The September 2020 IPO of Snowflake, an enterprise cloud data software company, was a landmark event; not only was Snowflake’s IPO the largest software IPO on record, but it was also the fifth-largest IPO of all time. But the Snowflake IPO was also notable for drawing attention to the way the company developed: Snowflake was incubated and co-founded by a venture studio at Sutter Hill Ventures. According to CNBC, Sutter Hill Ventures owns 20.3% of Snowflake's outstanding shares. Altogether, Sutter Hill’s stake is worth about $12.6 billion—a remarkable return on a total investment of less than $200 million. Sutter Hill’s return on Snowflake is now greater than Accel’s $7.7B return from Facebook. In addition to its Snowflake success, Sutter Hill owns more than 25% of Pure Storage, another of its incubated portfolio companies. Pure Storage was valued at ~$2.9B when it went public.

Sutter Hill’s track record offers a positive early indication for TI Platform Management’s studio venture strategy, which is to build a large initial stake in incubated companies and to maintain ownership through later rounds of financing.

Since our inception, TI Platform Management has backed 47 funds founded by 56 entrepreneurs (over 1140+ companies) and invested directly in 31 companies. During that time, TI Platform has anchored and been involved in the formation of more than a dozen studio ventures.

Although studios have traditionally been of marginal concern to LPs focused on gaining allocations in venture funds led by VC industry leaders, more limited partners are beginning to take interest as it becomes clearer that studios represent one of the most promising avenues for high-yield, long-term investments.

The Emergence of Specialty Studios

In recent years, new studios have emerged across the venture capital landscape, offering a more cost-effective model for venture investment that promises to reshape the industry. Unlike traditional venture capital firms, studios incubate their own portfolio companies, often within a specialty subsector of the venture market. Each studio operates according to its own particular strategy, but the guiding principle is a simple one: by developing a unique specialty within one or several related verticals, studios are able to attract experienced entrepreneurs, skilled engineers, and proven growth marketers into talent networks capable of supplying their portfolio companies with a strategic advantage at every stage of their development.

Along with startup accelerators and platform-based funds, studios are leading a new wave of innovation in venture capital funding and startup development. TI Platform Management has been acknowledged as a pioneering firm for our early support of these new venture structures, and for our sustained relationships with numerous studio founders. Our firm has anchored several studios and aided in the formation of nearly a dozen more.

In this white paper, I discuss the evolution of the venture studio model, the profound changes it has begun to generate in the venture landscape, and its significance for institutional investors.

Venture Studios Take a Page From Hollywood’s Playbook

Institutional investors have traditionally relied on venture capitalists to identify and invest in the best companies and entrepreneurs on their behalf. Due to this reliance on intermediaries, institutional LPs lack deep relationships with top entrepreneurs. Instead, venture capitalists acted as advisers to entrepreneurs in their portfolios and made themselves the conduits for the contact between LPs and startup founders. However, as LPs acquire increased exposure to venture, and as their teams develop deeper and more sophisticated networks across the industry, LPs have gained insight into the benefits of backing repeat entrepreneurs and offering support through their networks. The studio model for venture development capitalizes on this structural shift in the VC landscape by facilitating and rewarding the creativity of repeat entrepreneurs who have demonstrated track records for success.

Venture studios focus on developing a methodology for testing prototypes for multiple startups at once. Typically, a studio is able to scale several concepts and companies simultaneously by creating shared infrastructure for rapidly prototyping products and concepts that depend on similar domains of expertise. Similar to a Hollywood production studio, which employs talented professionals across the entire production process, venture studios share resources, management, infrastructure, software, and skilled community members as they generate and develop multiple concepts that will later become independent companies initially led and staffed by studio members.

Studios Capitalize on the Success of Repeat Entrepreneurs

Venture studios operate according to the principle that success attracts talent, and that talent in turn begets more success. Consequently, venture studios are typically organized by proven entrepreneurs. These studio-based entrepreneurs are sometimes called “parallel entrepreneurs” because the studio structure enables them to work on a variety of different ideas at the same time, ultimately leading to cohorts of new businesses that develop in tandem. Their track records as proven builders enable them to recruit top talent and to attract founders with promising, scalable business concepts. After bringing together a critical mass of successful, repeat entrepreneurs and the industry’s top talent in engineering, marketing, and growth, venture studios are able to pair compatible team members with business projects and concepts at the pre-seed stage, and then support them as they scale.

Many high-profile startups were incubated by prominent serial entrepreneurs. Examples of such entrepreneurs include Elon Musk, Max Levchin, Mike Speiser, Garrett Camp, and Kevin Ryan. Elon Musk co-founded a number of prominent companies, such as Paypal, Tesla, SpaceX, and Solarcity. Max Levchin co-founded Paypal and incubated Slide, Yelp, and Affirm through HVF studio venture. Mike Speiser incubated two public companies, Snowflake and Pure Storage, through Sutter Hill Ventures. The repeated success of these entrepreneurs was made possible in part because venture studios allow serial entrepreneurs to do what they do best: imagine, iterate, prototype, and test new products.

