Why 80% of Venture Studios Thrive (and Why 20% Don't)

Venture studios have become like the popular kids in school.

Everyone wants to be associated with them or even better, be them.

The number of venture studios has increased by 625% over the past seven years, with ~600 studios globally. But, it turns out the popularity isn’t all sunshine and rainbows.

An estimated ~20% of venture studios shut down each year. What seems easy from the outside is a different story from within.

To break down the success factors for venture studios, I spoke with Isaac Valadez, the venture lead at Code & State. Code & State is a Web3 venture studio building on the Internet Computer Protocol (ICP), which has launched four successful cash-flow generating ventures. Isaac has also previously started four companies, two of which failed and two of which were successful. 

He’s experienced the inner workings of the startup playground both as a player and coach, which is why his insights were so valuable.

In this article I highlight the factors required to build a successful venture studio and where so many go wrong. 

Why Venture Studios are Hard

We all know building a business is hard. Now, how about building multiple businesses at the same time?

This is the challenge venture studios are up against. While studios have increased resources and expertise to build and scale projects, they still face the same challenges as traditional startups. At some stage, they’ll have to raise funding, test products in the market, or reach profitability. 

If anything, building a venture studio is harder:

• Studios have to raise more funding to begin with, compared to a traditional startup. 

• Studios must attract talent on a larger scale for all their ventures, beginning with the founding teams which make or break the companies. 

• The core studio team often suffers from distributed resources as they are working on multiple projects simultaneously that require a high level of expertise.

Hence, venture studios = entrepreneurship ^2.

Venture studios have to achieve entrepreneurship at scale. Paul Graham, the founder of Y-combinator, defines an entrepreneur as being relentlessly resourceful. In his own words:

In any interesting domain, the difficulties will be novel. Which means you can't simply plough through them, because you don't know initially how hard they are; you don't know whether you're about to plough through a block of foam or granite. So you have to be resourceful. You have to keep trying new things.

Unfortunately for venture studios, there is no recipe for being relentlessly resourceful. Paul compares it to writing or painting. Could you give someone the exact instructions or recipe to create new masterpieces? 

While venture studios can acquire expertise and unique processes that provide recipe guides, none of their startups are like IKEA furniture - they don’t come with predetermined step-by-step instructions. 

Studios must be relentlessly resourceful at larger scales, which presents challenges reflected in the 20% annual closure figure. So it turns out it’s not as easy as becoming friends with the popular kids…

To build successful ventures, there are three ingredients a startup needs.

Three Components of a Successful Startup

Startup success is subjective in that everyone has their definition of success. For a venture studio, success is achieving a return on the investment of the funds invested into the company, or in other words, making a profit.

To achieve this, Isaac outlined three factors required: Team, Concept, and Context.

Or, think about it this way:

Successful startup = Team x Concept x Context

If one factor isn’t high, it puts startup success at risk.

Team

You’ve probably often heard that the founders and core team make or break a startup, and it's true.

Being a founder often feels like hitting brick wall after wall, quite literally eating shit every time. Teams have to have the ability to persevere and be resourceful, continuously getting back up. 

Alongside perseverance, finding the perfect founder team is like searching for a needle in a haystack. There's no magic formula, and the right combination of skills, trust, and personalities is exceptionally rare. While the broader market might shrug off the failure of numerous startups, venture studios can't afford such high casualty rates. Experts like Cedric (Code & State’s founder), with their experience, have a keen eye for identifying potential in teams. However, the bottleneck often comes down to the limited time of these experts.

Additionally, in the world of startups, stepping into the game often means you're starting with less - less data, less money, less market share, and fewer people. This situation makes you wonder, if your startup idea is really good, what's stopping competitors from just taking it and doing it better? 

The secret weapon here is having a founding team with a unique insight, a special understanding of the market that others don't see or don't want to see. This unique insight is like a slingshot against the giants, giving your startup the ability to compete and win against the odds. It all comes down to the founding team's ability to spot and use this insight to their advantage. They know "how to win" in a way that even if the big players try to copy them, they can still stay ahead. 

This shows the importance of the founding team. Their unique ideas and strong will can make a startup successful, even when it's tough. Venture studios need to find and keep the best people, which means they must offer something special in the market.

Concept

Think of the concept as the idea. Code & State follows vigorous criteria to evaluate ideas, but one framework stood out.

They look for single miracle ideas. 

Elad Gil, a serial entrepreneur and investor, first coined this term.

His thesis was that to build a valuable startup, it has to require a miracle to succeed. A miracle could be a behaviour change for target audiences, a business deal, a specific regulatory change, or another. For Airbnb, it was to build the supply of properties and demand from users on their platform.

