Venture Studios
What are venture studios, how the economics work, and how to model venture studios
Financial models for venture studios
Hemrock's free Venture Studio Model is built for the dual-entity model. Building on the Venture Capital Model, Annual Forecast, it adds a Studio sheet for:
- Operational expenses of building new companies
- Ownership stakes in new companies and proceeds from exits
- Annual cash flow needs of the studio, including revenues from managing the fund and optional investment from the fund into the studio
Get Started and Forecast model the investment fund. Forecast includes proceeds to the fund from (a) investments in the new companies and (b) investments into the fund, and aggregates returns and performance metrics for limited partners.
Download the venture studio model for free (donation requested) at Venture Studio Model.
More on modeling venture funds at How to model a venture capital fund.
What is a venture studio?
A venture studio (or startup studio, or venture builder) is an organization that creates multiple startups simultaneously, using shared resources - capital, talent, infrastructure - to systematically create new companies with a hands-on approach from the start. Unlike incubators, accelerators, and investors, studios create companies from internally generated ideas and play an active role in development, execution, and management before spinning successful ideas into independent companies. Studios retain an ownership stake and may also invest alongside VCs.
Background reading: Big Startup Studios Research 2023 by Max Pog and the High Alpha explainer.
Venture studio economics
Studios employ engineers, product managers, designers, and marketers to discover, validate, create, and grow ideas into new companies. A typical budget to launch a company to external investment readiness is $200k to $1mm.
In return, studios take an equity stake in new companies, typically 20-80% depending on the studio and stage:
- 20-40% is typical when the studio cofounds a startup aiming to launch as a standalone company.
- 50-80% reflects a model where the studio continues to invest in growth, perhaps as the near-sole investor or owner.
Studios typically earn revenue from exits (IPO, M&A), and potentially from revenue sharing, dividends, or billing for services provided. Studios may also earn fees from managing external capital, depending on structure.
Studios differ from holding companies: studios aim to launch high-growth companies that benefit from venture investment; holding companies aim for profitable, self-sustaining businesses. Studios earn as investors (exits); holding companies earn as operators.
Studio legal and economic structure
Max Pog highlights three primary structures:
- Holding Company: a single entity that creates startups and takes equity stakes. Raises money from LPs that invest in the holding company, which owns the shares from incubating companies.
- Fund: a dual entity that raises money from LPs under a normal fund model (management fees and carried interest, often 2/20). Management fees paid to the management company operate the studio. The fund owns the shares from incubating companies.
- Dual-Entity Model: studio and fund are separate entities. The fund can invest in the studio (the studio can also raise money from independent LPs). The fund owns preferred shares from investment in new companies; the studio owns common shares from cofounding. The fund pays management fees to the holding company. The fund is an investor in the new companies once they are spun out of the studio.
John Carbrey of Futuresight details more structures and their pros and cons at Understanding Startup Studio Structures, including studios' use of angel syndicates, SPVs, and other structures for initial and pro-rata follow-on investments.