One of the most rewarding aspects of practicing corporate law is the opportunity to represent a business from start-up to successful liquidity event. While a business will face challenges throughout this life-cycle, some of the most important come at the beginning when an entrepreneur is trying to get his or her company off the ground. Key among these challenges is access to experience and funding.
Over the past decade the start-up and seed investor community has developed a number of resources to help address these challenges. Chief among these are start-up incubators, angel networks, and seed-stage specific venture funds. Each of these groups can bring significant value to start-ups both in terms of funding and access to experienced mentors. However, the cash and human resources offered have limits. For example, angel investors and seed-stage venture funds typically limit their investments to an initial Series A round. Further, while incubators often give entrepreneurs access to top notch business mentors, a start-up’s time in the incubator, and its access to those mentors, is limited.
As an alternative to traditional incubators and angel associations, we increasingly are seeing groups utilize a “studio model” for creating and fostering start-ups. The studio model – also called “parallel entrepreneurship” – usually involves the creation of a studio-like holding or hub entity the principals of which include experienced entrepreneurs, executives, and industry and technical experts. The studios, which often are financially backed by institutional investors and successful entrepreneurs, seek to generate new business and product ideas, the more promising of which are used to form new, free-standing companies. In addition, some studios will identify and acquire interests in existing early stage businesses.
The studio generally maintains not only a significant equity interest in these businesses, but continues to be actively involved in the start-up’s operation and strategic direction. In fact, while the studio may identify one or more key entrepreneurs or executives to have primary responsibility for a particular portfolio company, the new business is far from self-sufficient. Rather, a key component of the studio model is the economies of scale associated with having multiple ventures leverage off of the studio’s resources. This can include access to the studio’s physical and technical assets, back office support, sales and marketing personnel, and other human capital.
Advocates of the studio model suggest that access to this shared resource pool greatly increases its portfolio companies’ chances to succeed. For example, start-ups typically do not have regular access to the type of experienced personnel and service providers made available by the studios. While incubators may provide some of the same resources, access to those resources generally ends after a company leaves the incubator. In contrast, studio enterprises characterize themselves as long-term partners – or co-entrepreneurs – in their spin-out ventures.
Of course, the studio model is not without its detractors. For example, entrepreneurs seeking to partner with a studio will need to be prepared to give the studio a significant equity stake. In addition, some argue that, because studio personnel are attending to multiple ventures at once, no one business gets the direct attention it needs.
While the studio model certainly is not a fit for all companies, it provides yet another example of the start-up community’s efforts to seek new and better ways to get promising start-ups off the ground.