The Struggles of Startups
With over 160,000 US businesses closing permanently due to the pandemic, it may be problematic to say this is an exciting time for entrepreneurs and investors — but hear me out.
Even with the world on pause, investors have been throwing capital at startups like there’s no tomorrow (no pun intended). This is mainly because, in recent years, the startup economy has seen exponential growth with new investment models which, categorically, did not catch on until about five years ago. These new funding platforms are connecting entrepreneurs with the right investor who will provide necessary capital and resources, allowing the startup to avoid risk, expedite efficiency, and keep startup momentum moving forward.
In the past two years, this has been my exact experience with the acquisition of Stripe Theory — an Atlanta-based digital agency I created back in 2015 — by ACC. And though, like many startups, we have encountered our fair share of ups-and-downs in 2020, both companies have shown remarkable resilience, and I couldn’t be happier to have leveraged our skill sets with a partner who is aligned with our vision.
What I would like to share is how entrepreneurs and executives can make the right decisions by seeking out these new investment models; why times of challenge reveal new business ideas and opportunities; and why, even during an economic downturn, there are many ways to foster startup innovation.
What causes startup failure?
Entrepreneurs can learn from why others don’t succeed. As Bill Gross, the founder of startup studio Idealab, announced in his TED talk, “In the last 20 years, we started more than 100 companies, many successes, and many big failures. We learned a lot from those failures.” Making adjustments is not always easy, but by understanding why over 21% of startups fail in the first year, entrepreneurs can make the right choices to avoid preventable errors in early-stage startups.
The following are the most common obstacles for startups to overcome:
- Failure to launch: Most startups fail before they even launch. It’s easy to get bogged down in the details of the startup world (e.g., operations, finances, partners, strategies, software, technology, and many other factors). However, refining these sectors to perfection is often not as important as launching at the right time. Many startups fail to find their footing because they were overly optimistic with their timeframe, or they were not able to get their products or services out before their competitors. While timing is not the most crucial factor in determining a startup’s failure, timing is the most critical element for a startup’s success.
- Operational challenges: This can be any kind of problem that arises which can render a startup less efficient, less profitable, or defunct. Many categories make up operational challenges, including everything from managing overhead, to monitoring performance, to mitigating cyber risk, and more. Primarily these challenges put unnecessary strain on a startup’s energy and resources and can lead to failure if not dealt with properly early on. For more in-depth knowledge on operational challenges read, 10 of the most common operational issues businesses face (and how to beat them).
- Wrong team: According to CB Insights, having “not the right team” is the third leading cause of startup failure. Not surprisingly, choosing an inadequate team is estimated to be the reason 23% of startups fail. Entrepreneurs can do everything in their power to raise capital, choose the correct business model, and leverage marketing channels — but if they fail to hire a diverse team with the necessary variety of skill sets to handle the immense workload, they will be another statistic that could have been avoided.
- Trouble getting funding: More than three-quarters of startups failed due to running out of cash or a lack of funding. What frequently goes wrong is that startup management fails to achieve the next milestone before cash is exhausted. Entrepreneurs need to know how to regulate the accelerator pedal to avoid the risk of becoming insolvent. In the early stages of a startup, while products and services are being developed, the business model needs to be refined and corrected to conserve as much cash as possible. And while running out of capital is difficult to correct, it can be prevented by using the correct avenues, which we will discuss in the next section.
Choosing what type of startup funding is right for you.
For the majority of startups to succeed, it’s going to take more than passion, hard work, and an abundance of coffee. For a lot of startups, the right early-stage investment can make or break their business. While each funding type offers a different value for entrepreneurs, no single option is right for all. Identifying the most appropriate investment model and partnership is the first step in deciding which type of investment is right to grow your business.
The following are the four most common investment platforms:
- Angel investor: This is an individual who provides capital for a business startup, usually in exchange for shares or ownership equity. Typically, an angel investor gives support to start-ups in the early stages (where risks of the startups failing are relatively high) and when most investors do not have the financial backing to get their vision off the ground. A small but increasing number of angel investors invest online through equity crowdfunding or organize themselves into angel groups or angel networks. This allows the angel investor to share investment capital while providing advice to their portfolio companies.
Advantages: Funding range, business acumen, no-debt financing, minimal paperwork, networking opportunity
Disadvantages: Loss of complete control, availability is based on who you know, less transparency, average investment amounts are less than VC
Pro tip: Since most angel investors like to have an active role with the startup, try looking close to home. The Business Development Center, Community Futures Office, or Economic Development Center in your community may have an active group of angel investors willing to inject capital.
- Venture capital: A VC is a form of private equity financing that is provided by venture capital firms or funds to startups that are projected to have high growth potential. This is usually measured in terms of the number of employees, annual revenue, scale of operations, etc. Venture capital firms invest in these early to middle stage companies in exchange for equity or an ownership stake. Venture capitalists take on the risk of funding startups, with the expectation that the firms they support will become successful.
