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Venture Studios – give wings to new ideas
By Stuart Morley
Small businesses are often touted as pillars of the economy. These local enterprises will be especially crucial in rebuilding the economy after COVID. However, we face a square peg in a round hole challenge.
The round hole is large companies are not turning their research and development into new companies resulting in a shortage of grassroots businesses that needed to raise employment numbers. The square pegs include,
governments that pour millions into business accelerators, incubators, college and university research projects with relatively few concepts being commercialized;
investors who feel discouraged by how much work it is to find suitable investments and how much babysitting novice founders require; and
family offices and portfolio entrepreneurs that want to invest in startups but without the heavy lifting of becoming an angel investor.
So how do big companies outsource their research and development to trigger more startups and attract new investors without relying on government subsidies?
It may seem impossible — but there is a way. Venture studios can help square pegs fit into round holes! And they do so without pressuring innovators into becoming novice founders.
What is a startup studio/venture studio?
Venture studios are private companies owned by various shareholders, who are usually a combination of:
large businesses wanting to outsource their research and development; and
new investors interested in funding startups but wanting to avoid the hassle of finding and guiding the founders.
Studio CEOs are responsible for hiring management staff, innovators that develop solutions, and entrepreneurs in residence, who will run the new startups. A studio aims to launch five new startups a year and 50 over a decade. This way, most ventures survive, and some do really well, helping build a sustainable studio that does not require government funding.
Each startup cannot be a “unicorn” business. It can, however, be one that can grow to $50 million or $100 million in revenue over time and become a significant employer in the community.
Show me the money
Ideally, it costs about $2.5 million a year to run a venture studio. About half the money is spent on hiring staff and $250,000 from the remaining funds goes to each startup as seed equity. The studio, together with the startup CEO, finds additional funding of up to $1 million or more from third-party investors.
Who runs the venture studio?
The studio would also have a manager responsible for supervising the team of innovators. Ideally, this team is hired from a local pool of talented university students. The innovators are hired on yearly contracts with the possibility of renewal. Studios need innovators on-site so product prototyping can take place, however, software developers can be remotely located.
Another manager arranges and organizes weekly visits by large companies that present their R&D problems to innovators. These companies are potential first customers for startups as well as likely studio shareholders.
Successful problem solvers can earn a royalty on their solutions or they may choose to join the startup based on their idea.
What happens at a studio doesn’t always stay at a studio
Venture studio operations find solutions and incubate them until they become products for customers to purchase and use. Finding the product/market fit is key before launching a new business. This is done to determine that there are enough paying customers to make a startup worthwhile.
The next step of the process is to hand over the baby to entrepreneurs in residence. These are often serial entrepreneurs, who have sold their last business and are looking for the next challenge. These entrepreneurs become CEOs of the new company and would be expected to provide some equity to the startup.
All of this is key to ensuring investors reap profits not grievances.
Venture studios make good economic sense for all
Studios not only create jobs in the local community but their startups also have a low-failure rate. This is because they’re grounded in research, expert knowledge, and are managed by seasoned operators.
Being in the know
As a venture studio shareholder, you’re more than just an investor. You’re where the action happens. You’re not only creating the future, but you’re also watching new trends unfold. Being involved with a venture studio provides an inside track on new technologies across several industries. This helps pre- empt next steps and guide new investments. You can also foster ideas that are identified in another ventures you’re part of.
Step into the world of venture studios and give wings to ideas.