A venture studio is an organization that builds and funds companies. There are a number of varieties, each of which is considered within this article.
Venture studios typically follow a rigorous validation process for exploring new opportunity areas and ideas. This venture building process is designed to reduce risk and increase the odds of success. The process typically takes 3-6 months to complete, but can extend longer. In the end, a venture studio will explore many ideas in order to validate a few ventures (often per year) that it believes have strong potential.
This process, in part, helps distinguish venture studios from other startup creation or funding structures, including:
Startup studios, venture builders or dev shops: Although they tend to follow a rigorous validation methodology, they do not necessarily have the funding instrument (i.e. a venture capital fund or other investment vehicle) for making investments. These entities may be successful at building products, but need capital partners (i.e. angel investors, venture capitalists, corporate venture capital, etc.) to fund business growth.
Startup accelerators: Accelerators are typically cohort-based programs with a set start and end date. They last 3 months (or 6 months) with programming, education and mentorship. Many provide a small capital investment as well. Accelerators don’t do the work of validating and building ventures, they only provide guidance. Most startups join an accelerator once they’ve built a product.
Venture capital funds: VC funds invest capital in startups at different stages. Venture capitalists rarely invest at formation (when a company is being incorporated), which is where venture studios play a role. Venture capital funds may provide value-add services, typically in the form of expertise and network, but not in hands-on validation and venture building support.
Angel investor groups / networks: Angel investors are capital allocators, investing individually or as groups in early stage startups. Many angel investors are (or were) operators and come with great startup experience, but angel investors or angel investor groups do not play a hands-on, execution role.
Corporate innovation: Most corporate innovation, rightly so, is focused on core innovation--the incremental innovation work required to constantly improve large companies’ products and services. Corporate innovation teams rarely have the purview or experience to build new ventures through a venture studio model.
Venture studios build and fund companies from the very beginning. They play an active role in ideation, validation and venture building, combining a rigorous methodology and capital.
Types of Venture Studios
There are many flavors of venture studios, because there are many variables to consider. Our Founding Partner, Ben Yoskovitz, created a Venture Studio Checklist (for corporate and non-corporate studios) that includes 60+ variables.
For the purpose of this article, we’ll compare the following:
Corporate Venture Studios vs. Non-Corporate Venture Studios
Internal vs. External Corporate Venture Studios
Vertical or Horizontal Venture Studios
Corporate Venture Studios vs. Non-Corporate Venture Studios
A corporate venture studio is run and funded by a company (often a large company looking to build new ventures to fuel future growth, or what we call ‘growth innovation’.) It may be building wholly-owned ventures and/or spinning out new startups (more on this topic in Internal vs. External Corporate Venture Studios). Typically corporate venture studios fund the ventures or startups they create off their balance sheet. These companies may have corporate venture capital (CVC) groups, but they typically don’t get involved at formation or pre-seed.
A non-corporate venture studio is an independent entity whose purpose is to build and fund startups. It may be funding startups off its balance sheet or through other investment vehicles such as a venture capital fund, rolling fund, syndicates, etc.
There are companies, such as Highline Beta, that run their own venture studio and support the creation and management of corporate venture studios. These organizations aim to collaborate with corporate partners to unlock meaningful assets in the creation of new startups.
Building a corporate venture studio is definitely different from doing traditional, incremental innovation. It requires different methodologies, risk appetites, talent, governance structures and more. But it can be an excellent way for big companies to innovate beyond the core.
Internal vs. External Corporate Venture Studios
There are two types of corporate venture studios:
An internal corporate venture studio builds businesses (or ventures) that are wholly-owned by the company. These are sometimes referred to as “spin-ins”.
An external corporate venture studio builds businesses (or ventures) that are partially owned by the company, but are in fact “spun-out” as independent entities.
Let's examine both in more detail below:
Internal Corporate Venture Studio
An internal corporate venture studio builds internal ventures that are not intended to spin-out as new startups. Often these studios are subsidiaries, giving them more freedom to operate, especially in regulated environments. A few key characteristics of internal venture studios:
Completely funded by the corporate. Since none of the ventures spin out into new startups, the corporate is responsible for funding studio operations and every business that’s created. No independent investors participate.
Typically staffed by existing employees. Internal venture studios often abide by the same HR requirements of the large company (i.e. salaries, salary bands, insurance, etc.) which means they’re primarily staffed by existing employees that see an opportunity to execute a growth innovation mandate. Internal venture studios can attract external, entrepreneurial talent, but unless upside is provided (beyond standard salary & benefits), it’s tough to attract the best people.
Founders recruited are less entrepreneurial. The founders recruited to run these ventures will be less risk-taking and entrepreneurial, because it’s unlikely there’s any material upside (beyond a good salary & benefits). They will rely more heavily on the corporate and its assets to benefit the startup significantly.
