Venture studios are companies that create, invest in, and run a group of startups. They are similar to venture capitalists but are more involved by providing not only money but also resources, guidance, and expertise to help startups grow.
A common question is where do venture studios get the funds to keep launching new projects, especially when one venture is still in progress? They make money in two main ways. First, they take a percentage of the ownership (equity) in each startup they invest in, and their earnings return when those startups are sold or go public. Second, they charge fees for the services they offer to their portfolio companies.
Equity-based compensation is the primary way venture studios make money. They earn a share of the startup’s ownership, so when the startup succeeds, the venture studio benefits financially. This model can be very profitable, but it carries risk because venture studios only earn money if their portfolio companies do well. Sharing equity with the startup’s founder ensures that everyone has a mutual interest in making the venture successful.
Alternatively, studios generate revenue through fee-based compensation.They charge fees for the services they provide to their portfolio companies, even if those companies don’t ultimately succeed. This revenue helps fund and sustain the venture studios’ future investments and operations.
Venture studios can generate returns when their startups are sold or go public. This model can be highly profitable, but some venture studios choose to keep their companies with the goal of growing them into highly successful startups (called unicorns). Often, funds gained from successful ventures are used to launch new ones.
The takeaway behind launching a venture studio lies in the ability to create multiple projects using a proven business model. This approach has advantages, especially in an environment where failure is common. Venture studios are more profitable and resilient than typical startups for a number of reasons.
Diversification of projects across various industries
By actively exploring multiple sectors, venture studios mitigate the risks associated with focusing on a single industry. They leverage their expertise and network to identify emerging trends, untapped markets, and promising opportunities across diverse fields.
Leadership from experienced professionals and developers
Studio professionals have successfully navigated the challenges and complexities of building and scaling businesses, and leverage past experiences to guide the strategic direction of the studio. With industry insights, market awareness, and technical proficiency, these leaders identify promising ideas and projects, ensuring they align with market demand and have the potential for growth.
Funding from portfolio companies during crises
During crises, venture studios can face financial challenges just like other businesses. However, they have the potential to receive funds from their portfolio companies. If these portfolio companies experience success and secure funding, they likely have the ability to provide financial support during challenging times.
These are just a few reasons why founders find the venture studio model exciting. In the future, we can expect to see more venture studio-based projects taking off.