The potential for growth for startups is limitless. Even the best ideas, however, require the right environment to develop and thrive. In this article, we’ll look at two different options: Venture Studio vs Venture Capital, and help you decide which one offers the best chance of helping your startup grow.
Venture Builder vs Venture Capital: What is it?
What is a venture builder?
A Venture Studio is a type of investment team comprised of technical experts and cross-industry entrepreneurs that invests in firms with long-term development potential or in their early phases. VS, on the other hand, provides techniques, experience, and funding. In exchange, it develops a new business model with corporations.
What is venture capital?
Venture capital is a sort of financing provided by investors to startups or small firms that are expected to grow rapidly. VC investors then profit from the equity of the firms they invest in.
Venture Builder vs Venture Capital: Example
In terms of value creation, a studio differs significantly from venture capital firms. Because venture studios focus on forming new ventures, the studio’s operation as a co-founder generates significant equity value. As a result, studios can create 10x the value in a venture as a venture capital investor would with just their financial capital.
To illustrate, consider the following scenario: a $500k venture capital investment versus a similar scenario in a venture studio. A total of $500k is invested in the formation of a new technology company, of which $350k is a preferred investment and the remainder goes toward the formation of common equity.
Relative Value Creation Between a Venture Builder and a Venture Capital.
As demonstrated above, even in the early stages of an investment, there is a significant difference in value creation between a traditional venture capital firm and a venture studio. In this case, the studio has 3.4x more equity value than a traditional venture firm. In terms of value created (beyond the initial capital investment), the studio has created 14 times the value of a venture capital firm.
These significantly different dynamics result from studios’ founder role versus venture capital firms’ pure security selection role.
The table below compares relative investor returns in this early stage example.
In the example above, investors would have 2.3x the VC firm’s return out of the gate if they received 20% of the studio’s common shares.
Investing in a studio fund has many advantages over venture capital firms for investors.
Three major benefits are as follows:
- Investors gain access to breakout companies at the earliest valuations.
- Investors gain the ability to set a company’s inside price.
- Investors can purchase pro-rata rights to the studio for future investment. In the preceding example, these studio pro-rata rights are 3.4x greater than what a VC firm could offer, allowing the ability to quadruple down on the top deals.
Venture Builder vs Venture Capital: What is it looking for?
What is a startup studio looking for?
When you attract the attention of a startup studio, they evaluate your product differently than a venture capitalist. For starters, they are frequently interested in your startup at the outset. Whether you’re in the ideation stage or the test-and-measure-the-MVP stage, startup studios are looking for a good idea, not a beautiful, awe-inspiring pitch deck. And it can still be undercooked or even sloppy.
They’re also looking at you to see if you’re a future CEO candidate and how well you manage a team of smart people. Startup studios, of course, crunch the numbers, but they’re more interested in the problem your product is attempting to solve. People in a startup studio are far more product-focused, and their business decisions reflect this.
What is a Venture Capital looking for?
VCs prefer to partner with startups because they want a high return on their investment. However, investing in early-stage startups is one of the riskiest forms of investment. Even after being vetted and funded by VCs, more than 70% of startups fail. This is one of the reasons why venture capitalists typically do not invest unless the business plan calls for a tenfold return on investment in seven years. They require the payoff to offset the risk.
The stakes are high. At first glance, it may appear that it isn’t even worthwhile for investors. However, when startups succeed, they frequently do so spectacularly. For instance, in 2011, the venture capital firm Sequoia Capital invested $58 million in WhatsApp. Their stock was worth $3 billion in 2014. That’s a nearly 50x return in three years.
Venture Builder vs Venture Capital: How Does It Help?
How does a venture studio help you?
The return on investment is important when a startup studio invests in you, but it is not the primary focus. The team is focused on the product, the ever-changing business plan, and the product-market fit. As a result, the tone of your conversations with these investors will change. There will be less explaining and presenting and a lot more doing. Your company is more of an action item than a gamble.
Startup studios, like venture capitalists, are well-funded. However, a significant portion of the investment comes from actual infrastructure and resources geared toward companies with exponential growth potential. The initial investment in a startup studio appears to be a multidisciplinary team of experts ready to get your business started. Instead of a large sum of money, you are given human capital, which is likely what you would have spent your large sum of money on anyway.
Human capital will take the form of digital marketers, researchers, scientists, industrial designers, web designers, branding gurus, financial advisors, and recruiters, who will assist you in hiring the talent you require as your company grows.
Unlike venture capitalists, startup studios are embedded within your organization. Certain members of the team may know their market better than you! This gives you a lot of power. First and foremost, it saves you time. By collaborating with a startup studio, you avoid wasting months interviewing the right people to get your business up and running. Instead, you work with in-house experts who are eager to assist you in growing. Startup studios are more efficient than venture capitalists.
Second, it improves your ability to concentrate. You’ll be able to examine your product in ways you wouldn’t otherwise be able to because you’re not wasting energy on finding the right infrastructure or mastering the intricacies of a supply chain. This kind of focus is priceless and will pay off handsomely.
How does venture capital help you?
If you receive a VC investment, you will not be left in the dark. They will network for you, provide you with the funds to secure the expertise you require, and most likely advise you on financial matters.
They’re not, however, rolling up their sleeves and joining you in the trenches. Furthermore, they’ve probably done some research on what you’re doing, but they’re not deeply involved in the evolution of your product. These are exceptional businesspeople, but they are not engineers, designers, or chemists.
They’ll help you and want you to succeed, but how much help they give depends on the likelihood of a good return and less on the product’s brilliance. When viewed through their eyes, their investment is a gamble. And if the odds are no longer in your favor, or if you’re not moving fast enough, they’ll probably say good-by.
While both traditional VC firms and venture studios provide viable alternatives to traditional institutional investment channels, their approaches to funding are very different.
The traditional VC route may be a better option for larger, better-structured projects seeking investment without involvement. A venture studio, on the other hand, may be a more effective route for smaller, less organized projects seeking the benefits of executive involvement and resource pooling.
Venture studios are growing in popularity and will continue to do so in the startup world. If you are a blockchain or Web3 founder that wants to collaborate on a project, contact us – Satom Venture Studio.
Satom is a venture builder that can assist you in turning your big ideas into brilliant applications. We help founders who are dedicated to building a decentralized world. At the Studio, we combine cash investment with a one-of-a-kind mix of enabling services to assist creators of Metaverse and Web3 applications in building successful businesses.