Ep#24: Why Venture Studios Are the Future of Startups - with Matt Burris

So I look at this as, you know, how do you define the right deal structure for the portfolio companies you're building? What's the cap table going to look like? And there is no one answer, there is no one standard and there really can't be in this space because you've got studios that are building deep tech, biotech, you got studios that are building cash flow, you got studios that are the founder that take this all the way through to like we've got a product before they bring somebody else in. And you've got studios that are acquiring IP to like there's such a breadth, there is no one answer. But what we can instead look at is what are the right frameworks we can use to understand what an acceptable range of equity really looks like? And how does this deal structure come together?

Welcome to Startups Decoded where we uncover what it really takes to build and scale startups. I'm Andy Walsh, founder and strategist. Each week we will bring you actionable insights and real stories. Let's dive in. Hello and welcome back to Startups Decoded. Today is something that I've been spending a lot of time on in the last year or so with nobody studios but today talking to Matt Burris. Welcome to the show.

Thanks. Thanks for having me.

It's really important conversation focusing on venture studios today and venture studios as an asset class have been around for a while but it feels like in the last couple of years there's been an acceleration in the number of them globally, seen some case studies and success. And there's a whole story to unpack around this and to set up today's conversation. Matt, I'd love to be able to hear from yourself as far as your background and how you ended up in the venture studio space.

Absolutely. It started with almost burning my house down.

That's an answer that I've never had before. So we need to explore that a little bit too.

I thought it'd be a good tee up. So the first startup that I built was a metal 3D printer company I started not with a minimum viable product but a minimum viable test. I had to prove to myself that I could use a Blu ray laser I bought off of ebay to melt metal and you know, be able to print something solid. So let's start by melting metal. Melted zinc, bronze and stainless steel, but lit titanium on fire. So titanium ignites at 450 degrees Fahrenheit in an oxygen environment which is kind of the basement. And yeah, luckily I didn't burn the house down. Nothing caught on fire except the Titanium. So it was an exciting moment. And that startup actually connected me with the first studio I ever met in person. And they gave me some advice that got me into an accelerator in the Bay Area. That studio was in Bloomington, Indiana. They're really good friends with the guys that came together and started High Alpha and they influenced a lot of High Alpha's design. So that was about 2010, I want to say somewhere in that time frame. So about 15 years ago, I got connected to the first studio. That's how it all started.

Wow. I know that it's probably evolved. When I was chatting to Ben Yoskovich at Highline Beta, he talked about at the time when he was first doing this, that it was probably more focused as a incubator as far as language. And then the venture studio came to life. What period was that you talked 2010, when you were first jumping into that? How long before that was the venture studio term? Even around.

You know, the terminology has evolved a lot. And the studio that I met back in my hometown at woodsprout Box, now they're a paragraph. They were actually connected in with a lot of the accelerator networks at the time because accelerators still hadn't been fully defined. So they were trying to figure out, like, what's the difference between accelerators and incubators? And this thing that sproutbox is doing, it's not either one of those, how does this all come together? And realistically, that's kind of the challenge that's gone on for the last 15 plus years. In fact, I'd say 30 years in total since the first modern studio got launched back in 96. And it's something we still struggle with a little bit today because we just have so many different terms for what a studio is, and everybody has different meaning attached to those terms. And that's created a lot of confusion just in the whole space.

Yeah, there's a lot missing from today's narrative still, even after these years of experience, and I think that we'll unpack a few of those today. Some of the things that we're looking at is legitimization. And how does this become an asset class that not only grows and delivers great businesses and successful exits and returns for investors, but also is something that has enough structure so people see it as something they're aspiring to do and can make choice within the startup world. Is this something that's viable for them because it presents a lot of interesting opportunities, particularly for the entrepreneur within that who's just perpetually coming up with ideas and they don't need to be personally attached to them. They can just have this almost blank canvas of sorts and we'll explore that. But I think as far as the formalization, I'd love to kick off with, at your perspective, where would you say the market is at right now in the sense of venture studios as far as perception in market, how legitimate they are and to set a bit of a benchmark for our conversation?

I'd say it's still very early days. I would say that institutional investors do not yet consider venture studios to be a legitimate asset class because I would point to the fact that they do not allocate money against it today.

Right.

If they look at any asset class as like this is a great one to back, they're going to set some allocation sign every year, put some capital at work in that asset class. We don't see that today. We do see institutional investors in the studios. So it's not that they are not aware of the asset, but it hasn't yet matured to the point where it makes it easy for them to deploy capital into it. And that's part of the mission that we have at the Venture Studio forum is to really define the asset class and help it grow into that. That point.

Yeah, and I see it and hear it colloquially from conversations, et cetera. And, and there's two sort of investment modes, right? There's the actual studio itself, which is in theory the, the incubation hub and the, and the exploration lab of ideas, concepts, prototypes, et cetera. But then you go into the portfolio and you have a range of companies that then on their own, right, can get investment as well. And the studio side has some legal restrictions around it too. Like for a VC particularly, they're not allowed to, to invest in something else, that invest in something else as part of their operating agreement within their company. And LPs would not probably want that either. But I think the portfolio opportunity is real and there's some things there that we should explore today to look at the state of play and how we can change that moving forward. But you talked there a little bit around the Venture Studio forum. It's probably a great place to start our conversation and journey today. So that's been recently started. Can you tell us a little bit about the origin and what your mission is?