Advantages: No obligation for repayment, large capital can be invested quickly, VCs are easy to locate
Disadvantages: Requires high rate of return, main goal is for the startup to exit, dilution of ownership and control
Pro Tip: According to CB Insights, these were the largest VC partners in 2019: Sequoia Capital, Tiger Global Management, Benchmark, Andreessen Horowitz, Founders Fund, Bond, Lightspeed Venture Partners, First Round Capital, GSR Ventures, and Index Ventures.
- Accelerator: An accelerator is a company that invests and provides services such as mentorship, office space, or strategic planning. The resources allow startups and ideas to take shape while operating at a lower cost during the early stages of incubation. This allows accelerators to act as a pathway to venture capital partnership in the early stages of startup development (when traditional VCs are cautious to invest). Most accelerators have a “demo day” where startup founders can pitch to investors. This requires an application process to join and requires a commitment for a specific amount of time. Accelerators are open to anyone, but are highly competitive and offer the lowest equity share. However, with the low equity margins, this means that with accelerators the cost is offset by offering far less oversight than startup studios. Typically, this involves the accelerator taking 7% of the company in exchange for around $100k for material services during the acceleration phase. After acceleration, startups receive less mentorship but continue to use community space and office hours.
Advantages: Lowest equity share, provides office space, managerial advice, focuses on the long-term growth of the startup
Disadvantages: Difficult to get in, typically do not raise additional capital, loss of independence, the added value may seem expensive for some startups to bring accelerators on as shareholders
- Startup studio: The startup studio business model is the latest investment platform to emerge in recent years. A startup studio is an organization that comes up with disruptive ideas and products and finds industry-relevant executives to build businesses. They oversee the startups from the onset of investment and will help guide the company well beyond product launch. Studios hires founders (either external or internal entrepreneurs who will direct the startup through “exit”). These founders come in and run each market-tested company, providing the startup with top-level mentorship, all underpinned by an enormous amount of support provided by the studio. Out of all the investment platforms, studios take the most hands-on approach and provide the most resources. The only downside to partnership is that they take the highest amount of equity and some do not accept outside pitches from entrepreneurs. However, startup studios are seen as the safest approach to early-stage investment, being that the studio will see the startup through the acceleration phase and past common obstacles that 90% of startups fail to overcome.
Advantages: Expedite growth, reduce risk, and add operational expertise that will add significant value beyond capital.
Disadvantages: Highest equity share, hardest to get into, not all accept pitches from outside entrepreneurs
From my experience, the startup studio business model will disrupt startup funding and startup acceleration as we know it. Startup studios set out to challenge outmoded industries, or simply to solve big problems for today’s consumer. This is particularly appealing for entrepreneurs who may have “the next big idea” but do not have the capital and resources to get their product or service off the ground.
What is a Startup Studio?
Essentially a startup studio functions to develop startup ventures by providing financial and strategic support to bring the idea to life. A typical engagement between startup and studio starts with the refinement of the startup business model. This includes everything from setting goals, building the brand, and creating specialized teams that oversee startups from conceptualization to market launch and beyond.
In the past five years, startup studios have become particularly appealing to entrepreneurs — and for good reason. Often entrepreneurs will have strong ideas but don’t have the experience, financial backing, or team to make their vision a reality. Studios function as an operational safety net, taking care of the business operations, so the founder can focus on the idea. By breathing life into the business with initial investment and mobilization of specialized teams, studios mitigate the risk of starting a new business and help entrepreneurs focus on what matters. With this business model, entrepreneurs never have to worry about making a bad hire as they are always surrounded by industry-proven professionals. This includes an entire workforce of:
- Software developers
- Sales/business developers
- Marketing/communication specialists
- Product developers
- Financial advisors
- Legal representatives
So what type of studio is right for your startup?
While every studio has its own unique vision, it’s important to note that not all studios are one-stop shops. For instance, many early-stage investors have seen major success by specializing in “niche industries.” High Alpha, which specializes in B2B SaaS, is quickly becoming the industry leader with twenty-one new software companies since its launch in 2015.
With the success of many of these niche studios, large corporations have started to create external studios of their own. Kraft Heinz funds Evolv Ventures to invest in emerging technologies across the food value chain. CPG giant Procter & Gamble opened P&G Ventures, producing four successful wellness brands. The most recent addition to their portfolio is Zevo, a line of people-and-pet-safe insecticides.
