February 9, 2023
The landscape of venture funds is clear. Pre-seed, seed, Series A, and growth funds are all well-defined terms known by the ecosystem. All clearly are positioned for specific founders, investors, and ecosystem partners. This is the power of industry terms. It provides clarity. Clarity that startup studios have been seeking for years.
Startup studios are known by seven names according to work done by the Global Startup Studio Network.
Seven names for the same thing. A creator of new companies that brings a process, team, and funding to build companies from the very beginning. Startup studios simply are founders. They just happen to be companies organized for that specific purpose.
And here is where we find a fundamental distinction. One that has the potential to define distinct types of studios just like stages describe VC funds.
If all startup studios are founders, how do we categorize studios as founders?
The title of founder can take many forms. Traditionally, a founder is the originator of the startup. They came up with the idea and work to bring it to life.
In the same vein, co-founders are those that were there at the very beginning of the company.
However, the cofounder title is sometimes bestowed to someone that joins after the formation of the company and can come on board as late as after a Seed round.
Then there are those that take the founder title upon themselves as they completely reform and relaunch a company.
These are four very distinct types of founders. And like founders, studios can take on each of these founding roles or more than one.
Startup studios are designed to repeatedly and successfully create companies from scratch. The type of founder role a studio embodies has profound impacts on the skill sets, processes and operations needed, economic terms, and position how a studio should position itself. Let’s examine each of the studios individually.
While all studios take a hands-on role in building and refining their product, approaching sales and growth, and the spinout of each company, where they differ is in the founder roles they take on. Each of these founder roles requires a distinct set of skills to excel matched with core operational competencies to execute repeatably. Studios are not limited to taking on a single founder role. Studios playing two roles are fairly common.
The founder categorization of studios is useful in the positioning, design, and investment due diligence of studios.
Embracing a founder role provides studios a quick way to position themselves in the eyes of entrepreneurs, investors, and ecosystem partners.
Entrepreneurs need a clear way to tell if a studio is right for them. Venture capital has trained them to think in stages. With this framework, all studios look the same, leading to significant confusion.
When investors look at studios, they often latch on to the similarities with accelerators and incubators, lumping studios into an early investor category rather than considering them a founder.
The studio founder role is also a useful concept to leverage in the design of studios. The team’s background, experience, and skillsets will lend themselves to deliver on the unique needs of each founder role and potentially create gaps that need to be addressed.
This same exercise can be used by investors in the due diligence of studio investments to ensure that the team track record, process, and operations are optimized for success.
Ecosystem partners often make the same assumptions that investors do. Confusing who to engage with and presenting less than ideal partnership opportunities.
It’s worth exploring each of the founder roles studios can take on individually.
Founder studios start companies from scratch. They play the role of the first founder, finding ideas, sorting through them, and validating which ones are worth pursuing as a foundation for a company. Finding the ideas is usually the easy part.
It’s much harder to understand which opportunities objectively deserve the full resources of the studio. Taking a good idea and making it great requires nurturing and refinement. How a studio initially decides to kill or refine an idea and their ultimate criteria for selection is a critical element to the speed and effectiveness of this process.
Even harder than finding ideas worth pursuing is recruiting the founder or CEO to take over and lead the company to success. There are some critical differences between recruiting a founder and a CEO.
Recruiting founders is ideal for early-stage companies lacking in product market fit where extensive exploration of the unknown still awaits. Recruited founders need to be passionate about and open to the opportunity, otherwise you risk triggering rejection.
Bringing on CEOs on the other hand is generally a better fit when the company is more mature, with validated of product-market fit, and often with early customers already established. The CEO role is less about figuring out what the opportunity is and how to deliver a solution and more about executing on what has been demonstrated to work. This role is generally easier to hire for but requires the studio to build out the portfolio company much further.
A Founder Studio must have the capability to execute the search for both ideas and the leaders who will take ownership of them. Dozens of frameworks exist to find ideas and validate them for fitness with the studio and follow-on investors.
For studios focusing on recruiting founders, idea validation efforts are typically faster and less intensive. They’ll focus on creating a solid foundation for a recruited founder to have a strong chance of falling in love with solving the problem discovered, encouraging them to take ownership by shaping core aspects during the early days.