Yeah, so you know, we've been in the space for a number of years, me and my, some of my partners at the 9.8 Collective. And we've seen the repeated problem over and over that it's really difficult to raise capital. There's a lack of really well documented best practices in this space. The community itself is fantastic. Venture studios are really open with one another. They'll share insights and best practices. But bringing that all together so that the whole ecosystem can really take a major step forward, that's something that we've been missing. And so we said, hey, let's start a trade association, a nonprofit global trade association focused on elevating the venture studio as an asset class. So that means we needed to go define it formally. We need to build up frameworks that allow investors to navigate allocating capital and evaluating studios easily and be able to compare them against one another easily. And that's kind of a challenge today. I think the comparison. I think studios will recognize this because they typically will pitch family offices. If you go to a pitch a family office, well, you pitch one family office, you just pitch one family office. It's going to be radically different than the next one. And that's really the state of studios today. If you're an investor, you see one studio, you saw one studio, the next one that you see is going to be very different. And that makes that investor's job incredibly difficult. So we need to solve that and that's what we're working towards today.

So good. And someone has to take the lead on that. Right. It's for the betterment of the industry at a global scale, which has so many positive flow on effects. And a lot of it is definition that you talked about as far as like, how do you get a standardized set of terms? Investopedia is a really good example of every day I get the email and I'm pretty deep in this space, but there's terms that get thrown in there. I'm like, never heard of that before. So they come up in my conversation and I think giving people the language to be able to talk about it and understand the structure, but also the alternative models within that. And I guess that's the gray area right now as far as what actually is it, how does it function and how do people know what they're walking into? Because one size does definitely not fit all.

No. And that's one of the biggest challenges in the studio space. If we take a step back. Question one, what is a venture studio? The way we define it is it's a company that builds other companies by taking a meaningful role, playing an entrepreneurial role, operator role and an investor role. So that creates a little bit of a framework where you can test is a studio A studio one, because there's a control element there and there's very distinct roles that the studio is playing in building and creating that company and that allows us to start one. It's a formal definition, but we can see how well a studio performs in any one of those roles. And it also creates a nice separation between the other asset classes in the space. If I would look at an accelerator as a comparison, an accelerator definitely invests, right? They're taking an equity position, they're filtering for, you know, good deal flow, they're putting some capital at work, but they are not taking an ownership or controlling role as an entrepreneur. They'll advise, but they're not executing there, they're not owning anything there. They'll advise on the operations, but they're not doing any of the operations themselves. If you just look at the time that an accelerator puts in on a portfolio company level, maybe a couple hours a week, a studio is usually on the order of 20, 40, 80 plus hours a week per portfolio company. So it's just such a different level of support that this kind of definition starts to really bring clarity to the value that the studio is actually adding in building those companies.

Yeah. And if you were to step outside venture studios or startups and look at the industry at large, the way that startups can be built now is becoming more automated, which is ultimately the thesis of a venture studio, which is how do you operationalize a linear process that allows you to take lessons from experts who are exited founders, investors that come from different backgrounds that can at the right point, through a process, add value course, correct whatever they need to do at that point in time. And if you're a startup operator doing it for the first time, you can get on various gbts and build out business models and things that you wouldn't know how to do yourself natively in a way, and get a bit of a head start on that. And I think that that sort of formalization of startups at large, not even the asset classes within that, I think is becoming that point that I think ultimately will help venture studios long term.

Oh, for sure. Like a lot of those automation tools are going to benefit studios, they're going to benefit entrepreneurs of all types. The challenge is, and this is where I think studios are going to excel versus not going through a studio process. If you're doing this yourself, especially the first time, you don't have a point of reference to, you know, check the AI, right, because we've all seen AIs hallucinate and sometimes they hallucinate really, really well. And if you're not an expert in that space, you're like, hey, that sounds reasonable, let's go do it. And that can be a major mistake and a distraction and one you'll make with, with great confidence now so that, you know, becomes the challenge. And a studio can look back at this and go like, that doesn't sound reasonable. We've experienced very different. If we have some data that points us in that direction, then that's a different story. But we've experienced very different. Let's not do that. Let's do the things that we know that we've seen that work, that we have playbooks for. We've got teams that know how to go execute. So yeah, AI is going to help a lot. It's going to help the studio move a lot faster. But I think there's a balance even within the studio world where the studios are going to like bring even more advantage into the model is level up the quality of what they do. So at a certain point it's not about building more companies because every company you build takes a lot of resources, a lot of capital to deploy. So there's a balance between let's build more and let's build better. And overall the studio model is focused much more on let's build higher quality, quality companies that succeed at higher rates, then let's build more. But AI is going to allow you a little bit more flexibility in how you approach that.

It makes a lot of sense. And I was reading some data the other day and I can't think who put it out. It was Pitchbook or someone else, but they were talking about fundraising success rates for first time founders versus second or third. And if you're a second or third time founder and you've had exits, it's much easier to raise and be able to get enough capital to do what you're doing. I don't know if they followed through with this or not, but I'd be curious to see does that actually increase the chance of success on returns? Because what that establishes is a pattern of data there. A repeat founder has the ability to drive greater returns. It's precisely what a venture studio does, is that expertise of multiple pieces. Yet it still has this cloud over it, I would say, in the sense of what it's doing. So to step through some of those stages in a venture studio, I think trying to not fully unpack it, but typically how it would work and because that gives us a path into looking at along the way, how does say an investor understand the value of Venture Studio and help qualify and quantify what that looks like so you've got a let's start off with the entrepreneur side as far as ideas, prototypes et cetera what is sort of typical in that.

Environment yeah so if we step back and look at that full process real quick usually there's five stages everybody tweaks it a little bit but you find some ideas you go validate them the ones that you do validate that you determine are worth building you start building then you grow them and then you spin them out of the studio so they can stand on their own. Everybody approaches this process a little differently with good reason Right You've got studios like NLC Health or MDB Capital that build in biotech their licensing IP that early process looks very very different than somebody like High Alpha or Pioneer Square Labs or OSS Ventures where they're going to search for some opportunities or take a problem space and look within it so with that of kind.