The Question
As a founder considering working with a venture studio, you may wonder about your financial upside. Can you make more money with a studio or going another route?
Yes, a venture studio provides lots of help. How does it pay for itself?
We’ve built a financial model to help you think through this question.
The Financial Model
Monte Carlo Modeling
Predicting the future is hard. To think and communicate clearly, it helps to be explicit about your mental model. Tetlock and Fermi teach us how to make predictions when we are uncertain. Breaking down the problem into smaller pieces and making range estimates can help us. So can building many different possible futures by picking random numbers for each uncertain variable and analyzing the set of possible futures. This is a Monte Carlo simulation.
Our template for thinking through this situation use a Monte Carlo simulation. You can update the assumptions. Or clone and build your own model. We welcome your questions and suggestions.
How to Use the Model
Each box is like a spreadsheet cell although instead of one number each cell contains a range of possible numbers reflecting uncertainty.
Read the model from left to right. The top half of the model tracks a founder who works with a venture studio. The bottom half tracks a founder without a venture studio.
Key assumptions in first column are:
1. Improved percentage point change of exit working with studio
2. Number of VC rounds or dilution skipped from working with a studio
3.Amount of equity for studio
You can change the assumptions to match your predictions or research.
What do you have to believe for the studio to pay for itself?
What Assumptions to Use
According to the Global Startup Studio Network research companies launched from studios are more likely to raise a Seed and Series A. The assumption on the alternative for venture backed companies is that most of the other founders stopped working on the business and had no to modest financial outcomes.
The other finding from GSSN is that studio companies are faster to raise. We did not model the time-value-of-money benefits. We also do not include any benefit of opportunity cost. Faster to seed means less time in the slog. It means you get to serving customers faster. That helps you find out faster if the business will be sustainable. That’s time you could be doing something else.
In our model we start with a 20% ownership stake for the studio although you could plug in different values.
What the Model Shows
With an assumed 3 percentage points increase in chance of success, a founder working with a studio that might allow you to skip half a round of dilution, ends up with 44% better financial outcome compared to founding without a studio.
With no skipped rounds and the 3 percentage points improvement in success, you are still better off with a studio.
If you are compare to co-founding with another person, you can end up with significantly more working with a studio. In this scenario, the expected outcome is well more than double.
Even if you assume an equal chance of success or and no rounds skipped, you are still better off than a 50/50 split with a cofounder.
A Technical Note
The exit value is set to a range of $10million to $5 billion and averaged across a log normal distribution. We used this distribution because it was built in. Perhaps we should use a power law to be more accurate? You can also pick a different range given your understanding of the venture market. We are open to corrections and feedback.
Our guess is the negative outcomes in the distribution are also a side effect of the distribution built into the tool. We are not trying to include them.
Your Feedback
We hope this is useful for you. Please share your feedback and let’s all get better at building valuable ventures!
