FAQ for Those Who Decided to Launch a Startup Studio
I wrote this article, meaning to help potential studio owners by collecting answers to the most frequently asked questions. Still, my experience is as subjective as it gets, so I hardly can claim to be in possession of the absolute truth.
Who is this FAQ made for?
Ideally, of course, this FAQ is written for those who think it would be nice to launch a startup studio as the next step. But in reality, I intend to reach everyone who wants to understand all the kinks and quirks of such a business model.
Suddenly, studios became especially relevant. People talk about them at meetings, mention them in the media, but not so many of them truly understand how it works. Well, here’s some first-hand information.
What do you know about this? Who are you?
My name is Max, I am the founder of Admitad Projects — one of the first corporate startup studios in the CIS region.
We have finally completed the full production cycle. We collected ideas, made them into products, developed them, and turned them into businesses that have grown so much that the company is ready to buy them for incorporation. We’ve got not one, but four such projects, which excludes the stages of “Rookie’s luck!”, “It’s a coincidence”, and “Third time is the charm”.
On the Internet, there’s not much written about studios that went through the full cycle, so I hope our info will be useful to the community.
Alright, got it. What are your results?
Starting from January 2019, we tested about 150 various business ideas. Here’s what survived and currently stays under our management.
- Several pre-seed projects (the amount changes weekly)
- 9 seed-stage projects
- 4 round-stage projects.
Projects up to the seed stage show maximum mortality. It’s some sort of Game-of-Thrones battle royale with lots of blood and death. If a project survived till the seed stage without burning out and did everything else correctly, then the death rate drops by a multiple (at least in our practice).
How did you measure the studio’s efficiency?
In the first year, we measured it in the amount of investment per seed round. We made a project, brought it to the investment committee of the parent corporation, and it decided whether or not it should run an investment round (worth several hundred thousand dollars).
In the second year, we measured it by revenue growth. It’s good to create projects, but we need them to earn money and become profitable in a clear timeframe.
For the third year, the goal was hybrid. We keep creating new things (projects that are interesting for the company and worthy of investments) and develop what we already got (revenue growth).
For me personally, the main goal, albeit qualitative instead of quantitive (why the hell we are doing it) is the investor’s interest in the projects that we create. Will the company buy out the studio’s projects as a strategic investor? By answering this question, you’ll also understand whether you are making garbage. As I already said above, we have four pending exits to the corporation. The rest are still growing, so in six to twelve months, we’ll be able to update the numbers.
How is a corporate venture builder different from a non-corporate?
Startup studio, venture builder, company builder, venture studio, and a dozen other names — for me, it’s all the same thing. Although there are people on the market who distinguish between these concepts, my knowledge is not yet that sharp. I think all these terms represent a system of creating multiple businesses simultaneously in a controlled and repeatable way.
The only difference to keep in mind is whether it’s a corporate studio or not. It directly affects the business model and work approach. If it’s corporate, then it’s all about developing and creating projects for a strategic investor (corporation). You can expect more formalities and less freedom of maneuver, but there is no problem with resources.
If it is non-corporate, then projects are created for the market and venture funds. Besides project development, a lot of time will be spent on fundraising, i.e. meetings with fund representatives, pitching, etc.
We classify projects based on their maturity. We adopted this principle from the venture capital market. We understand it because we have also worked and continue to work in the format of a venture fund.
What are startup studios for?
A studio is an entrepreneur’s co-founder that indicates what functions/tasks it undertakes and how much time it needs to close them. Ideally, the founder is only engaged in creating and selling the product while we take care of the entire routine and the remaining 99 functions. It’s a digital manufactory, not a magic wand. Just another format that complements those already existing on the market.
So let’s answer the question: what are startups studios for?
From an investor’s or corporation’s point of view:
- It’s a way of creating new businesses/startups while accumulating expertise within a parent enterprise. It’s another type of serial production, but with digital products.
- It’s a way of delivering the right project to the right niche if the market does not have what you want or it costs too much.
- If you are like Elon Musk, you’ll be fine without studios. You are experienced. You’ve got this. Also, you have Tesla.
- If you are a middle-level entrepreneur ready to create projects by yourself, you can contact venture funds. They’ll take a small share (10–30%), but in return, they can only give you money, no matter what they promised.
- You can also contact a startup studio. It often has its own infrastructure and a strategic investor. It means you might exit in the near future. With a studio, you’ll do it faster, the risks are lower as well, but you will be left with a smaller share (20–70%).
- If you are a beginner, it’s better to work in someone’s startup or studio first.
Why is a startup studio model effective?
We can’t say it’s super-effective in comparison to other models. It’s a solid market alternative in the sphere of digital products and innovation.
For founders, a studio has the following disadvantages:
The share you’re left with is smaller than in projects developed independently or with a venture fund.
But it has its advantages, too:
The project will develop faster, as it’s created into an already-existing infrastructure (legal entities, bank accounts in different countries, etc.) and services (from HR to development and sales). The issue of fundraising is resolved, too. All projects go through the same stages/problems, and the studio has accumulated knowledge and experience on how to pass these stages faster.
How are the studio processes organized?
It’s simultaneously the easiest and hardest question.
