Venture Studios
Is this a model for agencies who want to spin out multiple products?
When we first had the idea to build products in our agency, the approach we really liked was the venture studio model. But what we thought that meant and what it actually meant were two different things.
What is a Venture Studio?
A venture studio is a name given to companies who conceive, incubate and fund start-up ideas and spin them into entities in their own right. The big difference between a venture studio and a traditional incubator or accelerator, is that venture studios tend to come up with the ideas themselves, assemble teams internally to develop and launch these new ventures, and provide support in various areas such as product development, marketing, finance, and operations. Whereas incubators and accelerators normally take existing startup teams and encourage rapid growth through the critical early stages by providing investment and other services.
As an agency, we thought the concept of a venture studio sounded perfect for us because it described us: we developed ideas, created an MVP for the ones that showed promise, assigned people to work on them and then launched them. I think we did about 15 product launches either 100% us or as a joint venture with others. But in all cases the product didn’t exist before.
What examples are there of successful Venture Studios?
There are several, but I’m going to briefly mention three of them:
IdeaLab. Started by Bill T Gross who had previously sold his business to Lotus Software. They started way back in 1996 and have apparently started over 150 businesses with 45 IPOs covering internet technology, healthcare and renewable energy.
Rocket Internet. Based in Berlin, Rocket is known for copying established internet business-models. As an example they launched Zalando based on the successful model of Zappos in the USA. As well as being a venture studio, they are also an early stage investor into other startups.
Atomic Labs. who describe themselves as ‘an experienced team of founders and operators who have started dozens of companies, and created billions of dollars in enterprise value’. Atomic was founded by Jack Abraham after selling his startup, Milo, to eBay.
Could the Venture Studio model work for you?
The key question for me whenever I talk to agencies looking to spin out their IP into a product, is ‘what do you ultimately want to be?’. There is absolutely nothing wrong with launching a side product, or in this case many side products. But if they treat them like side products that is all they will ever be. Nothing magically blows up without a significant, focused effort.
My assertion is that if you are both an agency and a product company you are either a consultancy with a product, or a product company with consultancy as part of that offering. Neither is right or wrong. But you have to choose. You can’t be both equally.
So, yes, if like us 10 years ago, you have a collection of projects that you have launched and you want to group them into a single entity, that makes sense. One agency I’m working with at the moment is building this model out and looking at creating a framework that will allow them to rapidly spin out IP that they believe has commercial potential. The framework also enables them to efficiently invalidate ideas too. Most agencies won’t be short of ideas, so finding a way to quickly and unemotionally kill something before it starts to consume resources is smart.
But the one thing they’re not doing is looking at the venture studio as an alternative to their core business which is consultancy. The founders see their future primarily as a growing consultancy but also adding value by creating their own successful products. In my own experience, we sold our agency, but we also exited four other side products for more money than the agency we’d given everything to for over a decade. So there is definitely value for agencies in considering this model.
The most successful venture studios aren’t agency-first
However, if you look at the examples I gave you, they aren’t agencies with a nice sideline in building products. They didn’t even start as agencies and then transition into being a studio. They were all started by people who had successfully built and exited other product companies. They also all raised separate funds.
When we were looking at the venture studio route, we’d decided that ultimately we didn’t want to be an agency any more. We saw our future as 100% a product company. Building a venture studio, we thought, would be the vehicle to get us there. The idea being that the more products we created, the more revenue we would generate leading to a day where we could finally say goodbye to our agency clients. We naively believed that one of these bets would magically become a monumental hit making the decision to close down our agency an easy one.
But we also realised that if all we had to fund it was our own savings and the margins we were making from our agency, it would take us a long time to create anything big enough to be able to no longer rely on consultancy fees.
So we went out and spoke to VCs. I didn’t really know much about this area but I thought ‘why wouldn’t an investor want to put money into our idea?’. Basically, we can spin out products quickly and we can point to where we’ve done it before. OK none of them ended up being Salesforce or Uber, but they were generating tens of thousands of dollars each month. Surely that was interesting?
Turned out that the VCs thought our idea was ‘uninvestable’. Why? Because VCs aren’t giving you money for you to decide what to invest it in. They invest in individual businesses and individual founders who are going to be 100% in on the business they are backing. If we wanted to use investment to back our multiple product ideas, we would need to become a VC ourselves. But raising a fund is even harder than raising VC investment. Whilst we had a track record of building products, we had precisely zero experience of managing other people’s money and investing it on their behalf. On top of that, none of the businesses we had built had ever gotten to the size that would be remotely interesting to an investor. Remember the examples above: IdeaLab and Atomic Labs, had previously sold businesses to Lotus Software and eBay. You can bet that they were doing significantly more in revenue-terms than anything we’d created.
What do you want to be?
I want to reiterate - there is absolutely nothing wrong with creating a side product. And there is absolutely nothing wrong in creating several side products and rolling them up under a venture studio umbrella. In fact I would encourage people to think about that as a model because if you work out your framework, you can benefit from the resources and expertise you have.
But, if your plan is to become the next IdeaLab you may need to have a significant success under your belt first. And in order to have a significant success you probably will have to go all in. It’s the conclusion we eventually came to when we decided to sell our agency and all of the side projects we had with any commercial value, to go full in on ScreenCloud. Our best side project ended up doing about $500k in ARR. By contrast, when we decided to make our product the main thing, we created a business that is today comfortably north of $20m in ARR.
One final thing…
We were involved in one product that did much better in terms of revenue (although it still ultimately failed). But this wasn’t our own thing: it was a joint venture. The company was called Tepilo and at one point it was doing a few million pounds in revenue. The big difference though is that unlike our other side projects where we just dipped in and out when we had a bit of downtime, for this company we hired a full time CEO and full-time developers, sales and marketing people. And we raised investment for it, which meant we also had to take a minority stake.
So, my advice is that if you think your future is in product then you have to be 100% in. But if your future is predominantly an agency with a venture studio model, then find people to run those businesses if they start to show promise. It means you effectively become more of a seed investor (albeit one that provides services instead of cash). Because as a founder, you’re probably already spread too thin.