Ventures get absorbed into existing lines of business. An internal venture studio is more likely to build new businesses that are strategically adjacent to the core, which increases the likelihood of those businesses being absorbed back into the company. This may impact a new venture’s ability to scale (and certainly impacts its independence), but can also have quicker, positive impact to the corporate.
Ventures may still be spun-out. It’s still possible for an internal venture studio to spin-out new startups. It would need to design this into its operating and governance model, to make a strategic decision at a certain point in time, as to whether or not a venture should remain within the corporate (a “spin-in”) or incorporated as a new startup (as a “spin-out”).
External Corporate Venture Studio
An external corporate venture studio sits independently from the corporate and creates new startups. These studios may still be subsidiaries, or they could be completely independent entities on their own, which increases the potential for external investors to participate. A few key characteristics of external venture studios:
May be funded by other investors. If the external venture studio is an independent entity on its own (with its own cap table, board of directors, etc.) then it could secure funding from other investors, who are interested in owning equity in the studio itself and the startups that it creates. This isn’t a requirement for an external venture studio (the corporate can fund the operating budget exclusively), but it’s a possibility.
Typically staffed with external employees. Although it’s possible for an existing employee to leave their job and join the studio, it’s rare. More often, an external studio will hire new people. These people aren’t benefitting from the same salary and benefit levels of the corporate; the studio itself operates as a startup. But they tend to be more entrepreneurial, valuing the upside they can earn.
Founders are more entrepreneurial. The founders attracted to an external venture studio will be more entrepreneurial, however it still depends on the amount of equity the studio takes. If the studio owns the majority of the equity there’ll be less upside for founders, and this will impact the quality and type of founder that’s attracted to the model.
Startups may get acquired or live independently. It’s possible for an external corporate studio to create startups that are acquired by the corporate. But it’s not necessary for the startup, which can ideally raise external capital from independent investors and continue to grow on its own (likely with a partnership of some kind with the corporate).
The distinction between an internal and external venture studio comes down to the goals you have for building the studio and how the studio is designed.
“There’s no one perfect model for a venture studio. Every studio will have similarities, but differences too. Don’t take a cookie-cutter, top-down approach to venture studio design and creation, work bottom-up through the key goals, objectives and variables.”
- Marcus Daniels, Founding Partner @ Highline Beta
Vertical vs. Horizontal Venture Studios
Venture studios need to figure out what types of ventures / startups / businesses they’re building. They can either go vertical and focus on a specific industry/mandate or horizontal and focus on a few things (or be opportunistic as opportunities emerge).
A vertical venture studio has a specific area of interest, thesis or opportunity space that it's pursuing. It’s selected that area (or areas) strategically. For a corporation that operates in a specific industry, there will be adjacent markets, new customer segments or other opportunities that may benefit from a venture studio structure (versus internal, incremental innovation). For example, how do big CPG and FMCG companies tackle DTC (direct-to-consumer) and the challenges with retail channels? While these companies need to focus on selling more products (and incremental innovation on their existing brands), they could simultaneously be exploring DTC or expanding the value they offer beyond physical products (what we call “moving up the value chain”).
1848 Ventures is a good example of a vertical venture studio. Created by Westfield Insurance, 1848 Ventures focuses exclusively on SMBs in a few industries (including construction, real estate and retail). The specific industries they focus on are of strategic importance to Westfield Insurance.
Key Considerations When Designing a Venture Studio
Internal or External? As a corporation, do you want to build internally owned and controlled ventures that likely sit closer to the core business, or co-owned ventures that push the boundaries beyond what you can do internally? This is a major decision, because it impacts everything else that happens including governance, funding, talent recruitment, upside, branding, etc.
What will the studio focus on? Will you focus on a specific industry or vertical? Customer segment? Underlying technology or capability? How close or far from the core will the studio operate?
What assets do you have that can be leveraged? Big companies have a myriad of assets that can be beneficial to new businesses they create, including data, customers, capital, domain expertise, brand, technology and more. You’ll need to figure out which assets are the most valuable for your corporate venture studio and how to leverage them.
How will the venture studio be governed? The governance model impacts how the studio operates, and both how it operates and how its governed will be different from the core business. A corporate venture studio must operate at a higher speed than the corporation; ideating and iterating regularly, shutting things down more actively and doubling down on potential winners quickly (where there’s still risk). All venture studios have an operating model and methodology for validating ventures, but that doesn’t mean yours won’t be different, and the governance of the model (including deciding when to move ventures forward, budgeting, recruiting, etc.) is critical.
The biggest challenge with venture studios is finding the right people to make it happen. For a corporate venture studio this means a combination of entrepreneurial talent, investor experience (ideally) and a deep understanding of how big corporations function. This is why many companies look to external venture studios and venture studio builders to help them navigate this process.
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