The easiest because there are no secrets, just the classic Lean Startup by Eric Ries. In general, all the startup studios I know based their work on it. If reduced to one sentence, this book’s main idea is, “You don’t need to spend lots of money on obtaining answers to important questions when they can be obtained in cheaper ways.” For example, do not start programming a project until you understand what you should sell and to whom.
This is where the easy part ends. It’s just like the rules of football. Everyone knows them, but they can be followed very differently.
Because creating startups is neither magic nor art, it’s just a craft that has its own issues. As Armand Hammer said, “When I work 14 hours a day, 7 days a week, I eventually become lucky.”
This is how studios work. If you build the sequence of “hypothesis, verification, analysis, new hypothesis” correctly, then one way or another, eventually, you will definitely get lucky.
All our experience is reflected in the list of questions. By going through the list, we reduce project risks step by step. However, it’s useless without people who accumulated the experience of going through these stages. If someone simply copies our internal documents, they will receive information at the level of “I know”, but not “I understand” and much less “I realize.” Those are the rules of football. You can memorize them by heart, but you won’t become a better player than Ronaldo and Messi.
How do you form your pipeline and choose projects/ideas?
We have a process of Frankensteining ideas from 8–10 different ones. The team includes:
- Direction analyst. Their task is to study and compile lists of interesting projects and ideas from the indicated areas.
- Crowdsourcing via internal PR. Anyone can submit their idea. The process is implemented into onboarding, contests, etc.
- Venture analyst. They monitor, collect, generate project ideas from venture sources.
- Interviews with external experts.
- Themed brainstorms (GIST framework or others) + idea matrix.
- A separate analyst for the Chinese market because there’s just too much going on.
- Data scientist and sociologist. Based on the data that projects have, these researchers figure out how else we can apply them.
- Top management of the company and internal entrepreneurs (the best channel).
- Searching for teams with early-stage ideas, inviting them over for further development and growth.
Ideas from all sources enter a single database and get scored by several parameters (implementation/monetization complexity, market size, relevance, etc.). Now, we have no problems with coming up with ideas, there are lots of them. However, the bottleneck is the number of available teams that can test ideas simultaneously, as well as providing resources for them.
I would say that ideas are overrated. Indeed, they are the basis of any project, but a good execution can turn an average idea into a cool business, while a bad execution could even kill the best concept in the world.
If we find an existing project we want to develop further and become partners with, then the criteria are similar to a venture fund: the founder’s adequacy/expertise, the potential market size, etc. We don’t care about the rest too much because we work with early-stage startups, embedding many features of our own. Therefore, what scares off venture funds is just another challenge for our studio.
What do you offer to startups?
- 20% in a business we build together from scratch. Founders provide their time and skills, we provide our skills and money.
- Infrastructure that allows you to make your way faster than developing everything independently, falling into 99.9% traps along the way.
- You are free to make mistakes and try again if it did not work out the first time.
- Investments up to Round A without diluting a founder’s share.
- A strategic investor from the start. It’s immediately clear who will buy your project and how you can advance the exit.
- If you know how to create startups but fail to come up with a cool idea, we can share ours with you. As I said, there are many ideas.
3 principles of a corporate startup studio done right
- Development is lava. The later you touch it, the better.
- “We have it better.” Answer honestly, why would a project created in your studio have higher chances than a similar one created in the market?
- In a studio, you have to learn how to do things faster. If a founder solves a problem in the market faster than inside your studio, this is a problem. Ideally, the speeds should at least match.
Are you afraid of competing with other studios?
Well, not really. It’s not clear what we compete for. A studio is only good when it can answer the question, “Why would an ‘inside’ project be better than the one developed in the market?” To get the correct answer, the studio must be focused.
It’s unlikely that one studio will be able to develop new oil pumps, retail products, and online services all at once. On the contrary, it’s good when there are many studios, and each has its own niche and features to give to the market and founders. For example, we believe that we are well versed in online advertising (AdTech), marketing (MarTech), and smart B2C shopping.
Examples of successful startup studios
I think this is a rather useless question, although people are often interested in it. Still, here are some successful studios:
- Rocket Internet
- Pioneer Square Labs
Their stories about tremendous rounds and big exits are easy to google. But does it mean that you need to follow their steps to become successful? Of course not. They work in a completely different market, with different exits, specialists, target segment sizes, etc. Abroad, the macro factors are completely different, so if you use the same tools in the CIS, there will be little sense.
By the way, this is one of the reasons why most of our accelerators do not work. It is not enough to copy Y Combinator — you also need to copy the US market and the infrastructure of Silicon Valley.
How much does it cost to launch a startup studio?
The question is similar to “How much does a car cost?” because it can be very different. However, I’ll try to give you some hints. If you launch a corporate studio and need to systematically generate projects for possible investments, then I wouldn’t recommend you to get involved without having at least $5 million that you are ready to spend on it. For comparison, we have invested about $20 million in projects and our expertise.
If you create projects for the market or venture funds, then you can be very economical about it (even with no investments at all). You can gather experts who will do their part without salary. It’s also good to have contacts within funds, as it can help you receive investments for the MVP you developed. This version of the studio is realistic, but it would be easier for it to generate one startup at a time than a whole series. The more projects you simultaneously work on, the more difficult they are to manage. On the one hand, you reduce risks if one project fails. On the other hand, you lose focus. When you have enough resources, you can solve the latter problem, no big deal. But without them, one can only hope for the best.