In this blog, we will iron out the differences between the traditional Venture Capital firm funding route and the Venture Studio model.

By highlighting the pros and cons of each, you will gain a clearer understanding of which route is best for your business.

Here’s what we will take you through…

• Intro
• Understanding Venture Capital firms
• The Venture Capital model
• Objectives of Venture Capital firms
• Understanding the Venture Studio
• The Venture Studio Model
• Objectives of the Venture Studio
• The Key Differences
• Advantage of Venture Capital
• Disadvantages of Venture Capital
• Advantages of Venture Studio
• Disadvantages of Venture Studio
• Recent trends
• Choosing your route
• Conclusion

Intro

In an entrepreneurial ecosystem, startups have a variety of options for securing their much-needed initial funding.

A typical starting point is either bootstrapping or raising money via friends and family.

However, with both of these routes coming with great personal risk, it’s increasingly accepted that entrepreneurs shouldn’t have to risk their own livelihoods or relationships to give birth to their ideas.

Instead, entrepreneurs should look to form relationships with Angels, VCs and Studios as early as possible to help get their businesses off the ground.

Nowadays, getting the support of an early-stage capital fund is popular with entrepreneurs who want pre-seed investment.

However, the Venture Studio route is increasingly more interesting.

The Venture Studio is a slightly different take on an incubator. This format provides entrepreneurs with a bunch of resources they will need to launch. Due to these increased resources earlier in the business’s lifecycle, they typically take far more equity in the business than an incubator.

The structure of a studio provides the entrepreneur with a great deal of support in all facets of the business from product and technology to go-to-market and growth strategies.

Despite VCs and Venture Studio’s shared aim of providing financial backing to startups, they differ significantly in their approach, involvement, and execution. This article aims to provide a comprehensive understanding of these two models, highlighting their unique characteristics, benefits, and drawbacks.

Understanding Venture Capital 📗

Venture Capital is a well-established model of investment, typically associated with high-risk, high-return ventures. These firms usually operate as silent partners, providing significant financial backing to promising startups in exchange for equity.

Word of warning though. VCs operate in line with the Power Law and push for it. This means that a ‘small number of investments in a venture capital portfolio will generate the vast majority of returns. In other words, the majority of startups in a venture capitalist’s portfolio will fail, but a few will be extremely successful and generate the lion’s share of returns.’ This law was established by Sebastian Mallaby in his book ‘The Power Law: Venture Capital and the Making of the New Future.’

What does this mean to you as an entrepreneur? VCs want massive successes or failures. One or two companies make the fund and they’ll push for that to be you.

This means that running a solid business that makes you as the entrepreneur a single/low double-digit millionaire is not in their interests and they’ll push against that.

So go in with your eyes open.

The Venture Capital Model

Venture Capital is often perceived as a large financial organisation that specialises in providing. However, they can span from a one-person micro fund to pretty sizeable institutions such as Andreessen Horowitz. There isn’t just one type of VC.

They usually offer high sums of money in exchange for a stake in the company. This model is characterised by its "hands-off" approach, wherein investors provide capital but leave the operational decision-making to the startup's founders, thus acting primarily as financial advisors. Whilst many VCs may be characterised as “hands off”, a more “hands-on” approach can be preferable as typically, this will mean more support along the way.

When deciding which ventures to invest in, VCs focus on the team, traction and the market size. Market size can be broken into TAM (Total Addressable Market) and SAM (Serviceable Addressable Market) - with SAM increasingly becoming to more important of the two.

Objectives of Venture Capital

• A venture capital firm exists to invest money and to see a significant return on that money for the executive partners of the fund, and their limited partners (essentially their own investors).
• Therefore, their goal is to identify startups with massive potential, that will reach “venture scale”.
• They seek to identify startups with high growth potential in sectors such as technology, regulatory changes, or consumer trends.
• They invest in these companies, take a portion of the equity, and expect a high return on investment upon the company's exit - either an IPO (Initial Public Offering) or a sale to another company.

Understanding the Venture Studio 📙

On the other hand, a Venture Studio, also known as a Startup Builder or Startup Factory, is a relatively new model in the investment landscape. A Venture Studio aims to generate, build, and launch startups from within, offering more than just financial backing.

Warning: as of late 2023 we are starting to enter the hype phase of Venture Studios. That’s often when sharks enter the waters, so again, as always keep your wits about you and don’t be taken advantage of.

