December 07, 2020

Startup-studio. What is a venture builder and how it differs from an incubator and accelerator / Rusbase

The goal of any production process is to minimize errors and maximize profits. Why not apply the factory principle to the startup creation?

 

This question simultaneously came into hundreds of minds all over the world. Some of them joined and started venture builders. Rusbase learned how venture builders emerged and operated, and figured out whether startup studios in Russia are just as popular.

What is a venture builder?

Venture builders are companies that do business out of streamlining the creation of startups. They launch several startups at the same time, invest their funds, and help raise additional money.

In exchange for human and financial capital, venture builders get a stake in the company and eventually cash in either on the company’s business performance or on its sale.

The most famous and experienced venture builders are IdeaLab and Betaworks in the USA, and Rocket Internet in Germany. They have built hundreds of successful startups.

According to Attila Szigeti, author of Startup Studio Playbook, from 2008 to 2017, venture builders around the world raised over 5 billion dollars for their projects, and since 2010, the annual financing gain amounted to 48%. This field is rapidly developing in Russia as well.

 

Lost in translation

Terminological ambiguity is quite common in Russian and English alike. For one thing, one and the same phenomenon may go by different names in various companies: Venture Builder, Company Builder, or Venture Studio.

And that all adds to other terms in use, like Startup Factory, Startup Studio, Startup Foundry, Startup Nursery, and also parallel entrepreneurship.

The three most popular names are Startup Factory, Venture Builder, and Startup Studio. This terminological variety is what followed after the bright idea of growing startups as plants in a garden plot crossed too many minds all over the world at the same time, with no common name for it to pin it down.

The popularity of various variations of the name of startup studios
Picture: Global Startup Studio Network (GSSN)

Accelerator, Venture Fund, or Venture Builder?

What is the fundamental difference between a venture builder and a venture fund, business accelerator, and business incubator? Let’s consult a dictionary. In 2011, the U.S. Department of Commerce defined business accelerators as “facilities assisting incubator graduates, as well as incubation programs for companies that are ready for external financing.”

  • Incubators help emerging startups to build a solid foundation for growth. Their functions range widely: they may include mentoring, technical support, assistance in prospecting, market promotion, and whatnot.
  • Accelerators usually get involved at a late stage of product availability and help teams over a short time that is yet sufficient to prepare for serious investments.
  • Venture funds usually look for existing projects with ongoing sales and a good potential for growth, so they often conduct a long due diligence process before giving it their best shot.
  • A venture builder not just supports startups but creates them on its own. It takes full responsibility for the business, from the initial idea to the sale/viable profitability.

In a nutshell, a venture builder combines the functions of an entrepreneur and investor by reinvesting the capital derived from the sale of mature companies in the creation of new startups. While monitoring the project throughout all stages, a venture builder keeps it clear of common errors.

 


Startup studios create new jobs to run startups that are staffed by people from the market.


For this purpose, they use both traditional methods, such as assessment and interviews, and business games, which help identify people with an entrepreneurial streak that can act in uncertainty.

Startup studios have different ownership structures. Most of the share capital comes from the studio founders and original investors — these can be either individual limited liability partners or venture funds.

 

History of startup factories

The history of startup factories dates back to 1996, when brothers Larry Gross and Bill Gross created their IdeaLab in Pasadena. It was a straight startup studio: the Gross brothers came up with most ideas themselves, selected teams for their implementation, financed them and then helped to attract additional investors.

One of the builder’s most famous projects was GoTo.com, which created the world’s first contextual advertising system Overture Service, purchased by Yahoo in 2003 for $1.63 billion.

History of startup studio development
Picture: Global Startup Studio Network (GSSN)

The brothers were way ahead of their time: in the late 90s, there were no technologies crucial for the creation of startup factories: server farms for distributed data processing or the MVP concept, and few people were aware of design thinking.

However, early studios provided powerful computing resources as well as advanced specialists and investment.

The real venture builder boom did not begin until 2011-2013, when technologies and the market finally matured. Today, venture builders are experiencing another wave of growth. Now they are using the lean startup method, focused on mobile technologies and ready to implement any idea on demand.

According to the Global Startup Studio Network (GSSN), as of today, a few new studios are created each month worldwide, and if the growth rate remains the same as the recent trends show, by 2023 their number will triple.

