Naval

Ryan Hoover

Nivi

 Recently and perhaps coincidentally, I've been approached by a number of

 entrepreneurs who want to create venture studios. Venture studios are different from 

 the classic Y Combinator Accelerator, where you pay six or seven percent for a quick 

 program and some money, or from the model where you just start a company on your own.

 A venture studio is one that comes up with the idea, incubates you, 

 basically gives you some shared resources on recruiting and operations 

 and fundraising and so on, and then takes in exchange 30% of the money.

 Generally, these have not been good models and I want to get into why.

 Firstly, let's talk about where venture studios do work.

 They do tend to work in areas like consumer packaged goods,

 or in video games, where a lot more of the value is in the distribution.

 When distribution is really difficult, when brand building is really hard,

 and you just need huge amounts of resources, either in capital or existing brands,

 to deploy your product out there, venture studios can work.

 Where they fail is in creative endeavours where 

 technology creativity is required, aka the classic tech business.

 Why do they fail in these cases? The number one reason they fail 

 is because the scarce thing in the environment are entrepreneurs.

 It is not ideas. It is not capital. It is not distribution. It is not 

 recruiting. It is not operations. It is entrepreneurs pure and simple.

 And you cannot recruit the best entrepreneur into your venture studio where you're going

 to take 30 or 40%. The idea is not scarce.

 saying, hey, I have a great idea for a novel.

 Want to give me 40% and write it for me?

 Or it's like going to a movie producer and 

 saying, hey, I have a great idea for a movie.

 Want to make the movie and give me 40% for it?

 Doesn't work that way. Creative endeavors require 

 creative people, and the creative people are at the core of

 it. They are the most important thing by far, and the good ones know that.

 And the environment knows that, so those 

 people can get funded for 10 or 20% of their company

 instead of you taking 40% off the bat for a fairly small amount of capital.

 Services like operations, recruiting, fundraising, and office 

 space are cheap and can be purchased on the open market at low rates.

 Does this mean venture studios never work? No, there are cases where they have

 worked but these are the exceptions rather than the rule and it's worth

 The classic Idealab model, which was started by Bill Gross

 back in the late 90s and spun out Overture, among other things,

 did kind of sort of work because A, that 

 was in one of the biggest bubbles of all time,

 the dot-com bubble, and B, even then I would argue that it never produced

 the massive hits from that age like Google and Amazon.

 Max Levkin, one of the founders of PayPal, who then went on 

 to found Affirm and co-found Yelp, did have a successful run,

 but I would argue there it was because he himself was the entrepreneur.

 He did recruit one or two brilliant entrepreneurs early on,

 and it was more that those entrepreneurs were using their 

 venture studios as a way to find the project they wanted to do next,

 as opposed to funding other entrepreneurs where they would take a healthy chunk.

 HIMS and HERS, as well as some of the things

 that have come out of science, like Dollar Shave Club, but again, these were consumer

 packaged goods companies where I would argue that distribution and branding mattered for

 more. These are not classic technology companies.

 These are companies that are taking consumer products and distributing them under a unified brand.

 Other than that, the history of venture studios is miserable.

 Here's the very, very simple question. When you're faced with 

 a great entrepreneur who is creative and capable and can build

 technology and that person can raise money, recruit people, get office space and get distribution

 to your venture studio and give you 40%?

 Generally, the people who need you to give 

 them office space and a little bit of financing

 in exchange for such a healthy chunk, either they can't do math, they don't understand

 economics, they're risk averse, or they just don't understand how the whole business works

 in the first place. So is that really what you want to stake your future on?

 Feel free to leave comments or questions in the side chat or 

 comments and I will stitch them in and answer them one at a time. Thank you.

 Colin asks if the Venture Studio model could 

 work if Venture Studios just took a lot less.

 The answer is yes, as Y Combinator has proven, but in that case, the 

 value that the Venture Studio would provide would also be a lot less.

 Like, for example, Y Combinator limits what they're doing to a 12-week process.

 They do a batch process. They don't come up with the idea for you.

 The team has to come in already formed. 

 The idea has to come in at least half formed.

 The team has to have executed for a while.