The Venture Studio Model

A venture studio is a company that invests in and aids in the development of early-stage startups. They provide not just capital, but also a variety of other resources such as mentorship, development resources, and business knowledge. They aim to facilitate the growth and success of the startups they back, usually taking a more hands-on approach compared to traditional VC firms. Due to this, they take much more equity (typically between 20-70%)

Objectives of Venture Studio

The overall objective of a venture studio remains the same as a Venture Capital fund - to invest in entrepreneurs who they are inspired by, and who they believe will be able to take a good idea to a successful company. They aim to create a collaborative space for entrepreneurs, providing them with resources like seed funding, guidance, and business know-how. They aim to reduce the risk associated with launching a startup by providing expertise on key startup subject areas and support at every stage, from idea generation to post-launch.

The Key Differences 🤷🏼‍♀️

While both Venture Capital firms and Venture Studios provide funding to startups, their approach, involvement, focus, and investment strategies significantly differ.

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1. Investment Strategy

Venture Studios and Venture Capital firms have distinct investment strategies. While Venture Capital firms invest in existing businesses with potential, Venture Studios create new startups from scratch, providing operational support along with financial resources.

2. Investment Stage

Venture Studios often engage with founders and startups from day one, whereas a pre-seed/ seed VC firm comes in later (typically).

3. Area of Focus

Venture Capital typically invest in startups that have already got to market, with strong growth potential. In contrast, Venture Studios focus on co-founding or incubating new businesses from the beginning. Just to be clear, we are talking on a ‘most-likely’ basis- obviously, there are examples that have managed to go against the grain, but we are letting you know about the most common routes for entrepreneurs.

4. Level of Involvement

Venture Studios are much more involved in the startups they back, offering more than just capital. On the other hand, Venture Capital firms usually take a more passive role, focusing primarily on providing financial resources.

Advantages of Venture Capital 👍🏼

Venture Capital, with its well-established model, offers several benefits to startups.

• Large Capital Provision

One of the main advantages of partnering with a Venture Capital firm is the large amount of capital they can provide. This can be particularly beneficial for startups that require substantial funding to kickstart their operations.

• Reputation and Legitimacy

Venture Capital firms, especially well-known ones, can lend significant credibility to a startup. Their reputation can help attract additional investors and resources, and their network can provide valuable introductions and opportunities.

Disadvantages of Venture Capital 👎🏼

Despite its advantages, Venture Capital also has certain drawbacks.

• High Pressure

Venture Capital firms expect high returns on their investments, which means startups may be under immense pressure to deliver results quickly.

• Diluted Stake

Due to outside investors, your overall outcome will be less.

Advantages of Venture Studio 👍🏼

Venture Studios offer a unique approach for startups, providing numerous benefits.

• Hands-On Support

One of the main advantages of partnering with a Venture Studio is the hands-on support they offer. Venture Studios are usually staffed by experienced entrepreneurs and business professionals who can provide invaluable guidance.

• Reduced Risk

By providing operational support and resources, Venture Studios can significantly reduce the risk associated with launching a startup. They will also reduce personal risk for the entrepreneur they are working with as they will typically provide some financial support as they work to get their product to market.

Disadvantages of Venture Studio 👎🏼

Despite its benefits, the Venture Studio model also has some limitations.

• Limited Freedom

Venture Studios often take a hands-on approach which might limit the freedom of the startup founders. This isn’t necessarily a negative, it just may feel annoying and stifling for the founder at the time.

• High Fees and Royalties

The costs associated with Venture Studios can be substantial, which could impact the profitability of the startup.

Recent Trends in Venture Capital and Venture Studio 👔

Over the past few years, the Venture Studio model has seen significant growth, with many new studios popping up across major tech markets. Meanwhile, the Venture Capital model, while still dominant, has seen a decline in the total number of deals as of 2023, despite an increase in overall dollar investment. Some VCs are now moving across to begin setting up their own Venture Studios.

Choosing Between Venture Studio and Venture Capital ❓

The choice between Venture Studio and Venture Capital depends largely on the specific needs and objectives of the startup. If a startup requires a hands-on approach and a wide array of resources, a Venture Studio might be a better fit. On the other hand, if the startup prioritises financial backing and independence, a Venture Capital firm might be more suitable.

There are many ways to launch a successful startup- it depends on your financial positioning, track record and how much guidance you need from your investors.

Conclusion

While both Venture Capital and Venture Studios offer viable options for startups seeking funding, they each have distinct advantages and drawbacks that need to be carefully considered. Ultimately, the choice between these two models will depend on the specific needs, goals, and circumstances of the startup.

Bottom line, if you’re an ambitious founder explore both routes. The most important thing is finding a way to bring your vision to life.

Remember, research and due diligence are key when choosing the right funding option for your startup. Whether it's a Venture Studio or a Venture Capital firm, ensure they align with your startup's vision, needs, and long-term goals.

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