Posts tagged: funds

How do you build successful businesses? The short answer is it’s hard. Yet from the outside, many assume investing and building successful startups is a pretty straightforward activity. Their thinking: money conquers all challenges, and nobody is more flushed with cash than Venture Capitals VCs.

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They assume that once VCs identify the companies building innovative products, they’ll simply throw money at them and let them work. In the future, if the company is a success, think IPO or Paystack-Stripe acquisition, the VC walks away with a decent return despite adding minimal value to the growth timeline.

But many times, this never happens. There’s a higher chance that a startup will fail than it getting any traction at all. And startups fail all the time; it’s just the nature of the business world. According to Fortune Magazine, nine out of 10 startups fail. That’s why some investors use the “spray-and-pray” model of investing to increase their chances of cashing out with that golden startup that saves the rest of their portfolio.

In recent years, more investors and firms are harkening on to an old truth. Maybe money is not the single most important thing companies need. Perhaps they need other kinds of support to build high-growth ventures even at the early stages? What if an investor could do more than just dole out money to help a young company make it to the finish line?

This is a reality many investors may need to accept. They must be ready to roll up their sleeves and help portfolio companies execute, especially at the early stages. To do this effectively, more VC firms should, and indeed a few are creating something called venture builders.

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A venture builder, sometimes called an incubator, a startup studio, or venture studio, is an organisation that develops new companies or startup ideas and dedicates resources and teams to nurture the product until maturity.

Venture builders take different forms. But two models stand out, with the major difference between them being the origin of the idea.

In the first model, venture builders are out chasing innovative startups for investments. The goal is to tap into a wide variety of ideas from entrepreneurs, pick winners, and help them grow their businesses leveraging the builder’s in-house resources. This model overlaps with traditional VC investing, but the difference is the investor’s level of involvement.

However, the second model is slightly more popular. Here the venture builder conceives the idea for a startup or a bunch of ideas in-house and then assembles a team to execute these ideas while supporting them with much-needed resources, expertise, infrastructure and network.

One familiar venture builder is Rocket Internet, which has incubated many startups, including publicly traded food delivery company, HelloFresh and Jumia Group, the Pan-African retailer and its basket of marketplace services. Other notable venture builders include Founders Factory, a startup studio that has built over 35 companies from scratch and GreenTec. There are also famous examples of corporate organisations deploying the venture builder model. One organisation is Opera which housed OPay for a few months in 2018. Alphabet, the parent company of search engine, Google has also deployed significant resources on moonshot projects, including Waymo, the driverless car startup.

But the venture builder approach isn’t without its drawbacks, and it does receive a fair amount of criticism. For one thing, they seem expensive and may not necessarily be the best use of financial and human resources for venture firms—many of which tend to have lean teams focused on deal-making and due diligence.

A good way to get around this criticism is to limit the number of startups entering their portfolio. Unlike accelerator programs and Venture Capitals that tend to back dozens or even hundreds of startups each year, venture builders are most optimal if they support a few companies annually. Three to five is fair enough to ensure the builder provides the best value with the resources they render.

The venture builder model certainly offers merits for early-stage innovation. One notable rationale is they test and validate ideas quickly in-house. After all, according to CB Insights, 42% of startups fail when due to a lack of product-market-fit. Venture builders engage in few core activities: business ideation, building teams, capital allocation and team operations. Each of these activities is key. And like regular startups, builders must prioritise similar growth development models such as prototyping and leveraging design thinking and agile process management. Execution and speed are equally crucial to the venture building model to validate ideas and scale quickly.

These resources aren’t cheap. Venture Capitals builders typically invest seed-stage funding in new ideas in return for a significant chunk of equity or a majority. This makes sense and could return many multiples during exits.

Beyond financial resources and access to quality networks, one crucial benefit of venture builders is they’re not shy to provide the much-needed human capital to develop and scale ideas. Talent is key to startup development, but acquiring the right talent can sometimes be expensive and time-consuming, both of which would affect startup execution timelines. CB Insights data shows 23% of startups fail because they assembled the wrong team. Venture builders reduce this challenge with their pool of skilled and experienced teams spread across various incubated startups. They also have the resources and appeal to attract top talent to scale startups to maturity.

As the new startup gains traction, venture builders should spin off the company, allowing it to grow independently and attract follow-on funding from external investors. Like regular Venture Capitals investments, venture builders can exit portfolio companies through secondary sales of equity, a stock market listing or mergers and acquisitions.

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