It should be noted that large corporations still invest heavily in traditional R&D internally. However, the startup studio model is becoming more favorable. As an external entity, these studios have to swing for the fences to be recognized by their parent company as innovators and disruptors. Though most startups backed by large corporations fail — when they do hit a home run and make a big impact, it attracts media attention and therefore investors. As this business model evolves, expect to see many more Fortune 500 companies gravitating away from traditional R&D and investing heavily in the newly favored startup studio model.
Outside of R&D and industry-specific studios, many startup studios are finding great success with a diverse portfolio of clients. Rocket Internet, Science Inc., Wilbur Labs, Pioneer Square Labs, Betaworks, and Idealab have found extraordinary success by creating category-leading companies with a diverse portfolio of clients.
These are a fraction of over 200 startup studio companies around the world. And while each studio scales differently and operates under a separate business model, they all share three key characteristics:
- A singular focus on building companies: Building companies is the core product of a studio. While investing and acquiring may be a component, building from 0 to 100 is the core focus. Launching a startup is typically a one-time event, and for a startup studio, turning an idea into a business is a repeatable and standardized process.
- Operational assistance: Startup studios have a layer of shared resources allowing for more rapid development and faster growth between the idea, launch, and scaling. From playbooks to shared teams, processes, and infrastructure, their shared resources allow companies to hit the ground running.
- Strategic guidance: Startup studios are more operationally involved, especially early on, than incubators or venture capital firms. By leaning on a repeatable process and experience from a team that has launched multiple companies, this hands-on approach helps reduce risk and expedites growth.
How a Startup Studio Works — Key Benefits and Takeaways
According to the Global Accelerator Network, the average studio works by injecting an initial $232,458 in capital to each startup. In return, the startups give an average of 36% equity to the studio. These are of course ballpark figures and the numbers can change drastically given the type of support, projections of the company, and the experience level of the incoming founder.
Unlike accelerators that typically have a fixed amount of investment and equity split, many factors come into play when determining the correct amount of equity a startup should expect to split with the studio. The amount of equity should always be discussed in great detail before partnership. Be wary of studios who work off a “one-size-fits-all” funding platform. Without considering the key factors specific to each startup, these studios might not have the best interest of the founders at heart.
Key factors to consider when splitting equity:
- Trust: If the startup and studio do not trust each other, it will be challenging to come to a financial agreement. In such cases, the studio will likely drop the idea altogether.
- Credibility: Is the studio credible? Founders should be willing to accept less equity if the studio has a proven track record.
- Resources: Not all studios offer the same type of resources. Every resource should be monetized and considered as an investment.
- Team: What does the team bring to the table? Will you have access to the best industry professionals?
- Investment: How much is the studio investing? If they are investing heavily in the early stages of the startup, they will want to be compensated for their higher investment in terms of equity.
With the equity take, what makes a startup studio more appealing?
Most times, finding the “next big idea” and proper channels of distribution cannot be found by one team alone, let alone expedited. The greatest advantage of working with a startup studio is that they provide startups with the opportunity to work on various stages simultaneously. This versatility increases the chances of success by not only channeling the correct resources but also allowing the partnership to ideate and innovate by building new and better solutions.
If for any reason the idea falters, they will know when to reallocate resources to keep the momentum going. Whatever a startup is lacking, whether it be capital, development, or a go-to-market strategy, startup studios exist to give the idea a fighting chance. This involves bringing in all the human and resource capital and learning from their entire portfolio of clients to produce something greater than what is typically achieved by a traditional independent startup.
Deciding if a startup studio is right for you
Keep in mind, the startup studio model is not for everyone. Perhaps you’re an entrepreneur who craves full autonomy and flexibility. A good partnership takes a lot more than just solid financial backing. Working with a studio will always require “more cooks in the kitchen.” Startups will have to be flexible and trust the studio’s guidance to push their vision to the next level.
If you think you may be open to this type of support, startup studios will provide every resource needed to help your business grow. Maybe you already have the right team and need guidance and a roadmap to execute your vision, in which case, perhaps an incubator is what you’re looking for.
Is a startup studio worth it?
Considering that the survival rates of startups increase significantly when partnering with a studio — in my opinion, it’s worth it. Of the 415 companies they have created, only 9% have failed, 3% exited, and the rest are still active. Compare those numbers to the 21% of startups that fail within the first year, the equity take becomes incentivized by the security and long-term growth that the startup studio model offers their entrepreneurs.
Differences in Startup Studios
The differences between accelerators, VCs, and angel investors can often be subjective nuances when not looking at the individual company directly. However, with a startup studio, you’re essentially hiring a team of experienced professionals who come with every resource necessary to build a startup from scratch.
Startups are risky, and the earlier it is, the riskier they are to invest in. Therefore, startup studios are the hardest platform to get into. Some studios like Betaworks, Science Inc., and Human Ventures accept outside pitches, and if they like the idea, will bring in founders to execute the vision.
