Venture Studios: the rapidly emerging asset class delivering venture-like returns for non-venture-like risks

With public markets stumbling and ongoing recessionary fears, corporates and public companies are faced with a new challenge: how to drive growth through innovation, whilst avoiding the higher-risk venture bets of recent years...

Venture Studios: the rapidly emerging asset class delivering venture-like returns for non-venture-like risks
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With public markets stumbling and ongoing recessionary fears, corporates and public companies are faced with a new challenge: how to drive growth through innovation, whilst avoiding the higher-risk venture bets of recent years. The answer is in Venture Studios, an emerging asset class which targets venture-like returns, for a more private equity-like risk profile.

For many, the holy grail of investing manifests in reliable, predictable assets with top-of-market returns. But as any investor or public company CEO knows all too well, predictability and top-of-market returns tend not to go hand-in-hand. The holy grail is something of an illusion.

Frustratingly, it is the type of asset classes that drive true step-change and exponential evolution that also display the most unpredictability. For all the money that goes into venture investing, 9 out of every 10 startups fail.

But if the past 20 years tell us anything, it is that when they succeed, the bets made on new ventures are the investments that deliver outsized growth. In recent years it has been startups, not corporates, that are making these bets and that are delivering innovation. Famed VC Vinod Khosla puts it bluntly: “retail innovation did not come from Walmart, it came from Amazon; media innovation did not come from TIME Magazine or CBS, it came from YouTube and Twitter and Facebook; next generation cars did not come from GM and Volkswagen, they came from Tesla. I can’t think of a single major innovation coming from ‘experts’ in the last 30, 40 years.”

In Singapore, we have seen the same tale play out in recent years, with innovation in spaces such as mobility, retail and finance delivered by the likes of Grab, Carro, Lazada, Carousell and Nium rather than by the incumbents.

Rewards require risk

Two of the key advantages that these startups have over established corporate incumbents is their ability to take risk and their culture of exploration. Entrepreneurs, venture capitalists and the venture build community in general are optimised to take risk. They are set up to embrace uncertainty, to take on risky experiments, and to be willing to lose. Corporates and public companies, in contrast, are optimised to operate at scale, for stewardship, and for the avoidance of risk. The very governance and process that makes them great at operating at scale, makes them entirely ill-suited to creating something new from scratch.

The difficult reality that the corporate sector has suffered from in recent years is that the risk profile required to win in venture building is far too great for the risk that can be taken by a corporate or public company. And the unfortunate consequence of this status quo is that corporates are saddled with 2 significant problems in their quest to innovate and grow: an inability to truly own innovation; and the resultant reality that to keep pace, they must pay a premium to participate, which comes with significant capital inefficiency.

Always chasing the puck

Firstly, without the risk appetite required to truly explore, and to be comfortable in exploration, corporates are unable to take the lead on determining the evolutionary direction of their industry. At best, this results in a perennial challenge to plug gaps and play catch-up. At worst, it signals imminent demise through redundancy - the classic example being Blockbuster at the hands of Netflix, with a more contemporary illustration being felt by Facebook/Meta at the hands of TikTok.

Secondly, as industries evolve and customer expectations shift, corporates that are not leading the way on innovation themselves must settle for the capital-inefficient path of ‘acquiring’ innovation, either by paying up to become the customers of successful startups, or by ponying up amongst competition to acquire those startups that have achieved scale.

Corporates have too often ended up skating after the puck, clinging to the coat-tails of those leading the way, whilst paying a capital inefficient premium for the ‘privilege’ of doing so. Not surprisingly, this approach to keeping pace with innovation rapidly becomes very expensive and capital intensive, for little reward. The graveyard of corporate innovation labs left behind in the last decade illustrates that all too acutely.

But with public markets stumbling and ongoing recessionary fears, the high cost of participation as a ‘follower’ will become increasingly prohibitive, and therefore the downside risk of not determining direction of travel will become even greater. In bull markets, most can win. But in today’s bear market, the risk to corporates of participating rather than leading has become even greater. Bear markets don’t favour passengers.

And so emerges a challenging corporate dichotomy: how to deliver the innovation and growth that has been demonstrated by startups and venture markets, whilst also keeping a check on risk. How to deliver venture like upside, for significantly diminished risk profile.

Fortunately for corporates, the answer is found in using the key advantage they do have - their assets - as leverage to unlock the entrepreneurial capability that they lack. This is the path to the holy grail, and the path is being paved by a rapidly emerging asset class: the venture studio.

The ultimate upside unlock

Venture studios see experienced entrepreneurs come together to ideate, fund and build multiple ventures in parallel. Those that show limited potential are quickly killed, and those that quickly generate traction are spun out into the hands of specialist founders with deep experience building companies. In that respect, the type of talent seen in venture studios looks materially different to that typically seen inside a corporate structure, where the focus is overwhelmingly on operating & managing companies that are already operating at scale.

The studio team itself launches multiple ventures every year, rapidly spreading its risk exposure across a portfolio of bets, whilst creating cost efficiencies by operating shared services across all ventures and empowering ventures by providing elite-calibre, mission-critical skillsets on a fractional basis. As and when the individual ventures require capability, network access, talent acquisition or funding, they have it - and when they don’t need it, they avoid paying for it.

