Startup studio: Building a Successful Tech Business Without the Silicon Valley
The Silicon Valley model for growing an innovative tech company is highly dependent on the concept of the unicorn. VCs, angel investors, and accelerators sift through thousands of proposals sent to them by independent entrepreneurs. They fund a large number of them, hoping that one will become uber-successful. The single unicorn then attracts a huge volume of capital, allowing the VC to write off all the other companies as a loss.
This process has a low hit rate, and requires a highly developed ecosystem that can support all the independent teams working to conjure the next unicorn. While the Silicon Valley model has been incredibly productive over the past 50 years, there is a growing need for other approaches with other advantages.
The startup studio model aims to breed camels instead of unicorns: tough, hardy creatures that don’t take a miracle to create.
Camels produced at startup studios reach seed funding at a whopping 50% success rate. Technospark, for example, is a fast-growing tech campus on the outskirts of Moscow that boasts this level of consistency. How is this achieved, and what are the advantages of this model?
Finding a genius vs. building a team
The search for unicorns is a high-risk proposition, even within highly-saturated environments like Silicon Valley.
Geniuses are great, but you may not always find one.
However, the tech startups today has many important needs that require competent teams and clear entrepreneurial approach, rather than unique ideas.
This is especially applicable to hardware and deep tech fields, where startups require more time and funding to get off the ground. Technospark is one of the first startup studios to take this as their focus. For example, it’s known that large retail companies need warehouse robots, and there is great potential value in a startup that can build a stronger, cheaper bot — and Technospark launches such startup.
Having identified a solid business hypothesis, the startup studio then engages an experienced tech business builder, offering him the role of entrepreneur-in-residence. He puts together a team of engineers. Back office staff such as lawyers and accountants is available for a monthly fee.
The startup studio provides the early-stage capital and facilities that are so difficult to achieve for independent companies which are just starting out.
This model, also known as the “venture builder” approach, is well suited for the hardware and materials space, as well as IT. It’s also great for any city in the world that happens not to be San Francisco or Boston. While the first startup studios arrived in the mid-nineties, we are currently seeing a major global proliferation of such ventures. More information about the history of this phenomenon can be found here.
Companies as Clients
The deep tech-focused startup studio responds to two major trends in the high-tech sector. The first trend is a sharp decrease in the cost of starting a hardware venture in the last decade, which mirrors a similar process for software and internet startups from the mid-nineties to 2005.
With a relatively modest war chest, a startup studio like Technospark can enter a variety of lucrative markets, with the high strike rate offering investors a clear path to profitability.
The second trend is in the behavior of large companies, which are now more and more likely to want to purchase startups rather than create a new department within their own corporate structure. In 2017, 50% of all mergers and acquisitions deals were purchases of startups; in 2012 this was 25%, and only about 7% in the 1990s.
A great example of this is DSM, a 100-year-old Dutch chemical company that transitioned from coal to high-tech chemicals, and is now pivoting to biotech. It is doing so by purchasing dozens of small startups, not with mega-deals but with modest acquisitions in the tens-of-millions range.
A hardware-focused startup studio like Technospark meets this demand by using an assembly-line approach to startup creation. In a recent interview, founder Denis Kovalevich outlined the methodology:
“Of the 100 companies we’ve launched during the past 5 years, 10 already have products on the market; these are the most marketable companies, and they will be sold in the coming years. The next 30 companies (we refer to them as “candidates”) are developing their products at full speed, and most of them will be transferred to the group of leaders in the next year or two. Then there are 60 very young startups, and we launch another 10–15 fresh startups every year.”
The goal is not to create an over-capitalized unicorn, but a highly viable company with an appropriate valuation.
These kinds of ventures easily find buyers, bringing a steady flow of capital back on to the assembly line.
Of course, we all love a good unicorn. Not all tech entrepreneurs are as public as Elon Musk, and 99.9% of tech entrepreneurs are noname. A business-savvy startup studio with entrepreneurs-in-residence can be extremely productive in terms of increasing efficiency and reducing investments in a wide range of fields within the high-tech sector.