In 2018, there were more than 200 studios. In 2020, as reported by Enhance Ventures, there are already over 560 studios worldwide, which exceeds a 625% growth in the past seven years.

 

Venture builders in Russia

The TechnoSpark Group of Companies is one of the first venture builders in Russia that has been successfully working in the field (there are many projects that have not survived to this day). It was founded in 2012 by private entrepreneurs in partnership with the Rusnano Fund for Infrastructure and Educational Programs.

Over the past 8 years, about a hundred startups have been launched at the site in Troitsk, in the center of New Moscow, including Ronavi Robotics logistic robots, Solartek solar roofs and windows, Zdravprint plastic orthoses.

“Startup studios are the obvious answer to the burning question in Russia about what one has to do when there are no entrepreneurs and investors have no one to support,” comments Denis Kovalevich, one of the founders of TechnoSpark. “Besides, it is a suitable solution for those who have a small startup capital.

With a lot of money, you pour your capital into management by creating a venture fund. If you are short of money, then you are forced to invest not only in financial equity, but also in sweat equity, something that one gets for years of hard work rather than money.”

Many of TechnoSpark’s startups have already got external investors, but it is still not enough.

 


In Russia, there are only a handful of investors financing venture builders’ startups.


Denis Kovalevich sees three reasons that explain this:

  • “A classic investor checks whether a startup has its own trendy and eloquent founder as well as its own team of skillful engineers. It’s not that we cherish the stars just for the sake of it. Each of our strong startup builders is engaged in three to five projects at a time, just as engineering groups that are involved in the development of many products simultaneously. This manner of operation reduces investment costs many times over.
  • The investor wants the company value to grow 10-50 times over the next 3-5 years. The only way to increase capitalization in Russia like that is to inflate a bubble. We don’t do that either, instead we spend time preparing the company for objective exponential growth, we deal with products, prototypes, and sales.
  • For a classic investor, one startup that has taken off is worth times more than the other 9 that have not. Here, 25% of companies move from the conceptual stage on to the product competition stage, 50% — from the product to the competition for revenue, and 75% — to the margin growth stage. It takes 5-7 years for a company to be exposed to external investors, that is why we only started working with external investing in the last 2 years. But this type of investors that finance startup studios and their companies, has already been around in Europe and America, and, therefore, will soon emerge in Russia, too.”

Differences between startup studios and other organizations
Picture: Global Startup Studio Network (GSSN)

Serial work with material startups requires much more effort and financing than working with web projects. Therefore, there are few hardware-oriented companies in Russia.

The second company in the list after TechnoSpark is the Ulnanotech nanocenter in Ulyanovsk. The center operates on the startup studio model and is located in the Zavolzhye industrial park in Ulyanovsk. It was founded by RUSNANO FIEP, the government, and private investors of the Ulyanovsk Region.

Besides, the startup studio model is embraced by other centers within the FIEP investment network in Novosibirsk, Tomsk, Saransk, Kazan, Dubna, Gatchina, and St. Petersburg.

 

Other examples of venture builders in Russia:

  • Digital Horizon is an investment company that brings together a venture fund targeted at the Western market and a venture builder that creates and scales tech startups in Russia.
  • ADV LaunchPad is ADV Group’s venture studio that helps startups at the earliest stage, providing everything “to get to the seed investment”. The studio opened at the end of 2019, 9 startups have been funded, 3 of them are generating profit.
  • Innoretail tech startup accelerator is an “ecosystem” and “integration point” that brings together retail networks, startups, venture funds, development institutions, and partners in the retail industry. The company provides a platform for launching tech retail startups.
  • Sistema-2 Startup Studio is a startup studio specializing in open data and blockchain analysis technologies, digital business transformation, game practice and thinking technologies, HR-digital, public analytics, and company positioning.
  • SKL Tech started as a private business incubator developing tech B2C startups but gradually changed its format. Now it’s a venture builder: it creates products from scratch, supporting them with expertise and its own investment. It is technologically focused on artificial intelligence projects (microlearning, smart devices and smart home, personal assistants, fashiontech, traveltech, healthcare).
  • Around Capital is a venture studio established in December 2019. It is engaged in promotion of Russian projects on the global market.
  • Evagreen Ventures is a new venture builder, which put its name on the map in November 2020. It works with projects related to sustainable development (alternative and renewable energy sources, healthcare, etc.).

