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Venture studios provide venture-like returns for non-venture-like risks

Samuel Hall
Samuel Hall2/15/2023 03:33 PM GMT+08  • 7 min read
Venture studios provide venture-like returns for non-venture-like risks
Retail innovation did not come from incumbents such as Walmarts, but challengers similar to the likes of Amazon / Photo: Bloomberg
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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, nine out of every 10 start-ups 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 venture capitalist 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 Holdings, Carro, Lazada, Carousell and Nium rather than by the incumbents.

Rewards require risk

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Two of the key advantages that start-ups 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 risks. 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 make them great at operating at scale, make them entirely ill-suited to creating something new from scratch.

The reality 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 two 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.

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Always chasing the puck

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 a bull market, most can win. But in today’s bear market, the risk to corporates of participating rather than leading has become even greater. Bear markets do not favour passengers.

And so emerges a challenging corporate dichotomy: how to deliver the innovation and growth that has been demonstrated by start-ups 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 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 will get them — and when they don’t need them, they avoid paying for them.

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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 start-up 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.

The results are startling: start-ups coming out of Venture Studios are 30% more likely to succeed than start-ups founded “in the wild”, with prominent success stories from studios including the likes of Snowflake, Aircall and Front. According to data compiled by Rainmaking, 84% of start-ups coming out of studios go on to raise a seed round, and of those start-ups, 72% make it to Series A. In contrast, only 42% of seed funded start-ups in the wild achieve the same milestone.

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 start-ups 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 start-ups 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.

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.

For investors familiar with venture capital and private equity, companies that come out of corporate venture studios provide an opportunity to reap outsized returns at lower risk.

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. 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.

Samuel Hall is CEO of Rainmaking APA

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