At Philo, we like to compare launching successful startups to the art of manufacturing diamonds. While mining for diamonds involves a stroke of luck to discover gems deep within the earth, manufacturing diamonds follows a rigorous process to allow for precision, control, and the ability to shape the outcome from the very beginning.
To manufacture a diamond, carbon is placed into a press and heated to temperatures between 1,300º to 1,600º C. After leaving the press, diamonds are exposed to further heat or even radiation to create the perfect color and clarity. Larger diamonds and higher-quality diamonds require much more time to produce than smaller, imperfect gems. Venture studios approach startups similarly to a diamond lab, using a structured approach to de-risk the startup journey and provide startups with the necessary resources, expertise, and environment to nurture ideas into successful ventures.
Relatively speaking, the venture studio model is still quite new. The first venture studio–Idealab– was introduced in 1997 in Silicon Valley, with studios becoming more mainstream in just the past decade. According to the Global Studio Startup Network (GSSN), there are now just over 900 venture studios globally.
Within the venture industry, studios are unique to the venture model in that they develop business ideas and startups in-house. Unlike a VC firm, which provides only capital, venture studios provide capital, in addition to all the resources necessary for a startup to launch successfully–including finance, operations, marketing, legal, engineering, IT, and HR support.
Venture studios are structured quite differently depending on the studio philosophy. Some studios partner with founders who bring business ideas to the studio. Other studios, such as Philo, create startups from ideas originated mostly in-house. Some studios focus on one or few verticals, while others like us prefer to remain vertically agnostic, focusing instead on areas of expertise. Studios also greatly differ in the time they spend developing a startup, the amount of equity they require, and more.
Studios take startups through a regimented, systematic development process–from ideation to concept validation and onward to launch only if the startup passes the milestones needed for success. Unlike an entrepreneur personally invested in his or her startup idea, studios approach startups in an unemotional manner, and will scrap an idea that doesn’t pass muster at any stage. Vetting startups and providing them with all the typical necessary business resources gives studio-built startups a tremendous advantage at launch–immediately positioning them with a 30% higher chance of success than traditional startups.
In terms of how long a venture studio continues to support a business, all venture studios vary. At Philo Ventures, we are committed to the mantra of “FILO,” where we are the first ones in to support a business and the last ones out. We also believe in versatility and in doing whatever a startup needs done. That means on any given day, a Philo partner or associate may spend the morning pitching a startup to investors, and in the afternoon, answering calls to provide customer support for a newly launched business.
Because there are so many venture models in the industry, it’s important to clarify the difference between venture studios, VC firms, accelerators, and incubators. While all of these models invest in the growth of high-potential early-stage startups, they each approach the goal differently.
Traditional venture capital firms provide capital to a startup in exchange for equity, but very little (if any) additional support. A VC firm will typically invest in a startup only after the company has moved into the product development stage and demonstrated market demand. Startups funded by VC firms traditionally have 10 years to return profit back to the investors.
Accelerators provide very little capital to a startup, yet much more support. Typically, startups selected by accelerators have created a minimum viable product (MVP) and have some type of established customer base. Startups selected by an accelerator enter a mentorship program to help them refine and polish their businesses over a 2-6 month period.
Unlike accelerators, incubators look for great ideas to invest in. They don’t accept startups past the MVP phase and often don’t contribute direct capital. Instead, incubators provide access to important business resources, mentorship, and shared working spaces. Startups remain within incubator programs for approximately 1 to 5 years.
Venture studios behave much differently than any of the other investment models. Unlike VC firms and accelerators that invest in startups already in motion, venture studios start with ideas and proceed to build startups through every business stage–from ideation to validation and on to launch. Venture studios provide startups with capital, as well as startup know-how and all of the necessary business resources in what becomes a far more involved process than any other investment model. In fact, on average, studios transition startups from zero to funding in less than half the time it takes for non-studio startups.
Nearly everyone in the venture world has heard the statistic that 90% of startups fail. But startups don’t fail simply because of a flaw in the idea or even a lack of capital. Beginning a business needs a good idea and capital–but also requires key business resources and startup know-how. Venture studios offer startups access to seasoned founders and experienced talent. They rigorously vet ideas and discard those that don’t pass the necessary requirements. Studios have the expertise to place structure around a startup idea, build financial models, conduct market research, create teams, and raise capital.
Among all of the industry players outlined above, only venture studios provide businesses with the unique combination of these crucial startup elements–capital, a validation process, business resources, and best practices and know-how. And that unique combination gives venture studio-backed startups a huge leg up.
There is a large amount of published research demonstrating the proven success of the venture studio model. According to GSSN:
As mentioned earlier, venture studios vary greatly based on their respective investment philosophies. Philo operates as a founder studio, where we prefer to generate startup ideas in-house. For us, the primary exception to this model is when an industry expert approaches us with a problem within the industry and asks us to build a solution.
Philo chooses to remain vertically agnostic, so rather than focusing on one or two primary verticals, we extend into a few verticals where we then leverage our expertise, such as AI, SaaS, among others. We provide shared business resources, office space, and know-how to our startups, rather than providing exclusive resources like some studios.
Again, we remain intricately involved in a startup through every stage of the startup process and even beyond launch (remember, Philo believes in being the “first ones in and the last ones out”). We never want a business to fly solo during a critical phase and simply “hope for the best,” so we nurture a startup well past launch until the company demonstrates a clear track record of success. This philosophy leads to us deliberately spinning out fewer startups per year than some other studios.
In summary, we are huge believers in the venture studio model. We have both witnessed and experienced startup success using this model, time and time again. We are confident that, with our unique combination of in-house ideas, validation process, areas of expertise, and startup acumen, that we will continue producing “startup diamonds” for years to come.
September 20, 2024