In the world of early stage investing, traditional venture capital funds have long been the go-to option for investors seeking exposure to high-growth opportunity companies. However, a different investment model is gaining traction and redefining the landscape – venture creation firms which are now often referred to as venture studios. I will use the terms venture creation firm and venture studio interchangeably in this article. These entities offer several distinct advantages to investors, providing a more hands-on approach to company building and a unique value proposition that sets them apart from traditional funds. I’ll discuss the advantages of investing in venture creation firms and why they present an enticing opportunity for forward-thinking investors. Of course—even within the venture creation / venture studio domain—there are many variations on the business model. I will mainly use the specific VIC Tech model, focused on life science startups based on technologies licensed out of universities, as the example in the discussion that follows.
Active Involvement in Company Building
Unlike venture capital funds that predominantly focus on capital deployment, venture studios form new companies and actively build and scale them. By providing not only financial resources but also strategic direction, operational support, and access to a network of experts, venture creation firms provide their portfolio of companies a greater chance of success. Here at VIC Tech, we identify high-impact, high-upside technologies available for license. When a technology makes it through our rigorous due diligence process, we form the new company. The inventors (most often university professors) are invited in as co-founders and technical advisors to the startup. We put in place the initial team and provide the founding capital into the new entity through our affiliated VIC Investor Network. Our participation in our portfolio companies is from founding all the way through to company exit. VIC Tech has built a nationwide innovation ecosystem supporting the founding and growth of these life science startups.
Diverse Investment Portfolio
Participating in a venture creation firm allows investors to gain exposure to a diverse portfolio of startups. Since many venture studios, like VIC Tech, are ongoing entities that already have a portfolio of companies, an investment in them provides immediate indirect ownership in the existing portfolio as well as ongoing participation in new entities that the venture studio forms for as a long as the investment is held. Furthermore, the investment is diversified across a large number of companies and across stage of development from earliest stage to growth stage. At VIC Tech, there is also diversification by sector. While VIC Tech is life science focused, this includes therapeutics, devices, and diagnostics subsegments as well as other related areas.
Reduced Risk and Enhanced Returns
Venture studios mitigate risk through their unique approach to investment. By actively participating in the development of startups, they can identify and address challenges early on, improving the odds of success. Additionally, venture studios typically provide ongoing support and resources to their portfolio companies, enhancing their chances of scaling and achieving sustainable growth. As a result, investors in venture studios may experience a more favorable risk-return profile compared to traditional venture capital funds, where the typical fund’s involvement in the portfolio company is often limited to quarterly board meetings.
Reduced risk by having better diligence and better support than a typical startup is a key feature of a startup formed by a good venture studio. However, there is another major factor for investors in the venture studio – venture studios typically have a larger equity stake per dollar invested compared to a fund. This is best illustrated through an example for which we will show the comparison between a seed VC fund and VIC Tech:
Comparison of a VC Fund vs VIC Seed Investment
The example shows that, all other things being equal, VIC Tech has a return multiple (estimated value of shares post Series A divided by cash invested) of 22x following the Series A round compared to a return multiple of 4x for the VC fund. The reason is simple – VIC’s founding shares in the company translate to a much larger equity stake. The larger equity per dollar invested is a huge difference and a major factor in how venture studios have the opportunity to provide better returns to investors.
Access to Early-Stage Opportunities
Venture studios build companies from scratch and this provides investors with unique knowledge of the companies. There are no hidden warts to be discovered after the investment is made. There are no problematic founders who do not realize when it’s time to turn over the leadership reins to someone else. Some venture studios allow their investors to participate in investment rounds directly in the portfolio companies i.e., in addition to the indirect ownership they have in all of the portfolio through their ownership in the mother company. At VIC Tech, our affiliated VIC Investor Network provides a vehicle for our investors to also participate in direct investments in the companies that most excite them while having the advantage of being able to watch and learn about the company through the entire growth cycle.
Synergistic Ecosystem and Network Effects
Venture studios such as VIC Tech foster an ecosystem that facilitates collaboration, knowledge sharing, and the creation of synergies among portfolio companies. By investing in such firms, investors gain access to this dynamic network, which can be a valuable resource for portfolio diversification, deal flow, and the exchange of industry insights. The shared resources, expertise, and connections within the venture studio's ecosystem provide a powerful foundation for the success of the portfolio companies, ultimately benefiting investors through increased chances of positive exits.
Summary of Key Investor Advantages
Investing in venture studios present an alternative to traditional venture capital funds, offering a more involved, hands-on approach to company building. Business models for venture studios vary but the figure below highlights several of the key benefits for investors in VIC Tech:
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