Many other studios such as Atomic, Pioneer Square Labs, Rocket Internet, Wilbur Labs, eFounders, and Idealab generate all ideas in-house and do not allow outside entrepreneurs to pitch ideas or submit an application. That is not to say entrepreneurs can’t get their foot in their door. I highly recommend entrepreneurs check out each website, as many of these studios are seeking creative, passionate self-starters to disrupt the status quo.
Be aware that startup studio business models rapidly evolve in the startup ecosystem. I expect to see this business model to be refined given the success of the studio, the number of projects under their belt, and the quality of outside ideas being developed. Keep an eye out in the future for collaborations between outside entities and studios as business models continue to replicate successful venture projects.
Timing is a key factor to consider a startup studio
As I mentioned before, most startups fail before they even launch. It generally takes a traditional startup almost one full year to complete all the business operations tasks. This includes entity formation, founding team hiring, compliance, legal, tax prep, payroll, perks/benefits set-up, insurance, employee policies, banking, accounting, fundraising, and IT tools.
With a start-up studio, while management is working on the start-up items, creative is focusing on building “the next big” product or service. This reduces the time spent and ensures management is focusing on the problems unique to their business: not reinventing the wheel on business building items. Without a startup studio, this diluted focus leads to a slower, distracted founding team during a critical phase.
Studios like Wilbur Labs reduce the start-up ramp-up time from one year to two or three weeks. This extraordinary achievement is due to the team using proven systems, playbooks, roadmaps, and checklists built upon their studio knowledge and history.
Life Beyond the Launch
So you have partnered with a studio, the startup has operated successfully for several years … now what?
The goal of a studio is to help the startup until they become independent. Many studios prefer to remain involved with the startup after they leave the nest, but some do not. Of course, the goal of startups is to exit (whether IPO or corporate acquisition) successfully so that founders, studios, and stakeholders receive money back for their investment. Typically, if the startup is not acquired after several years, the studio will continue to invest in the startup to look for opportunities to foster innovation. Established studios don’t have any problem finding capital (either from out of pocket or venture capital) and would prefer to keep a successful seed investment within their portfolio.
Given that the startup studio business model is relatively new, the data on what percentage of companies have successfully exited from their studios has yet to be released.
Startup Studio Major Players
Even with the model being a relatively new investment platform, this hasn’t stopped some studios from producing startups with a valuation that has met or surpassed the valuation of the studio they spun out of. These are a few of those wildly successful startups:
Wilbur Labs: VacationRenter, a company that aggregates the best vacation rentals and RVs, recently announced generating over $1 billion in gross bookings for 2020, making it the fastest-growing travel company ever after this milestone — even during a global pandemic.
Atomic: For Hims/For Hers, a retailer of men’s and women’s personal care products, is going public through a merger with a special purpose acquisition company (SPAC) in a deal that will value the company at about $1.6 billion.
Startups finding success during times of uncertainty
During periods of economic crisis and uncertainty, it is common for the next generation of companies to be forged. These companies, rather than take advantage of the crisis, are finding major success by helping people with innovative new products and services when the consumer needs them the most. These are a few of those startups:
Boundless — an online immigration service helping customers connect with attorneys, file applications online, and receive support throughout the immigration process — recently announced a $7.5 million investment round led by the Foundry Group. This investment allowed Boundless to acquire its rival and help the startup double the size of its team by adding 45 employees from the Las Vegas-based RapidVisa.
Joblist, built out of Wilbur Labs, has been gaining traction after making its public launch in August 2020. Joblist has powered over 500,000 job applications since its soft launch in 2019. While the Joblist team had planned a public launch for later this year, they decided to launch on an accelerated timeline to help an estimated 25 million unemployed Americans during the economic crisis.
Nuro, a robotics startup developing autonomous delivery vehicles, was the first company to receive an autonomous exemption being that its vehicles are designed to carry goods instead of humans. Already Nuro has begun to use its driverless fleet to deliver medical supplies to Covid-19 patients in California. In November 2020, Nuro announced that they raised $500 million bringing the four-year-old startup to a post-money valuation of $5 billion.
Not Just for Entrepreneurs
This industry is a fast-paced, exciting, and dynamic space in which to gain experience in building a profitable business from conception through scaling for growth. If you aren’t an entrepreneur with a great idea to develop, perhaps you are passionate about business development. If you:
- Enjoy doing something different every day
- Love trying new things
- Thrive in a collaborative work environment
- Consider yourself a creative problem solver
- Want to be a part of exciting new ideas
- Are interested in experiencing multiple industries
Then maybe the startup studio workplace environment is right for you. They offer an environment that fosters creativity, innovation, and collaboration to develop and launch the strongest startup concepts. If this is something you might be interested in, I highly recommend taking a look at the list below to see where you would be a good fit.