 

Benefits, drawbacks, and prospects of startup studios: expert opinions

Attila Szigeti, co-founder of the Hungarian Drukka Startup Studio, author of Startup Studio Playbook

Photo: Global Startup Studio Network (GSSN)

Yes, this approach to build new companies is very well suited for Russia too. Where there is high intellectual potential and at least a handful of entrepreneurial leaders who want to make a significant impact in their field through creating batches of startups, startup studios can emerge. Possibly the best Russian examples to this is Technospark, who seem to have found the perfect blend of entrepreneurial approach, high tech infrastructure and available funding.

Number of startup studios is rapidly growing globally, but there are significant barriers to entry, that still only a few can pass.

 


The biggest barriers are leadership and funding. It is challenging enough to create and exit one single startup company, but the leader of a startup studio has to create and run a team who can do this again and again.


Not to mention that each new startup created will need it’s own leader, and the studio often has to find and nurture talented people who will grow into this startup CEO role.

Then there is money. Most institutional investors are still unfamiliar with investing into startup studios in their earliest stage. A traditional investment approach is to make one investment into one company. Putting money into a startup studio fund is a one-to-many investment. It requires a new mindset, new investment calculations and new legal and organizational structure – that enable the studio to become a highly effective factory of startups and that also ensures that the investors money is in safe hands.

Most countries are still learning how startup studios fit into their innovation ecosystem. No doubt, that within 3-7 years, having studios everywhere – together with already common elements like incubators and accelerators- will be part of the norm, making innovation and business creation more streamlined.”

*A programming term, which means that one instance of the first object corresponds to several instances of the second object, while one instance of the second object corresponds to one instance of the first object. Take a football team as an example. It consists of several players. However, one footballer can only play in one team at a time. — Explanatory note.

 

Alexander Bespalov, Vice President of Investor Relations Club

Photo: Global Startup Studio Network (GSSN)

Despite the fact that the number of venture studios in Russia is growing, in general their work leaves a great deal to be desired.

Venture studios are mainly faced with quite a few problems. They fall for for pumping up capitalization of projects and attempt to grow a unicorn, which sometimes shakes the company’s economy to the ground. They practice frequent pivots (business model changes) and try to squeeze the most of the project, even at the expense of investors. And they experience difficulties in decision-making and influencing the founders.

 


Unfortunately, there are not so many tools for protecting investors in venture projects in Russia, therefore, studios are often forced to shape up abroad, which does not make it any easier for private Russian investors to cooperate with them.


On the bright side, teams in venture studios demonstrate more straightforward and professional work when it comes to projects, they tend to adhere to roadmaps, use more professional materials, and come up with viable offers for investors.

Besides, studios that have already proven their worth have a better chance of attracting investors than a single startup.

There are more opportunities to work with funds at later stages, as legal affairs are usually better elaborated by studios than by individual projects. It goes without saying that the knowledge bases and expertise accumulated by studios is another great value, especially if they are highly tailored in specific markets and “grow” projects that have a synergistic effect.

Alexey Soloviev, venture investor, founder of A.Partners investment company

Photo: Global Startup Studio Network (GSSN)

 

There are three success drivers for the venture studio model.

  1. Firstly, venture studio founders can be more precise about targeting market segments with good growth potential.
  2. Secondly, there is a certain economy of scale — services within the venture studio are rendered to all its clients on a centralized basis, which, on the one hand, reduces the burden on founders, and on the other hand, improves the quality of such services.
  3. Thirdly, a venture studio is a brand and it allows to centralize and improve the quality of interaction with the labor market by attracting the best talent to their portfolio projects, as well as with the investment market by furnishing assistance in project fund-raising.

As an investor, I’m most interested not even in projects assembled by various venture studios, I am interested to know if a venture studio itself, as a business model, can attract investment. Can a venture fund that manages LP’s money choose venture studios as investees?

It seems to me that a portion of venture fund capital could be allocated to venture studios, so that the studios, not the startups, would become part of the funds’ portfolio.

Sourse: Rusbase

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