The most successful studios are led by proven entrepreneurs who have already gained experience developing companies that have achieved +$150M in ARR. This reputation translates into an enhanced network and easily unlocks access to capital for subsequently incubated companies. Studio platforms thus allow successful entrepreneurs to act as both entrepreneurs and venture capitalists.

The resulting structure of these venture studios allows them to produce more cost-effective startups, because early-stage portfolio companies share certain resources, including technology, office space, accounting, and human resources. The shared infrastructure enables studio entrepreneurs to launch new companies at a fraction of the cost, as well as perform multivariate testing on product launches. As studio founders gain expertise in testing concepts through the shared infrastructure, the cost of each experimental idea will continue to decline over time.

Because they are helmed by prestigious entrepreneurs and enjoy better resources than a typical seed-stage startup, studio endeavors are well-positioned to attract top startup talent. They can also promise their recruits less risk: in the event, a prototype fails, founders and staff for abandoned seed-level concepts are reallocated to more promising projects. The studio model is thus a healthier and more sustainable environment for creating seed-level startups.

Why Studios Are Gaining Traction

Studios are not exactly a new concept: Idealab, an early version of the venture studio model, was founded by Bill T. Gross in 1996. What has changed, however, is the environment in which they operate. Technology has made it easier than ever before for studios to support simultaneous experimentation with multiple business ideas.

Over the past decade, one of the biggest drivers disrupting the venture capital industry has been the decreased cost of starting a company. With the advent of cloud computing technology (such as AWS), open-source software platforms, and other innovations in business development, companies no longer need to invest large amounts of capital into developing the infrastructure needed to operate a business. More importantly, developer tools have become more powerful, making it easier and more cost-effective for startup founders to experiment with ideas. Low-code and no-code platforms give non-developers the ability to build out commercial platforms that accelerate testing for product-market fit, as well as speed the overall process for forming a new business. As a result of these shifts, TI Platform Management expects that the future of startup creation will be strongly defined by studio ventures.

The Upshot for LPs: Better Alignment with Top Entrepreneurs

One reason why TI Platform expects studios to have a profound and far-reaching impact on the venture landscape is that they offer benefits for both institutional investors and entrepreneurs that traditional VC firms cannot provide. In short, they offer LPs access to breakout companies at higher ownership and lower fees.

Four principal benefits characterize this enhanced alignment between LPs and entrepreneurs:

1. Studios offer direct access to proven and successful entrepreneurs

By backing an entrepreneur-led studio, institutional LPs gain the ability to invest directly in the top, proven entrepreneurs as they build out a portfolio of companies that will enjoy an automatic network of talent and expertise. Owing to their track records of success, studio-based parallel entrepreneurs can easily raise capital from tier-one VCs. Instead of paying premium management and carry fees to tier-one funds for access to top entrepreneurs, LPs can invest directly in diverse portfolios built by serial entrepreneurs.

2. Studios eliminate traditional management fees

Studios eliminate the traditional management fees that LPs would ordinarily pay to invest in a highly curated portfolio of startups. In many studios, 100% percent of LP capital goes directly into supporting the operations of portfolio companies, resulting in zero management fees and the potential for zero carries. In addition, institutional investors have the opportunity to receive both preferred as well as common shares in underlying companies in exchange for the capital provided to support those companies. The studio model thus provides a highly attractive fee structure and produces an alignment between LP and entrepreneurial interests that traditional VC intermediaries have never been able to offer.

3. Studios enable LPs to obtain higher ownership stakes in breakout companies

Studios allow for more significant ownership of the underlying companies than traditional venture investment vehicles do. By maintaining a larger ownership percentage of these breakout companies since inception, at a pre-set lower valuation, studios offer LPs a larger equity multiple.

4. Studios Decrease Capital Risk at the Seed and Incubation Stages

The studio model is a powerful de-risking tool for institutional investors who wish to gain venture exposure at the pre-seed and incubation stages. Traditionally, a startup founder tends to spend all capital raised on an idea that may or may not work. By experimenting with multiple ideas at a much lower cost, studios can repeat the iterative business playbook at a rapid pace and eliminate less promising ideas at the pre-seed stage, before the concept is spun out into a separate company. As a result, an investor who backs a studio venture can invest in a diversified portfolio of high-quality, lower-risk companies incubated by proven entrepreneurs instead of investing in a collection of companies in which each is created and operated by a founder.

What Do Studios Mean For Traditional Venture Capitalists?

Traditional venture capitalists aren’t erased from the picture. However, they are displaced by institutional LPs in the capital structure: LPs invest in entrepreneurs through venture studio structures before traditional VCs gain access to them.

By cultivating relationships with studio entrepreneurs, venture capitalists are able to invest early in companies that are spun out of the studio as independent businesses. Studios retain a large stake and assume seed-stage risk, even as they minimize the downside of individual prototype failures by incubating several companies at once with overlapping teams. These suits venture capitalists just fine: as large and mature VC firms have raised more capital and pivoted more toward later-round financing, small seed-level and pre-seed investments are more suitable for studio ventures.

