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Myths about startup studios

Wednesday, September 29, 2021

Today we will try on the role of mythbusters: we will figure out why they have appeared and how the things really are.

Startup Jedi

We talk to startups and investors, you get the value.

Startup studios are still not the most common thing in tech-entrepreneurship. Although the first start-up studios boom happened back in 2007 and their number has been growing since then, the information about how studios are structured and function began to appear not so long ago. Of course, there are many myths around this form of entrepreneurship. They are happily spread by outside observers and skeptical entrepreneurs: these myths are easy to collect in a whole volume after reading the entire comment thread under one of the founder's posts about the success of his startup studio.

Today we will try on the role of mythbusters: we will collect the most important myths about "startup factories" and we will figure out why they have appeared and how the things really are.

Myth № 1. Startup studios outtake the major part of business from inexperienced entrepreneurs and exist at the cost of their success

How the myth appeared: in blogs and interviews, the leadership of startup studios sometimes mentions the studios share size (sometimes it can be up to 9%). The reader, who is not familiar with the studio's work principles, will really assume that it’s quite a lot for an organisation which is intermediary in the process of startup creation. The thing is that the studio is not an intermediary, the studio is actually a founder.

What really happened: most studios simply don't work with the side entrepreneurs. These aren’t accelerators or incubators, they don’t work with other people's ideas and projects. Within the studio, there is a team (or teams) of developers who analyze perspective markets, form ideas, test them and create startups based on the most promising ideas that have been tested by user demand. The startup studio provides them with all the necessary conditions. Sometimes studios hire an off-site CEO to run the startup and raise it in its early years. But this entrepreneur comes at the moment of creating a working prototype or a beta version.

There are several studios that work with projects and entrepreneurs from the side. Indeed, the share of the studio in the project will be greater than the accelerator or incubator have (this is agreed individually with each resident). But you need to understand: the studio doesn’t invest in the idea, but in the entrepreneur himself. During the verification stage, the idea can be finalized, reworked or completely changed, but the entrepreneur will have the chance to quickly launch the proven idea with the help of the back office, team and financial investments of the studio, receive a share, earn money and take up the next projects with the studio.

Myth № 2. Conveyor method in startup production doesn’t work

How the myth appeared: For the person familiar with entrepreneurship only from a distance, it may really seem that a startup is purely a handmade product. Especially after the bright stories of the founders, when a breakthrough idea came to them in a dream, a random interlocutor at Starbucks turned out to be a venture investor and immediately wrote a check, and the first million in the company was invested by an accidental relative from America... But in fact, the mechanism of production of a successful startup has long been described and written in an algorithm, for example, in Lean Startup by Eric Rees, which is called the founders' handbook for a reason.

What really happened: Why can't everyone launch their own startup then? It is not enough to know the rules. you need to be ready to play. Working with startups remains an extremely high-risk business, it requires a lot of dedication and strength of character, in addition, it takes a lot of time and resources.

Startup studios are committed to optimizing all these risks and reducing entry requirements. 90% of startups die because of the wrong idea, which the market doesn’t really need: startup studio teams in search of working ideas can “dig” 50 or 100 ideas. An ordinary entrepreneur doesn’t have the resources to test all these ideas, but the studio does. And since a single team of specialists, a back office and a pool of investors work for the startup studio, all time spent is also reduced.

According to Denis Kovalevich, founder of the “Technospark” venture studio, this approach allows ordinary hardworking and motivated people to start entrepreneurship — “not Steve Jobs and not Elon Musks”. Those who probably wouldn’t become a successful entrepreneur in the case of working alone.

The best indicator of success is the growth in the number of studios in the world, as well as the numerous successful startups launched by the studios: Picasa, Giphy, Snowflake, Bitly and many others.

Here are just a couple of recent examples: startup Giphy, a gif search engine, was launched in 2013 by Betaworks. At first, $1M was invested in the startup, then $30M and in the third round $300M. In 2020, the project was bought by Facebook for $400M.

Indigo Agriculture is an agricultural technology startup founded at Flagship Pioneering studio in 2013. A year later, it received funding of $7.5M, in 2016 it was $48.5M. Last year, the valuation of the startup was already $1.4B.