This level of search and validation can be done with relatively small teams and within a few weeks or months. Recruiting and matching a founder may take months or even years.
Studios recruiting for a CEO will have already undergone a deeper validation process or built out the initial product themselves. That empowers them to own the initial search for product-market fit, laying the groundwork for a CEO to execute on the plan. Taking an opportunity to this point requires more resources and time up front, changing the skill sets needed. The payoff is that recruiting a CEO to execute on the defined strategy is typically easier than recruiting a founder.
Taking on the role of a founder as a studio changes the dynamics of the ownership of each company. The claim of a true founder has a profound psychological effect, allowing a Founder Studio to claim a much higher portion of equity with less pushback on their ownership through multiple follow-on funding rounds. A balance must be maintained to ensure that there is enough equity for a founder or CEO to stay motivated while ensuring investors are comfortable with the equity stakes of the leadership.
Playing the founder role distinctly positions a studio in their ecosystem. Investors must believe in the capabilities and track record of the studio partners team above and beyond the process used to find ideas and recruit leaders to run portfolio companies. These investors may leverage the Founder Studio to help create the deal flow they desire to see by suggesting areas to look as well as potential portfolio company leadership.
For entrepreneurs, the Founder Studio presents a solution to a unique challenge. Those entrepreneurs or operators who are not good at coming up with ideas worth pursuing see the Founder Studio as an ideal partner. These studios are more aligned with their desire to build something and ensure it is well grounded.
Juxtapose out of New York is an example of a Founder Studio. They invest months to years and millions of dollars up front to find ideas worth pursuing. Their process involves doing deep customer discovery, mapping out the entire ecosystem and documenting everything. They specifically look for seasoned executives who have worn the CEO hat multiple times in their career and ideally have some startup or founder experience.
Co-Founder studios find a founder to partner with and work side by side with them to find an idea worth pursuing and turn it into a company. They may play a lead role in finding an idea worth pursuing or rely on their cofounder to find or come to the studio with an idea already identified that need to be validated.
Building a funnel of potential founders to partner with is just the beginning of the process. Successful Cofounder Studios must find founders that are a good fit. They will take on a core leadership role in finding, validating, and building the company in partnership with the Cofounder Studio which makes screening for fit essential. Building up and maintaining qualified founder flow is often a major challenge for co-Founder Studios.
Building a consistent flow of qualified cofounders to join the studio is a major challenge. Ideal cofounder candidates, those with management, product development, leadership, and risk tolerances are able to find many opportunities. Cofounder Studios must build awareness of the studio option in potential cofounders, competing with both the established startup ecosystem and employment opportunities.
Once potential founding partners have been identified, studios can begin searching for opportunities worth building a company around. Often a short co-validation period is used before the cofounder officially joins the studio where the studio and cofounder are actively involved in the search and validation of opportunities. This process not only finds opportunities but provides a chance for everyone to work together and determine if they’re a good fit as a team.
Ownership splits will vary depending on how many co-founders are involved and where the idea originated from. A typical approach for a Cofounder Studio is to start with an even split with funding diluting everyone.
Playing the cofounder role distinctly positions a studio in their ecosystem. For entrepreneurs, a Cofounder Studio can help solve capability gaps, open up entrepreneurship for non-idea founders, or provide the needed financial support and structure for mid-career professionals to consider a founding role.
Investors in Cofounder Studios look for a strong track record that demonstrates the capabilities of the studio. Cofounder Studios may leverage the unique advantages that they bring to address some of their internal gaps, as long as they can show how together they provide a repeatable way to find opportunities worth turning into companies.
Pioneer Square Labs is a Seattle based start-up studio that will often source co-founders and develop a relationship with them prior to bringing them on board. That gives everyone the opportunity to find out if they work well together before going all in.
Late Cofounder Studios join a young startup after they have validated an opportunity and begun to build an MVP. Generally Late Cofounder Studios try to partner with startups before the first professional investor or accelerator has invested. They typically bring a specialized skillset and track record that is lacking in the startup and critical to achieving success.
The key to their success lies in their ability to source startups while they are in their sweet spot for partnering. Which is often between formation and the first professional investment in the startup, before the startup has gone through an accelerator. This creates a unique marketing and deal flow challenge for these studios, putting them head-to-head against angel investors, accelerators, and pre-seed VCs.
