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Startup studios: how do the "unicorn" factories work

Thursday, June 24, 2021

During the years of the “startup boom”, we have already figured out who and how keeps the things working: founders, startups, accelerators, incubators, investors. But startup studios are still a dark horse for many. Today, we’re going to look into them a little bit closer since the intriguing term hides an amazing, bright, impactful and still quite risky world.

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Long story short — startup studios are engaged in the serial production of businesses. They are also called venture capitalists or “startup factories”.

Launching a startup is a laborious and unique process, once can say “an artificial work”: so how can it be put into “the production line”? It’s hard but possible: startup studios have a specific way of operating. More than 80% of startup factory’s activities are selecting and checking the ideas, and the speed of those checking is a ticket to the studio’s survival. There are only a dozen MVP’s left from hundreds and thousands of the screened ideas, and in the end, only 1–2 projects are entering the market and recoup the whole work.

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Who made it up

Although the term “startup studio” came into common use only in 2007, the first startup studio appeared in the last century. In 1996, Bill Gross’s Idealab pioneered in the venture capital business. Brothers Bill and Larry used an unusual concept: they were launching and developing few projects at the same time, so eventually, they could choose the most effective idea and then focus on its launch. Idealab managed to bring to life 150 projects, where 45 of them grew into successful companies. Later on, Bill Gross in his research confirmed the hypothesis, which started Idealab: the right launching moments and the realization speed are more important than the idea itself.

2007 was the year of the real venture capital boom: at this time, appear John Bortnik’s Betaworks startup studios and Samver brothers’ Rocket Internet. And six years later, there are more than 70 such-like “startup factories”: Science Inc, Prehype, Founders, Atomic, Expa, Human Ventures and many others are entering the market. The growth continues: by 2017, there are about 300 startup studios in the world and by 2020 the growth exceeds 250%. This metric is expected to be doubled by 2023. In addition to regular startup studios, there are emerging more highly specialized “factories”: for example, such studios like the New Mexico Angels Startup Factory and Italeaf promote scientific research.

Not only the number of studios is growing but the investments in “factory products” are growing too: according to the research of Atila Szigeti, the author of “Anatomy of Startup Studios”, from 2008 to 2017, venture capitalists managed to attract more than $5B investments and since then, there has been a year-on-year increase.

On average, each studio launches one portfolio company a year. More than 10 businesses, powered by startup studios, are bought in 3 years after the launch.

  • Dollar Shave Club — the unicorn company, which was bought by Unilever for $1B. The startup was launched by Science Inc. startup studio.

  • Other successful projects by Science Inс: Hello Society — social media business engagement system, it was sold to New York Times; FameBit — a product for “Democratizing the YouTube advertising market”, it was sold to Google.

  • Giphy — a search engine for gif-files, it was valued at $528M before it raised investments in Round D. It was created by Betaworks startup studio.

  • Aircall and Front — two successful projects by eFounders, a startup studio from France.

More success stories of “factory startups” can be found in a specific list called The 300 Startups Studios Taking on the World.

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How are startup studios different from accelerators and incubators

The key difference is the level of project involvement. Accelerators and incubators work with an already established team and a formed startup idea. Of course, they provide conditions that increase the likelihood of success: training, consultations with experts, certain resources — but they don’t interfere with the internal “kitchen” of the project. The project path from idea to success remains entirely the responsibility of the founders.

Venture capitalists attract their own ideas and practices, they look for the funds for the initial project development by themselves, participate in all internal processes and team selection.

Another difference: accelerators and incubators support projects on specific levels — most often when there is somehow proved to be a true idea and a complete team. In the startup studio, each project undergoes a full cycle — from coming up with an idea and to selling the ready-made business, and every work stage is controlled and supported.

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The main advantage of the startup studio is speed

Studios simultaneously develop several ideas at once, striving for the optimal and fastest solutions, with this solving the problems of a dozen startups “wholesale” at once. A well-functioning work scheme allows to “close” difficult places with the same resources in several projects at once, and to extinguish the “childhood illnesses” of startups in the bud.

“Project factories” differ in work vectors, geography, the scale of work and frequency of project launches, but they all have common features:

  • The main part of the job is a constant search and checking of business ideas.

  • Full immersion in each project, support and control of a startup at every stage of its development.

  • Working with several projects simultaneously, as well as, searching for problems in several projects.

  • Independent search for project financing: often there is a combined option when money is taken from the own fund and from investors.

  • Shared access to resources and acquired experience for all entrepreneurs and for the startup studio team. Different startups use a shared service (accounting, legal, technical, etc.), and by helping each other, projects create a whole new startup ecosystem.

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How do studios work with startups

Coming to a startup studio with his own idea, an entrepreneur can count on comprehensive support and joint development of his project with experienced founders. The studio takes care of technical issues, legal and accounting support, human resources, and financing. An entrepreneur can fully focus on the main thing — hypothesis testing and product development, and at the same time, staying ahead of the competition.

Startup studios provide all services in a centralized way: several specialists can cover the needs of a dozen projects. This allows saving significant amounts on the cost of each project. In addition, the studio can afford to hire more expensive and higher quality specialists, instead of the founders acting alone.

The process of working with startups in the studio has been put “on the line”, all the stages have long been clear: this allows to “guide” the entrepreneur through them much faster than in the case of an inexperienced beginner developing a project independently.

Startup studios are investors and shareholders of all their projects. The studio’s share in the project is usually higher than the accelerator’s share, but with this, the project involvement is significantly higher.

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Is it profitable to work with a startup studio

  • The founders get valuable resources, the support of a dozen experts, and the ability to tackle the product at an optimal pace without any distractions.

  • Investors get a trustworthy and complete product, as they trust the startup studio’s reputation, and they know how things are done there.

  • The startup studio team receives a share and income from the successful projects.

Figuratively speaking, while working with a studio, an entrepreneur stops wandering in a deep forest, simultaneously collecting all the bumps and rakes on his own, and gets a convenient path along which one can walk (and even run) straight to the goal. Without being distracted by the routine, solving force majeure and eliminating illiteracy. The likelihood of success is growing, and even if the product didn’t “take off”, you don’t need to get depressed, but move on to the next idea with the same team and infrastructure.

Of course, in the case of working with a studio, the entrepreneur gives up a share of the studio and lets it into the internal management processes. But the choice is always voluntary: either to make the product on his own, taking all the risks on himself or to share responsibility, problems and future benefits with the studio.

The results of startup studios are indicated not only by their growth but also by statistics on the projects themselves. Attila Szigeti, in his article “Startup Battle: Accelerators vs Studios”, notes that startup studio projects are growing 26% better than projects powered by accelerators and incubators for the same amount of investments.

  • Science Inc — one of the most famous “startup factories” in the world. They have created Dollar Shave Club unicorn and such products as Hello Society и FameBit.

  • Expa — a studio, which was developed by Garrett Camp, one of the founders of Uber. The most successful projects are Mix, Reserve, Operator и Spot.

  • Betaworks — a studio from New York, that launched to the market Giphy — a search engine for gif-files.

Startup studios entered the CIS market about 6–7 years ago. The most famous names are GekosCoffeeLab.vc05Bit Studio. Who knows, maybe right now, one of them is preparing the next unicorn company that will be world-famous?

24 Jun 2021

 

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