At first blush, as far as alternative asset classes are concerned, the venture capital model seems rather straightforward: Have a great idea and bring it to proof-of-concept mode. Pitch it to a venture capital firm, which then does its due diligence, researching your financials and prodding your idea for any weak spots. Pass that test? Great! Now, flush with cash, your company has that much more wiggle room to expand, with your backing VC firm having a vested interest in your success.
As are many things in life, however, the venture capital world isn’t that simple. The VC world faces a - sometimes deserved - reputation of being very much a world of connections. You went to Harvard or Stanford with the founder of a corporate management SaaS platform? Your foot is in the door, perhaps ahead of a founder of a decidedly more humble background who has a really great idea that can change the economy of her community for the better. In effect, venture capital can become a form of impact investing, with said impact helping bolster entrepreneurship in underserved communities.
Yet at the end of the day, venture capital, as investment classes tend to be, is largely about risk mitigation. While the world might not need another project management SaaS tool, such projects tend not to be capital-intensive and are a known entity. In other words, they are low-risk. At the same time, a great idea might not have been developed beyond being just that. There might be some finer points to hone, including business management or developing a prototype. Enter the Venture Studio model: a little bit VC, a little bit business school, and a lot of design thinking. It's a potential ticket to empowerment for a new generation of entrepreneurs reflecting the diverse perspectives and needs of the new economy.
We sat down with Sasha Saberi and Ryan Retcher at LOUD Capital, an early-stage venture capital firm based in Columbus, Ohio, whose motto is “Venture for People.” In essence, the firm is about providing a helping hand to promising projects that stand to make an immediate impact in their local economies. With this ethos in mind, the firm is proud to unveil the LOUDX Venture Studio: a potential nexus for burgeoning entrepreneurs to receive feedback, hone their ideas, and surround themselves with a team of experienced entrepreneurs, corporate innovators, and even a few venture partners. At the LOUDX Venture Studio, entrepreneurs can feel that much more confident for the next round of pitching - or even build their company with that very team.
Planting Roots: Signs Of A Pre-Seed Startup
Many first-time entrepreneurs might have a good idea. They might have experience and impressive resumés in their space. Nonetheless, they might not have experience as an entrepreneur. And that’s a skill set — and even an entire mindset in itself.
“They haven’t built a startup or a product before; and not outside the vacuum of a corporate environment where the funding and infrastructure are already there,” says Retcher, senior partner and COO at LOUD. “When you see those decks or get those pitches, it tends to be pretty evident. Conversely, even seasoned entrepreneurs on to their next big thing often lack a diverse team around them to scale as quickly as today's markets demand.”
It’s not that these startups lack the potential. Far from it. It’s just that they have problems distinguishing themselves from the entrepreneurs that might be a bit more battle-scarred. And even if they might not be as green, they fit a certain temperament at the outset.
“From the venture capital side, there are so many founders out there who do have that experience; who understand what it takes — from a professional, emotional, social capital standpoint — to build a company,” Retcher continues. “Those are the ones who stick out and for the most part, are the 1 percent of startups that do get VC funding.”
From that point, even if the startup has its house in financial order, there might be certain intangibles that could raise VC firms’ hackles. For starters, having the wrong initial group in place could mean small fissures that could crack when the startup hits its first roadblock, as Saberi of LOUDX Venture Studio points out. That brings up another factor: the personality of the founder. Does the entrepreneur have the right mentality to guide a group through obstacles and levels of growth?
Then comes the product-market fit. A founder might have unbridled passion about the product or service on offer. On the surface, living and breathing the ideals of a startup seems like the type of devotion that might prove appealing to a funding team. Nonetheless, what Saberi calls “euphoric intuition” might only get a startup so far. For a project to be viable, no matter how much enthusiasm there might be among the founding team, the market has to have a need for it.
“You get a really good idea but when you test it with users, and you're going down the funnel, you realize over time that maybe this isn't the right approach or idea,” Saberi continues. “If you're so passionate about it, you put these blinders on, and it becomes your baby, and it's hard to walk away from those approaches.”
The Studio Model: Cultivating Seeds Into A Harvest
So for the 99 percent of startups that don’t get venture capital funding straight out of the gate, what are they to do?
LOUD Capital is among one of the VC firms that has addressed this issue by incorporating the venture studio model into its portfolio. Says Retcher, it’s a solution to address a key quandary LOUD addresses when making funding decisions: “Where can we help the most?”
The LOUDX Venture Studio model allows the firm to invest time and energy into those projects that show promise and/or offer an impact component yet fall just out of bounds on what the firm can allocate at a given moment. "We are entrepreneurs ourselves, so when we invest we are putting our money on the entrepreneur,” Retcher continues. “Our best risk mitigation is ensuring they have the same tools and team we use to consult corporations and innovate new products through the studio to succeed."
Already having gained traction in such incumbent VC markets as Silicon Valley and New York, as well as in innovation hubs in Europe, the venture studio is a way to foster these startups and promote diversity in founders and projects while helping the firm mitigate its risks. In addition to getting the insights and feedback startups can expect to get from a VC firm, studio programs are often led by battle-tested entrepreneurs who have first-hand knowledge of what strategies and plans will pass funding board muster.
When considering venture studios, most VC firms and corporations look for those that have really gotten venture building down to a science. “At LOUDX, we do just that.” Saberi notes. “We start with bringing in proven methodologies in design thinking, leadership, and innovation and focus on hypothesis driven testing, rapid prototyping, and iterating our way to product market fit. One of the many approaches we utilize is design thinking inspired workshops such as design sprints and strategy sprints that help organizations set clear goals, find team alignment, make data driven decisions, and innovate faster.”
Saberi, who comes from a corporate innovation background by way of Dell, sees studios becoming a VC trend with staying power. For one, it’s a way for exited founders to give back without starting full-on VC firms of their own. But also, it’s a way for VC firms to develop and harness the best talent they see — with the potential opportunity for studio firms to become funded in their own right.
“With the studio model, we can get started today and build the right team of operators from all over the world and put a company together to tackle a problem,” Saberi notes. “That's where we feel that the studio is most innovative: It is using a lot of the proven methodologies with the different types of talent that otherwise a first-time founder wouldn't have access to.”