Late Cofounder Studios must not just evaluate the business opportunity but also the team they will be joining. Evaluating the startup’s founders and executive talent for fit within the studio and fit for their roles is critical to limit and identify personnel challenges after partnering.
Strong positioning, marketing, and inbound lead generation is a common operational element of Late Cofounder Studios. Directly competing with other funding and support options in the startup ecosystem drives this need. Late Cofounders need to be top of mind for these startups forces more active roles within the ecosystem and a larger support team.
After finding an interesting small start-up, studios must evaluate the team they’re joining and critically examine the opportunity being pursued balanced against the work they’ve done up until that point. Involving the startup’s team in this critical evaluation of their performance and the opportunity they are pursuing is one way Late Cofounder Studios evaluate founding teams for fit. Layering in other psychological teams, interviews, and coaching is common to build a better picture before committing to partnering with a starup.
Late Cofounder Studios can command a sizable piece of equity. Though they come in after the startup has market validation, they still take a cofounder share of common stock before any capital investment is considered. Demonstrating the value these studios bring to startups has a major impact on the common stock position obtainable.
Investors want to see that they can successfully identify promising early startups, evaluate their team for their roles as founders, and their fit for the studio. Just like in other studio models, the investors must believe that the value brought by the late co-founders will significantly impact success.
Entrepreneurs must be sold on the idea that this is a studio they should partner with after their idea has already gotten off the ground, which is arguably a harder sell. The stake that a Late Cofounder Studio commands and their role can make this partnership feel like a merger from the startup’s perspective.
The Los Angeles based studio Science is an example of a Late Cofounder Studio. Their best known portfolio companies are Dollar Shave Club and Liquid Death.
What Are Refounder Studios?
Refounder Studios take a radically different approach to company creation. They identify value assets to use as the core of a business they can build and scale. Typically, Refounder Studios look for developed technologies they can license or startups they can acquire, reposition, and relaunch. Evaluating and appraising the asset to be acquired becomes a core skill set to ensure quality deal flow.
Acquiring an asset to build a business around presents its own set of challenges. Often there is limited information available on the technology, business, and market opportunity. Accurately assessing market demand in these situations is challenging at best and can be substantially more difficult when there is limited time to conduct an assessment. Legal issues and negotiation complexities are not uncommon aspects to navigate in acquiring or licensing an asset.
Refounder Studios must make a substantial investment in validation before acquiring the asset and building a company. Evaluating the market potential, ability for the studio to build a company around the asset, alignment with follow on capital, and ability to recruit the right people are just a few of the critical evaluations that must be done by the Refounder, a time consuming process that may require access to expensive databases.
With an asset worth acquiring identified, the Refounder Studio must begin building a company around it and recruit a team to lead the company. This challenge is similar to what’s seen in the Founder Studio. However, Refounder Studios tend to take a more active role navigating product-market fit, so they lean towards recruiting CEOs rather than matching founders to portfolio companies.
Refounder Studios often start with full ownership of each company and will invest significant resources in selecting and acquiring the core asset. Fully replacing or building a team from scratch is often required in this model, with the new team taking minority equity positions. For a Refounder Studio, 50-100% ownership for the studio is typical between both common and preferred stakes.
Refounder Studios must demonstrate the capability to generate ‘acquisition flow’ of technologies or companies to acquire. Often the network and experience of the studio partners is what provides this flow for evaluation. Investors must have strong confidence in the continued strength of that team and their ability to rebuild the core asset.
For entrepreneurs, the Refounder Studio can represent a path to entrepreneurship without needing an idea or a unique deal flow partner. Refounders are more aligned with experienced operators who desire a strong partner and lower risk opportunity.
Flagship Pioneering is one example of a Refounder Studio, leveraging IP from partners as well as creating its own. This biotech focused studio has $5 billion fund and several IPOs, including the Covid famous Moderna.
Startup studios may be known by many names, but they all create new companies. How they take on one or many of the role of a founder creates an instant and powerful impression in the eyes of entrepreneurs, investors, and ecosystem partners. One that aligns with the benefits of the studio model and eliminates common confusions.
Such clarity is powerful.
It is up to each studio to use it effectively.