket Internet—a copycat business model, 2015
13 Based on PitchBook Data as of June 29, 2021. PitchBook Data, Inc.*
14 Mike Butcher, “In confidential email Samwer describes online furniture strategy as a ‘Blitzkrieg’”, 2011
15 Burt Helm, “The World’s Most Ruthless Food Startup: The Inside Story of How HelloFresh Clawed Its Way to the Top”, July 2021
16 CNBC, Start-up factory Rocket Internet to delist, six years after going public, 2020
17 Business Insider, The Dumbest Acquisitions In The History Of Tech, August 2011
18 NYT, “Biden’s Antitrust Team Talks Its Way to a Win”, July 2021
19 Bain & Company, “Five Things Companies Get Wrong about Corporate Venture Capital”, 2019
20 Global Corporate Venturing, “GCV Analytics Q4 2020” 2021
21 CBInsights, The 2020 Global CVC Report, 2021
22 500 Global, Unlocking Corporate Venture Capital
23 Dianna Lesage, Startup Accelerators vs. Incubators vs. Studios vs. Co-working, 2019
24 Ben Lamm, “The venture studio is the model we need right now” Venture Beat August, 2019
25 Entrepreneurship Ecosystem Insights, Accelerators vs. Incubators, 2014
26 Nextcorps, Startup Incubator vs. Startup Accelerator… What is the Difference?, 2021
27 Innoway, Innovation accelerators for corporates.
