What is The Best Way to Fund a Startup?
A venture studio offers a different take - instead of seeking funding to start a business, you form a studio as an incubator for new startups.
A compelling idea led you down the path of creating a startup business, with the hope of eventually dominating your chosen market. It’s a journey filled with many critical tasks, but arguably none more important than finding a funding source to bootstrap your nascent organization. After all, without startup capital, hiring employees, renting office space (if not going virtual), and building a cloud-based technical infrastructure becomes impossible.
Thankfully, many options exist as a suitable venture capital source for emerging businesses. However, they all boast their own positives and negatives. For example, if you want to maintain full control over your company, traditional venture capital might not be your best option. Rich friends or family members might be an acceptable choice, but with its own set of negatives. Ultimately, forming a startup studio provides many significant benefits beyond funding.
So let’s look more closely at a few relevant options for funding a startup organization. We provide a high level overview of the positive and negative aspects of each alternative Use these insights to decide on the best choice for raising the crucial venture capital you need to build a profitable business. After acquiring the funds you need, the real hard work begins!
What Funding Options Exist When Forming a Startup?
The variety of funding options for startup organizations seems overwhelming. But most of them follow similar models where you present an idea for your business combined with an initial market analysis. If successful, you receive funding, but typically relinquish a percentage of ownership as a form of repayment. You then still need to work hard to bootstrap this fledgling business to execute your business idea, while faced with the hard truth that 80-90% of startups fail.
Forming a startup studio offers a different take on the venture capital question. Instead of seeking funding to start a business, you form a studio as an incubator for new startups. As this organization matures, creating new startups becomes an efficient systematic process. Not surprisingly, this approach improves each startup’s chances of success by reducing risk. It’s a similar concept as any well-honed manufacturing process.
Why a Startup Studio Makes the Most Sense for Incubating New Businesses
Using a startup studio to incubate new businesses provides a critical support network that significantly boosts their chances of success. This support helps identify the initial business problem the startup hopes to solve as well as the ultimate solution, including the validation of both. With the venture capital and micro VC options, none of that important work happens until it’s too late.
This out of sync timing remains a common reason startups fail. Perhaps the required market research didn’t happen or simply led to mistaken assumptions? Maybe the customer base for the startup’s product didn’t exist or it provided the right solution at the wrong time?
With a startup studio approach those questions get answered early in the process. This timely intervention prevents mistakes at the early critical stage of the new business’s formation. These studios systematically validate the product idea and its market, form a talented team to execute on the idea, and ultimately offload repeatable work so the next startup gets the founders’ full attention.
Once again, this approach takes full advantage of the manufacturing world’s focus on forging a repeatable system. In fact, the same concept exists in a software development industry that now relies on Agile and its variants to reach the holy grail of continuous delivery. In a sense, forming this kind of incubator serves as a continuous delivery approach for startup organizations.
Startup Studios Reduce The Risk of New Business Failure
Analyzing the success/failure rate of businesses incubated by startup studios provides meaningful insights on why forming an incubator remains a great funding option. A recent study by GSSN analyzed the data surrounding startup businesses created using this approach, including failures, exits, and the size of the initial investment.
Obviously, a failure occurs when a startup business halts operations, with all investors losing everything they contributed to the business. An exit means the investors sold their original stake at a meaningful rate.
According to GSSN’s research, seed-stage investments for startups created by top-tier studios are more likely (34%) to result in an exit than the average Series D investment (27%). Accelerated startups are marginally less likely to exit (21%) than a Series D investment, and a third less likely to succeed than studio-born startups. Notably, the total average exit rate is closer to 10-20 percent, as noted earlier when mentioning that 80 to 90 percent of all startups fail.
In the end, forming a startup studio provides a greater opportunity for success and massive earnings as new businesses regularly get incubated. In short, a repeatable, systematic process ultimately results in a meaningful reduction of risk.