A factory for startups

7 March 2021 Filed under: creativity Reading time: 10 mins

A factory for startups

Established businesses find themselves wanting to get in on the startup game – for the innovation and for the returns. But how best to do that? Does the startup studio model make sense?

Established businesses are, for the most part, structurally compromised when it comes to innovation. “Large organisations are designed for stability and control,” Jeanne Liedtka and Tim Ogilvie point out in their book Designing for Growth. “They’re full of people with veto power over new ideas and initiatives.” These “designated doubters” expect data and proof before they’ll accept new ideas, which means they’ll never take risks, which means they’ll never do anything truly transformational.

Established organisations face the “twin engine” problem, identified by Bain’s James Allen. Healthy, long-lived businesses are powered by two engines: one sustaining the existing business, and the other developing new ones. Ideally, engine two grows as engine one declines, providing the business with an ability to tap new markets and opportunities even while the day-to-day ticks over. But all too often, businesses neglect engine two, holding it to the same standards of proof as the wider business, seeing it as a distraction or even a threat. This can lead to the Innovator’s Dilemma, in which an incumbent business tends to assign status and focus to its core offering and ignores smaller – and initially inferior – disruptor products until it’s too late.

In this world full of laggard corporates, disruption and innovation tends to come from startups. And so those corporates have tended to look longingly at the startup world, and have tried countless things to attempt to replicate startup-like innovation into their cultures – and to gain startup-like returns.

Two models for doing so that crop up repeatedly are internal startups and accelerator programmes; but these are both fraught with structural problems. Internal startups often fail because it’s difficult to genuinely integrate two different cultures, the risk-taking startup and the safety-first corporate, into the same organisation. And corporate startup accelerators are sometimes little more than marketing exercises, helping present corporates as less stodgy than the competition and helping them to compete for staff with trendy startups.

One model that might neatly avoid the downsides of both, though – offering a way for larger organisations to produce the innovation and returns of startups – is the startup studio.

Startup studios are effectively factories that produce startups. They start with the putting together of an team of entrepreneurs-in-residence, who are given shared infrastructure, resources, and in-house funding. These internal entrepreneurs generate ideas themselves, or co-found businesses with people outside the business. As a team, they then build multiple startups in parallel: if the ideas don’t work, they’re trashed and the team is reassigned to another idea quickly; if they do work, they’re spun off into a dedicated company and take on a life of their own. The studio retains equity in and a variable degree of control over their portfolio businesses, eventually exits, and can then reinvest and repeat.

Dedicated startup studios have flourished since the 1990s. In New York, Betaworks have been responsible for the creation of Bitly, Giphy, and Chartbeat. In LA, Science Inc. began in 2011 and its success stories include the co-founding of Dollar Shave Club. Here in London, Founders Factory has started and spun out hundreds of businesses. But startup studios needn’t be the preserve of specialist, large-scale, VC-backed firms. They have something to offer many types of mature business looking to involve themselves in some ventures action, and many advantages compared to both accelerator programmes and internal startups – two other approaches that established businesses might look at.

Unlike an accelerator programme, which merely invests in and advises externally founded startups, a startup studio actually starts the businesses and has a much larger stake in them – generally 50%. Accelerators can be like VC funds, playing the odds and hoping that one in ten of their investments succeed, going for volume and funnelling in the next cohort of businesses as soon as the previous one graduates. It’s true that startup studios do pursue a greater volume than those who start a single business, but they do so with a greater focus and a higher level of involvement.

Unlike internal startups, the entire culture of the studio and its entrepreneurs-in-residence is geared towards startups. There’s no clash between a wider organisation and a faltering, under-supported project or sub-division; the whole organisation is behind the startups the studio is creating, and it’s staffed with people who have the know-how and the mentality to work in early-stage businesses.

There are even advantages relative to more conventional startups. There’s a lowest cost of failure, for a start. Founders haven’t invested everything into a single startup, but rather are diversified from the beginning. This leads to a freedom from so-called “passion blindness”; it’s easier to be objective about something that you haven’t bet your whole life on and that isn’t your only egg-basket.

The studio model also makes a fairly formal distinction between the discovery and the scale-up phases, which can be useful from the perspective of the team. Developing the initial version of a product and getting things off the ground requires an entirely different skillset to scaling it up once it’s in-market; teams who are good at one might not be good at the other, and might not have the appetite to do what they’re less than good at. A conventional startup effectively demands that its founders be good at both; a studio allows internal teams to work solely on the discovery phase, and then professional scale-up teams to be recruited into the business when it’s ready to be spun out.

Countless maturing small businesses find themselves wanting to capture something of the venture spirit. That might be because they have a founding team that miss the cut and thrust of the early days, and are itching to try something new; it might be because they’ve found themselves in a line of business that, while successful, lacks the potential for VC-style returns or even an exit at all.

Launching or transitioning into being a startup studio is a great fit for consultancy or agency business. Such businesses are already used to working in parallel across several domains at once, and bring with them significant experience in a particular domain (e.g. marketing, design, or software development). Those domains can be some of the trickiest to bring to bear on a startup, and the most in-demand among founders.

The studio model is not perfect, of course. Since it favours the earliest of early-stage businesses, it’s risky. It can be more capital intensive than, say, angel investing. And it requires time and headspace commitments that can be tricky to scale (versus the ease at which you can scale money).

The trick to making it work is figuring out how to add systemic value across all the businesses that you start, leveraging some kind of competencies that put you at an advantage versus both venture capitalists and independent startups and that overcome the potential weaknesses of the studio model. That advantage might be expertise gained as a result of your primary business; it might be access to exclusive routes to market; it might be a network that you can tap; it might be access to talent that would otherwise be inaccessible to small startups. Whatever it is, the studio model allows you to apply it in parallel across lots of ideas at once, iterating and filtering aggressively towards ideas that work.

If it is possible to find that advantage, the startup studio model becomes viable. Ideas can be tried in parallel; the ones that work can either become the focus of the whole team, or be spun out into independent businesses. The studio itself becomes a producer of startups, and the wider business can approach that asset however it makes sense – as a series of lottery tickets for future exits, or as a source of proven innovations that can be brought into the wider business.

Roblog