Only a few weeks ago, the venture capital world witnessed one of the biggest IPO success stories of this year. Snowflake, a cloud-based data-warehousing platform, entered the public market and is now valued at more than 66 billion USD. Part of Snowflake’s success can be attributed to Sutter Hill Ventures, a venture studio that stood at the beginning of the company creation. Venture capital companies are increasingly moving upstream towards the inception of new ventures and in this blog, I elaborate on the reasons why venture studios are well-positioned to reap the benefits that investments in early-stage tech startups may provide.
The conventional tech startup formula seems simple; have an idea, assemble a team, build a product, and start selling and growing. Yet, 9 out of 10 startups fail. The common reasons behind the failure include insufficient financing, missing team competencies, inadequate timing, and lack of distribution network.
The venture studio model aims to address these challenges. The underlying premise of the concept lays in economies of scale. Instead of creating a single startup, a venture studio leverages a shared network of resources, staff, investments, and management to build multiple startups simultaneously. This enables startups in the studio’s portfolio to gain operational efficiency from shared expertise and resources.
Venture studios share some similarities with Hollywood movie studios. The goal of a movie studio is to find a promising script, hire a production team, and provide capital and operational support to create a successful movie. While movie studios release new movies, venture studios create new businesses and products.
Simply put, a venture studio is an organization that comes with ideas and hires executives who build companies around them. Venture studios usually use both internal and external sources to generate ideas. By conducting iterative validation process, a venture studio identifies promising ideas and then hires a dedicated team to build successful ventures. Venture studios usually take co-founder role in the new ventures while providing both operational and capital support.
The secret ingredient of the venture studio model is its decision-making process. By its very design, a venture studio is made for early-stage experiments and prototyping. Through iterative testing and validation of ideas, a venture studio can quickly identify a promising idea that best suits the studio’s core competencies. This reduces the cost of early market validation, removing many of the inefficiencies in the traditional venture model.
The future seems bright for venture studios. According to the GSSN report from 2019, the number of venture studios grew by more than 5,000% over the last decade. Today there are more than 200 venture studios while their number is expected to double by 2023. Even though what is to come is uncertain, venture studios are well-positioned to shape the future by bringing up success stories similar to Snowflake.