Studios Offer Two Primary Benefits to Entrepreneurs

1. Studios shorten and enhance the “zero to one” creation cycle

By providing teams with strategic capital, resources, and expertise through a shared infrastructure, venture studios are able to validate and execute multiple startup ideas at once. This enables the studio’s lead entrepreneurs to repeat the creation and iteration playbook over and over again. Each time through the cycle, they are able to gain insights into how to optimize resources and shorten the time to product-market fit, ultimately generating multiple viable concepts at a much lower cost over time.

Many proven entrepreneurs are at their best in this “Zero to One” phase of company development. The studio model enables them to create and iterate while delegating marketing and other later-stage business development tasks to studio teammates who specialize in those domains. By liberating entrepreneurial creativity, studios have the potential to unleash moonshot ideas, all while eliminating many of the risks associated with starting a company, and without missing out on potential upside rewards.  

2. Studios help entrepreneurs avoid ownership dilution

In addition to shortening the Zero-to-One company creation cycle, venture studios offer a second important benefit to entrepreneurs by solving an emerging problem in venture economics: ownership dilution for founders. As the venture industry evolves, dilution has become a cause of growing concern, as founders of breakout companies have experienced excessive dilution of their ownership stakes, forcing them to seek new avenues for funding and exits. The recent and highly publicized emergence of venture-focused SPACs is one result of these shifts. Another has been serial entrepreneurs’ pivot to the studio model.

Venture valuations across all stages and deal sizes have risen significantly over the past decade, with venture funds consistently taking a 15-20% ownership position. As venture firms raise larger fund sizes, and because they typically demand a minimum ownership requirement for startups, they tend to force founders to raise more capital than they need. After multiple large rounds of financing at inflated valuations, founders dilute their ownership significantly. As a result, many founders, who are the primary value creators, end up with a small amount of equity while VC firms take a much more significant cut.

Consider, for example, the stakes the following founders who raised capital from traditional VCs owned at the time their companies exited:

• Aaron Levie owned ~4% of Box at its $250M IPO
• Zachary Nelson owned ~4% of NetSuite when it was acquired for $9.1B
• Joseph Kennedy owned ~3% of Pandora at its $1B IPO
• Tom Gonser owned ~1.5% of Docusign at its $4.4B IPO

In contrast, Sutter Hill Ventures, which incubated and co-founded Snowflake, owns 20.3% of Snowflake's outstanding shares. Altogether, the firm is sitting on a stake worth about $12.6 billion—a huge increase over its total investment of less than $200 million. Michael Speiser, Managing Director of Sutter Hill Ventures, served as co-founder and original CEO of Snowflake; he personally owns slightly more than 10% of Sutter Hill’s stake at its IPO.

By cutting out venture investments at the earliest stages, studios allow for entrepreneurs to start with significant ownership in the startups they create, and to maintain ownership across a variety of different companies. In addition, the studio model enables entrepreneurs to retain significant ownership in breakout companies through multiple rounds of funding.

Profound Effects for LPs: Direct Access, Lower Risk, and Enhanced Upside

Venture firms have always touted their access to top entrepreneurs to justify the premium fees and carry that they charge. Unlike public market investing, in which investors select their preferred securities or portfolio companies, startup founders get to decide which investors they want on their cap tables. Historically, startups founded by proven and successful entrepreneurs have raised large, oversubscribed rounds in which multiple tier-one VC firms compete for access to those startups. For this reason, the venture has sometimes been called an “access-class” rather than an “asset class,” with top venture firms controlling access to the best opportunities. Studio models offer institutional investors direct and unmediated access to top entrepreneurs with a diversified portfolio of startups in which the formation and creation process has already been significantly de-risked.

By displacing traditional VC firms as venture intermediaries, the studio venture structure provides profound, compounded advantages for institutional investors, who are able to gain direct access to proven and repeat entrepreneurs —like Elon Musk, Max Levchin, and Peter Thiel—and to their companies—all at an attractive fee structure and at higher ownership stakes in breakout companies.

TI Platform Management has been on the cutting edge of venture studio development. Over the past five years, we have pooled our deep connections to successful entrepreneurs to create a collaborative network of repeat entrepreneurs who are creating the next generation of breakthrough companies.

A few figures demonstrate the breadth and depth of the TIPL network: proven entrepreneurs in our network have created more than $50B in market value, including $25B+ in enterprise exits. The total market cap of companies backed by entrepreneurs in the TI network exceeds $830B+.

We focus on building relationships with these entrepreneurs, tracking their progress, educating them on new venture funding models, and offering our network of support as they scale their companies and iterate new ideas. Because we understand the unique advantages of the venture studio model, and because we have developed a reputation for anchoring such platforms, TI Platform Management has been able to create funds with privileged access to venture studio investments.

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