Venture studio expert network interviews
Former studio executives discuss equity splits, CEO recruiting, resource allocation and common pitfalls
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Expert network interviews with studio executives
Tegus is an expert network that records and posts transcripts of interviews conducted on their platform into a searchable database. A few high quality interview transcripts with former studio executives were posted this week:
It appears these interviews were conducted by another studio team looking for best practices around building an EIR program. They cover a wide array of studio topics and are fonts of knowledge.
Equity Splits. Range from 10-20% with a $500K check to 50-65% ownership with a $2-$5mm check.
Idea vetting process similar across studios, but speed varies. Risk gates include: winnowing down a large number of ideas to a few high potentials, performing initial diligence, running Facebook ads against a landing page, and presenting to the investment committee. In parallel there is a matchmaking process with the partners’ network on who can best lead the idea being vetted. This process at Human Ventures takes 4-5 months, at High Alpha it’s completed in a “Sprint Week” held once a quarter.
Risk of “sunk cost fallacy” in venture ideation. During the ideation process, there can be a bias for studio teams to feel they’ve sunk so much time and resources validating an idea that they just need to push it through. Interviewees believe these are the ideas that should be jettisoned.
Studios need to be specialized in a single end market. Experts believe it’s too difficult to establish KPIs / gates to assess startup validity across multiple industries.
Studios experimented with first time founders, but settled on second time founders. This ties with our data on how top studios increasingly favor second-time CEOs for their startups.
Stable of CEOs. A primary focus of the partners of every studio is spent developing a pipeline of potential CEOs, at least a couple dozen at any time per studio. Partners socialize ideas with this network in attempt to find the right founder-startup match. High potential CEOs not currently employed may be invited to join an EIR program where they co-create startups internally, and receive a ~$150K per year stipend until they leave or launch a startup that pays their salary. One expert explains the salary: “the intention was for it to be quite low … the idea was not for it be comfortable because the whole point for a Founder In Residence is to move on past that program, so either move into a company that everyone is excited about or kill the ideas that are not working.”
One studio recently launched an MBA internship program as a trial for future EIRs.
Fundraising. While studios write the initial “pre-seed” check into their new ventures, their preference is to put the startup out to raise from external investors to lead their seed round. This allows the studio to mark up their investments, avoids signaling risks and avoids conflict of interest between GPs and LPs.
Investing in external ventures. 75% of one studio’s investments are in external startups not created in their studio. This enables them to manage a larger base of LP capital and monetize the market insights and relationships of their studio team. Meanwhile, a studio’s resources and company building expertise is likely a differentiator in winning deals. This investing + company building hybrid model aligns with our data showing, on average, investor led studios and VC incubations outperform CEO led studios.
Should the studio build the MVP? One expert recalls challenges building an MVP before launching a company and recommends building landing pages but leaving the initial product to the founding team since the process is so dynamic with sales.
Tension around resources. All studios provide significant back office resources, as well as growth and design expertise. The most resources are spent in the first year or two of a startup’s operations, before they reach their Series A. Several experts noted difficulty allocating resources among multiple competing startups. Experts argue studios either need to really staff up to service their startups or cut their support much earlier in order to launch more startups. Studios charge for resources, and they are unanimously seen as valuable.
Shoot for base hits or home runs? One expert believes a studio can, at best, slightly decrease a startup’s chance of failure vs the average VC backed company. So high volume is the right strategy. One alternative is partnering with corporates, which can be an early revenue driver for the studio and increase the probability their startups are acquired (albeit at a medium-scale outcome).
Corporate co-creation. Executives from High Alpha and Founders Factory extoll the benefits of corporate partnerships. Corporates have a problem where they see new opportunities but aren’t able to build new businesses in-house. Partnering with a venture studio allows them to experiment with new markets while avoiding their own internal bureaucracies. One partnership model involves a dedicated SPV where the corporate invests $10mm, earmarked for two studio developed startups and 4 external startup investments sourced by the studio. Corporates are often given rights of first refusal to acquire the businesses. Corporate co-builds are lower risk, lower return - while the largest outcomes in our data are developed wholly inside studios.
In-house recruiting partners / founder coaches. One former design lead describes: “I don’t know if you’ve seen Billions, but we had like an in-house entrepreneurial coach…he would actually screen the founders and their psychological profile to figure out are they good or not.” The studio targets founders who are disagreeable, not-neurotic, extroverted and charismatic.