Dec, 2019     

Venture studios offer lifeline to startups

These entities free up entrepreneurs to focus on their core roles Successful start-ups solve pressing problems for which consumers are willing to pay. In the process, they more often than not improve the life of customers and generate exponential returns for investors. Google, Facebook and Amazon – all ended up solving customer problems and generating … more


These entities free up entrepreneurs to focus on their core roles

Successful start-ups solve pressing problems for which consumers are willing to pay. In the process, they more often than not improve the life of customers and generate exponential returns for investors. Google, Facebook and Amazon – all ended up solving customer problems and generating billions of dollars in return.

A start-up ecosystem has been through many funding innovations.

  • Growth funding: Venture capital emerged to ensure that there was alternate capital available to entrepreneurs. Examples include Andreessen Horowitz and Sequoia Capital.
  • Early stage funding/mentorship: Angel investors plugged the early stage investment gap. They were typically successful entrepreneurs themselves and also acted as mentors to first-timers.
  • Early stage capability building: Incubators and accelerators solved the capability gap challenge for start-ups. Examples include Y-Combinator and Fintech Hive.

Ironing out inefficiencies

Even after all the innovations, building start-ups continues to be inefficient. According to estimates, only 0.1 per cent of start-ups are successful and generate returns for its investors. There are multiple issues for this sub-optimal return:

  • Entrepreneurs have to spend two-thirds of their time in non-core activities such as fund-raising and admin leaving less time for core business activities. Enabling entrepreneurs to focus on core activities can significantly improve the likelihood to success.
  • Mentorship: First-time entrepreneurs do not have ready access to the network of mentors and investors. This takes them longer to commercialise their ideas.
  • Risk-reward: Many industry experts do not have the risk appetite to join a start-up as the short-term trade-offs are high. A more balanced risk-reward ratio for the short-term would enable start-ups to attract talent early on.

A “venture studio” is a new model that solves the above inefficiencies. Typically, these start-ups studios are founded by successful entrepreneurs. This model breaks down the start-up building process in a structured manner from ideation, validation, creation, spin-off and scaling.

In a venture studio, ideas are generated internally or externally and validated quickly. Given the shared nature of services of the studio, including admin and fund raising, entrepreneurs can focus almost all their time to build the start-up.

Most venture studios also create “side-car” funds to scale the start-ups. They pay some kind of monetary benefit to entrepreneurs in addition to equity – this reduces the risk significantly. This lower risk in the short-term provides access to a higher talent pool of professionals who would otherwise not go into entrepreneurship.

On a growth curve

Globally, there are only a handful of venture studios. Idealabs was amongst the first. Now, there are more than 170. Arguably, the most famous is Rocket Internet, which already has had multiple exits (including Namshi in the Middle East). They are also the only publicly listed venture studio.

The Middle East is also seeing emergence of venture studios. In the UAE, there are two already operational – Glowfish Capital and Enhance. Glowfish Capital focuses on technology businesses in the region. They already have five companies online.

Enhance focusses on vertical marketplaces. In Saudi Arabia, Sukna Venture Studio (SVS) is leading the way with five ventures already built up and investments in others. They focus across both technology and non-technology industries.

There are venture capital funds such as Faith Capital and Beco who are investing at a very early stage and supporting entrepreneurs in building start-ups. Although this is a nascent industry, the results are encouraging.

Venture capital funded companies typically have a success rate of 8-12 per cent while venture studios have a success rate of 30 per cent with some reporting as high as a 50 per cent success rate.

We believe that once a few local venture studios scale up more will start, especially once venture capital, angel investors and large corporates start to actively support this model. The government can also support start-up studios by including them in their programmes.

A more inclusive and efficient way of building start-ups in underway.

Sandeep Ganediwalla is Managing Partner at RedSeer Consulting, Middle East.