All parties have skin in the game, with both the venture studio team and the founders recruited into individual ventures sharing in the equity stakes taken in those companies. In this way, venture incentives mimic the successful models of incentivisation that have powered the success of startup ecosystems and the VC industry, and look materially different from the way corporate teams are typically incentivised.

This change in paradigm has powered perhaps the most critical feature in unlocking innovation as a genuine capability amongst established corporate partners: talent.

Because the studio operates ventures with appropriate governance and process/speed, and because it is led and operated by proven entrepreneurs, it is able to attract high quality, seasoned, entrepreneurial and risk-taking talent, who are used to and expect to operate in such environments. In this respect, game knows game, and whilst risk taking entrepreneurs tend to struggle in constraining corporate environments, they gravitate to others with entrepreneurial zeal, demonstrable success and proven talent. Great talent wants to work with other great talent, and venture studios have far greater magnetism to elite entrepreneurial talent than innovation roles within traditional corporate structures.

These proven company builders provide the critical capability unlock, previously unavailable to corporates, that dramatically increases the probability of success. The results are startling: startups coming out of Venture Studios are 30% more likely to succeed than startups founded ‘in the wild’, with prominent success stories from studios including the likes of Snowflake, Aircall, and Front. 84% of startups coming out of studios go on to raise a seed round, and of those startups, 72% make it to Series A. Only 42% of seed funded startups in the wild achieve the same milestone.

Among studios that have been operating for a significant period of time, the high performing cases show remarkable results relative to the base case in venture markets. Startup studio Idealab has created more than 100 companies, with 5% of the portfolio becoming unicorns, 35% achieving IPO or exit, and with an overall 70% company success rate.

Boosting the model with a corporate’s unfair asset advantage

A corporate venture studio takes the proven venture studio model and adds an additional unfair advantage: access to the existing assets and scale strengths of the corporate itself. By leveraging these assets, corporate ventures are able to generate data faster than startups in the wild, and so can experiment, iterate and evolve towards product market fit with much greater speed. In a domain where rate of progress is so critical, corporate assets give entrepreneurs enormous unfair advantage versus startups in the wild.

With a venture studio, a corporate takes a portfolio approach to building the future companies and business lines that will drive its growth, rather than attempting to invest or acquire whichever companies happen to be created in the wild. The result is that corporates can shape the direction of their industry, align their growth trajectory with their strategic vision, and truly own innovation. And unlike ventures in the wild, the ventures that are built through a corporate’s venture studio can be positioned and prepared for effective interaction, integration and interoperability with its core business lines and product/service offerings from the start.

Rather than following the puck, with venture studios, corporates are now creating the future.

Over the past couple of years, Singapore has seen more than 80 ventures built by corporates, with the likes of ENGIE, Standard Chartered and Temasek leading the way with the development of portfolios of startups through their venture studios.

Now the model is established in the region, the uptake amongst corporates continues to accelerate. The likes of Bosch, Schneider Electric, SATS, Sembcorp and SMRT are all building ventures here, and demand for the corporate venture studios that I work on is trending upward even more dramatically in 2023.

A more reliable asset class that is fast-attracting investor demand

The reason for the fast-growing popularity of the corporate venture studio model is obvious: the cocktail of greater risk tolerance, venture-appropriate governance and elite entrepreneurial talent results in excellent outcomes from studio-built ventures. Corporates enjoy higher, faster and more reliable returns; they benefit from the certainty of being able to participate in reliable and strategically relevant innovation; they retain the ability to ultimately own the business and so lead the way with innovation in their industry; and all of this comes at a significantly reduced level of risk versus traditional venture investing.

As an asset class, venture studios offer 53% IRR (compared with 21% for traditional startups) and show scale and returns far faster than startups in the wild. Whereas the average time from founding to Series A is 56 months for a traditional startup, startups created by studios achieve the same milestone in just 25 months.

With these proof points now established, investors are now flocking to the asset class. The likes of Kleiner Perkins, Founders Fund, Khosla Ventures, Greycroft, 500 Global, Marc Andreessen, Sam Altman and Chris Sacca have all invested into Venture Studios and their portfolio companies in recent years, with the venture arms of Temasek and Wavemaker having invested into startups coming out of corporate venture studios in Singapore in recent years.

New funds such as Vault Fund are being established with a mandate to invest exclusively into venture studios, whilst venture studios such as High Alpha, Atomic and Rainmaking have raised and are managing funds that are dedicated to backing startups that emerge from their own venture studios. In APAC, I am seeing interest in allocating capital into such funds from the gamut of venture investors - from institutional capital, through VCs, family offices and super angels. These investors understandably love what they see as a combination of venture-like returns upside, with a more private-equity like risk profile.

With investment into the asset class just getting started, we are likely to see many more studios emerge in the coming years. It’s taken a little journey to get here, but it looks like the venture studio ecosystem is now approaching the holy grail.

A version of this article first appeared in The Edge on 15 February 2023.