Earlier this year, I attended “The Rise of the Venture Studio” panel discussion led by two partners from San Francisco-based Silicon Foundry. The novel premise of a venture studio is that greater returns can be generated by investing very early if there is a hands-on, venture formation approach.
So, rather than funding established startups as would a traditional venture capital firm, venture studios employ teams to help form, manage and validate startups. This can involve starting with merely a big idea or an innovative piece of technology and stand it up with the team, the plan and the seed funding to help find a product market fit.
The studio team typically guides the day-to-day activities of a fledgling startup until there is enough traction for the studio to raise capital from outside investors, while maintaining considerable founder equity. At this point, the business is ready to stand on its own, and the team can either go back to the start with a new concept, or stick with the growing company as it scales.
In some ways, venture studios are an adaptation of the accelerator model, a point Silicon Foundry’s Steve Gotz made in a recent Medium article.
“Accelerators generally wait for an entrepreneurial team to form and pitch an idea, whereas a venture studio generally relies upon a core team to constantly explore and validate new opportunities, oftentimes in collaboration with other funds and/or corporations,” he wrote.
Gotz makes a good point. Venture studios can be a winning strategy on multiple levels. Corporations and research institutions get help navigating a clearer path to commercializing their innovative ideas, the studio establishes considerable founder equity to drive higher ROI and the studio team members are motivated to quickly kill a struggling idea as the studio is structured to replace weak ideas with new promising ones.
Ironically, this model is very reminiscent of the hands-on approach of the early days of venture capital, before deals got so top heavy. Coastal deals making news today involve billion-dollar VC funds and $10 million first checks. When there is more money in play, investors can come in later in the commercialization process to support the growth of companies that are demonstrating market traction.
But in the formative days of venture capital, the name of the game was to get in early and then roll up the venture firm’s collective sleeves to make every effort to help the company create value. Incubation space, talent networks and corporate innovation pilots didn’t necessarily have formal names (or structure) back then. They were just part of the added value investors brought to the table to help shepherd their fledgling startup investments.
Over time, solid returns, larger follow-on funds and a more evolved startup ecosystem made this grassroots approach less essential than it once was for many coastal VC firms. But here in Ohio, JumpStart’s investing method has always leaned old school.
A glance through the JumpStart portfolio companies that have successfully exited shows that while we were typically the first — and in some cases the only — institutional investor, the technical assistance we offered these companies (customer discovery, talent recruiting, capital connections, etc.) helped fill important resource gaps early on. In recent years, JumpStart has intensified its services-oriented relationships with research institutions and corporations. These collaborations bring hands-on resources to help.
So, while the idea of a venture studios may seem novel today, it’s also not a radical pivot in thinking from the way investors like JumpStart work to create added value for their portfolio companies and strategic partners. A major takeaway from GCVI is that technology-based innovation is clearly top of mind in the corporate world. We look forward to expanding our partnership base to help the region’s institutions to adapt, or even adopt, a venture studio approach to get back to the future.
Jerry Frantz is senior managing partner, entrepreneurial services and investing, at JumpStart Inc.