Myth № 3.  Working in a startup studios only suits to entrepreneurs who are afraid to try on their own

How the myth appeared: To a young ambitious entrepreneur, such an idea will be simply wild — give out your idea at someone’s mercy and then work in a large team, when you can do everything alone and become a part of the history. It seems that only an insecure entrepreneur can voluntarily do this. Or the smartest?

What really happened: The only grain of truth here is that working in a startup studio isn’t suitable for all entrepreneurs. Atilla Sigeti, co-founder of the Drukka startup studio and author of the Startup Studio Playbook, explains: if an entrepreneur is focused on one idea, for him, it is important to implement specifically this idea, so it is better to choose the traditional way, where accelerators and incubators can give a helping hand. But if an entrepreneur likes the very process of creating companies, and immediately after successful implementation he is ready to sell the project in order to do a new one, a startup studio will become the best way to use the potential. With the resources of the startup studio, you can work on ten projects a year, instead of working on one. And from a financial point of view, it will be more profitable, too.

On the other hand, we can look at working with a startup studio not from the point of view of ambition, but from the point of view of logic, by asking yourself a chain of questions: where is the higher probability of launching a startup that will take off — on your own or in a startup studio? Which is better: to quickly implement the idea, gain experience, reputation and considerable income and take on the next one or spend several years on an independent path (but with a greater share)? This rational approach makes working with a studio a popular option for entrepreneurs who are inclined to sail on their own.

Snowflake company is a great example: in 2020, they entered the IPO and now, the valuation of the company is $33.2B. In the early years of the startup, its CEO was Mike Speiser, a serial venture investor who solved all management issues while the founding team was closely involved in the product. According to Benoit Dageville, the founder of the company, this distribution was beneficial for everyone: "For us, it was more important to create cloud technology and the company was a secondary issue".

Myth № 4. Startup studio services are not required

How the myth appeared: It seems that the position of startup studios is unenviable: they have to compete with hundreds and thousands of sole entrepreneurs, with accelerators, incubators and innovation departments of large companies. There are a lot of competitors, no clients, and there are few guarantees of success, and there are more expenses than in a small entrepreneurial team.

What really happened: Startup studios have a large and extremely wealthy segment of clients — large corporations. Over the past 10 years, large companies have found it increasingly difficult to compete with startups, and in a rapidly changing world, they are forced to adopt their tools and create their own innovations. A study by the European Commission says that from 2013 to 2019, the number of transactions between corporations and startups has grown by 3 times and the volume of investments by 7 times, from $19B to $134B. At the same time, it is often not possible to integrate startups in the company: 77% of such deals fail.

The best option for a corporation is not to buy a startup that may not fit into the structure of the company and not to create an expensive innovation department, but to order a technological solution from a startup studio and buy a startup created specifically for this client. And the world's largest corporations are already creating their own venture capital studios.

In 2019, Facebook announced the creation of a New Product Experimentation, which will create startups for the external market. The AXA Group investment group has its own Kamet Ventures startup studio where startups receive funding up to Series A, while AXA Group has the right to become the main shareholder in any of the projects.

Myth № 5. It’s just a trend which will pass soon

How the myth appeared: People started talking about the startup studios really recently, so you might get the impression that this is just a fashion trend that will disappear as soon as attention to it weakens (remember Clubhouse).

What really happened: In fact, startup studios have been around for over 20 years: the first Idealab studio was founded in 1996 and it was very successful. But it took many years of technology and entrepreneurship to make startup studios work on a massive scale. The first wave of venture studios happened in 2007 (BetaWorks, Rocket Internet and others appeared then), while studios started to appear en masse in 2013. Now there are about four hundred startup factories: every month, new venture capital studios appear in different countries of the world. And according to a study by the Global Startup Studio Network, by 2023, there will be 3 times more startup studios than now.

It is not only their long history and steady growth that speak in favor of the startup studios viability. They correspond to the development trends of the modern world: this is the spread of outsourcing, the transition from process work to the creation of internal products, the creation of business ecosystems.

Where do myths about startup studios come from?

To get rid of the feeling that startup studios are something strange, vague and high-risk, it is enough to dive into the mechanism of their work. Then it will immediately become clear that most of the myths are based on lack or distortion of information and are seasoned with distrust of this new tool. But mistrust of something new cannot stop its development and the whole history of technological entrepreneurship is proof of this.

We hope that today we managed to ruin some myths about startup studios for you and shared some useful information!

29 Sep 2021

 

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