Elad alludes that there’s a delicate balance of miracles:

If your startup needs zero miracles to work, it probably isn't a defensible startup. If your startup needs multiple miracles, it probably isn't going to work - with every miracle, you are multiplying in another low-probability event to get an even smaller expected outcome.

Alongside a $100M company valuation trajectory, this forms the core idea evaluation criteria for Code & State. 

Context

Context is defined as the situation within which something exists or happens, and that can help explain it. In the startup world, the context of the team and concept is often timing.

You can have the best idea at the wrong time. If Airbnb had begun ten years earlier, the technology advancement and adoption wouldn’t have been ready, so they wouldn’t have had the same unicorn outcome.

On the other hand, you can also have an okay idea but get the timing just right. A great example is decentralised exchange (DEX) launches. Most of them aren’t innovative, but if they get the right timing and market narrative, they can become successful.

Mixing the right context with a great team and concept leads to extraordinary outcomes. However, this is a delicate art which is why startups and venture studios have such high failure rates.

Context is defined as the situation within which something exists or happens, and that can help explain it. In the startup world, the context of the team and concept is often timing, which can be a critical form of insight or secret that founding teams bring to the table. This understanding of context can set them apart from competitors.

You can have the best idea at the wrong time. For example, if Airbnb had launched ten years earlier, the necessary technological advancements and societal adoption wouldn't have been in place, likely preventing them from achieving their unicorn status. This illustrates how a deep insight into the timing and context can be pivotal.

Conversely, an okay idea can achieve great success with perfect timing. Many decentralised exchange (DEX) launches are not groundbreaking in innovation, but by aligning with the right market narrative at the opportune moment, they can thrive. This success underscores the importance of the founding team's insight into understanding the context better than their competitors.

Mixing the right context with a great team and concept leads to extraordinary outcomes. The founders' insight into knowing that the timing is perfect for the existing market to shift to a new buying process is a testament to how all three factors—insight, context, and concept—are often interrelated. 

However, mastering this delicate art is challenging, which is why startups and venture studios face such high failure rates. The interplay between insight, context, and concept is what can make the difference between success and failure.

What Makes a Venture Studio Win?

Now that we’ve unpacked the core components of entrepreneurship and startups, it’s time to turn to venture studios. With such high failure rates, what separates the winners in the game from the losers?

Similarly to startups, a venture studio’s success hinges on the core team or the players in the game. Their experience, expertise, and network have an incredible impact on the success of the studio ventures. To highlight this, let’s compare two studios I’ve recently interacted with. 

Studio A’s team has a few years of experience working with startups, just opened a dev agency, and is now building a sector-agnostic venture studio. Studio B’s team has decades of experience across the venture landscape, deep expertise, a network of investors, and is now building a Web3-specific venture studio. 

Which one would you back?

Of course, there is a chance that Studio A could blow it out of the water and win the game. But, most would feel more comfortable backing the second team. In this case that is Code & State.

Once an A-player team has been assembled, studios need capital to build startups. While a studio can be bootstrapped, funds help accelerate execution speed for studios as they can acquire extra resources. However, this doesn’t mean they should throw money around and hope something sticks. For instance, Code & State takes great pride in running lean and optimising startups to be cash flow-generating machines. Isaac compares his role to being a cash flow mechanic, pulling the right levers to reach profitability. He doesn’t like to begin a new venture without already having revenue upfront. This lean mentality has bred into their culture.

Think of culture as the glue that holds together all the moving parts. Culture informs the teams’ resourcefulness (and hence entrepreneurship), ability to attract and retain talent, motivation to remain innovative, brand, and more. But, in particular, culture informs a studio’s processes, and it’s these that decide on and execute the winning ideas. For example, if your processes are rooted in biases rather than data, it could be the difference between achieving success or losing. 

If we break a studio down into components, it would be expertise, experience, network, capital, processes, sector focus, brand, and resources. Each additional component helps a studio level up and increase its chances of success. With the increasing number of venture studios, studios have missing components, which reduces their chances of beating others in the open market.

Conclusion

In wrapping up, it's clear that the world of venture studios is not for the faint of heart. Despite their growing popularity and the attraction of building multiple businesses simultaneously, the path is filled with challenges. 

Success hinges on a delicate balance of the right team, concept, and context, with timing often playing a pivotal role. The insight a founding team or studio brings, understanding the perfect moment for market entry, can be the secret sauce to outmanoeuvring competitors. 

Yet, the high failure rate among venture studios underscores the complexity of achieving this balance. It's a reminder that in the fast-paced startup ecosystem, having a great idea isn't enough. The real magic happens when experienced teams leverage their unique insights to capitalise on the right opportunities at the right time, all while navigating the intricate dance of entrepreneurship at scale. Venture studios, like Code & State, that master this art stand out and show what's possible when all elements align.

If you’re keen to learn more about Code & State and ICP, make sure to check out their upcoming event here and visit their site here.

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