Venture studios are companies that build, invest in, and operate a portfolio of startups, something you can learn more about in this guide. They are ultimately similar to venture capitalists, but instead of just investing money, venture studios are more involved by also providing resources, mentorship, and expertise to help their portfolio companies grow.
The question is, where do these venture studios gain the funds to continually launch new projects? This is especially confusing if they launch one venture before the previous one has become successful.
Venture studios typically make money in two ways: first, by taking a percentage of the equity in each startup they invest in; and second, by charging fees for the services they provide to their portfolio companies.
Let’s discuss these two approaches in-depth and break down why they work so well in today’s business world.
What Is Equity-Based Compensation?
Equity-based compensation is how most venture studios make the majority of their money. By taking a percentage of the equity in each startup they invest in, venture studios are able to generate returns when those startups are sold or go public.
This can be a very lucrative business model, but it is also risky, as venture studios only make money if their portfolio companies are successful. That’s why it benefits them to share the equity with the founder of the project - it ensures that all parties have an equal stake and are motivated to make the venture a successful one.
So how does this compare to fee-based compensation instead?
What Is Fee-Based Compensation?
Fee-based compensation is another way venture studios make money. By charging fees for the services they provide to their portfolio companies, venture studios are able to generate revenue even if those companies are not ultimately successful. This revenue can help venture studios fund future investments and operations.
You can think of fee-based compensation as a more typical contract - a service is required, the venture studio provides it, and is paid in turn for providing that service.
This revenue can help venture studios fund future investments and operations.
Venture studios are typically able to generate returns when those startups are sold or go public. This can be a very lucrative business model, but some venture studios keep their companies with the goal of growing them into unicorns.
What ultimately happens to the project will depend on how the venture studio is set up and what its goals are - usually, it would be to use the funds gained to launch a new venture.
The Draw Behind Launching A Venture Studio
The ability to launch multiple projects using the same tried and tested model of business is one of the biggest advantages of this approach, particularly important in an environment where failure is so common. Venture studios tend to be more profitable and failure-proof than the average startup because they:
- Diversify their projects to be in multiple industries
- Are built by experienced developers and professionals
- Have the funds from portfolio companies to see them through crises
These are just a few of the reasons why founders get excited about the venture studio model and why you are likely to see more venture studio-based projects take off in years to come.
It pays to work with an experienced venture studio if you don’t have the resources to launch your own. Studios like NineTwoThree are made up of experts with years of experience in their field and multiple successful apps and startups under their belts.
If you’re interested in launching your own digital venture or need advice, reach out to us today. From concept to completion, we’re here to help!