 The amount of capital they give is relatively small for the dilution.

 Their work is bounded in a 12-week boundary, and they 

 don't really have the ability to work with you a lot past that.

 They have to run it as a batch process, and most of their 

 value actually comes both in the branding of having selected you,

 in the demo day of exposing you to a lot of different 

 investors, and in the mentorship and guidance within the 12-week period.

 They're not doing your recruiting for you. They're not doing 

 your fundraising for you, although they are helping with that.

 They're not running your operations for you. They're not even giving you office space.

 Because they're taking less, they can also only do less.

 Even in that business, it's a winner-take-all, where Y 

 Combinator has a huge brand and gets to pass that brand along,

 and other people don't have the brand to pass 

 along, and so they end up picking up the scraps.

 My conclusion is that the market rate for this 

 set by the incubators because the kind of people

 you would want to rope in for your venture 

 are exactly the same kind of undiscovered talent

 This whole topic might seem not terribly useful in a niche within 

 a niche, but I think it's a good stress test of your understanding 

 of the venture capital market and maybe capital markets in general.

 And as a founder, you're always raising capital, which is a one-way 

 function on your cap table, which is easy to screw up and impossible to reverse.

 So it's good to stress test your understanding of the capital 

 markets with maybe more esoteric thought experiments like Venture Studios.

 Hey Naval, thanks for creating this room. I've heard the idea of Venture 

 Studio once and I haven't been looking into, you know, how venture capital works 

 and everything, but there is a new trend about the one-person business or solo 

 partnership without taking capital and just running things as a single person,

 thereby not scaling as much. I guess that also means they're not producing the classic tech 

 companies. What do you think of that in terms of, you know, the human quality of life as 

 opposed to creating something great and leaving a dent in the universe kind of entrepreneurship?

 Hims and hers could never be profitable because the compounded cost of

 minoxidil, biotin vitamins, DHT blocking shampoo, birth control pills, and

 flibanserin, none of those, even if you were selling tens of millions of

 patients on those on a recurring basis, none of those would produce a profitable

 venture-backed return. You'd have to make money on another type of upsell selling to that audience.

 Solo entrepreneurship or unfunded businesses are a completely different type of business.

 winner-take-all businesses, where they chew up a lot of capital,

 but then once you win, you win really big.

 That's true of technology businesses, businesses where there's no marginal cost to duplicating

 the product, businesses where there are network effects, businesses where there are very high

 activation energies, where you need to just 

 spend a lot of money upfront to have any business

 whatsoever. So in those kinds of businesses, you 

 really cannot compete as a solo entrepreneur or as

 self-funded because eventually someone will come along and displace you completely.

 In the immortal words of Glenn Gary, Glenn 

 Ross, first place you get a Cadillac El Dorado,

 second place you get a set of steak knives, third place you're fired.

 If that's the industry you're operating in and that's technology, then you need a venture

 capital funded business. If that's not the space you're 

 operating in, it's not winner-take-all, then by all means

 do the solo entrepreneur business or the unfunded business.

 I wouldn't say it could never be profitable,

 because these are not tech businesses and they will not enjoy tech margins.

 in that these are not venture-backed businesses.

 There may be an exception here or there,

 but that's generally due to outstanding execution,

 not because of the nature of the business being a good one.

 Well, thanks for sharing that and I guess my follow-up question is, is venture capital

 global? So the reason why I ask is for someone 

 like me, based in Australia and let's say I have

 a crazy idea about the next big thing and 

 I want to make it happen, do I have access

 to capital from Silicon Valley or stuff like that?

 Should the person be moving to the US, what should the person do?

 The later stage of your business the more global venture capital becomes.

 At the very early stages where you have nothing to show except just yourself,

 then it all devolves to trust networks and knowing people,

 and that tends to happen best in small local contexts.

 In later stage businesses where you can show a spreadsheet,

 you can show numbers, you can show growth and customers are numerous

 and easy to reference and growth is easy to track and spot,

 then it becomes much easier to attract funding globally.

 So ironically the earlier stage of your business 

 more you have to be in some place like the Bay Area

 or Shanghai or Bangalore where venture capital is local.

 The later stage of your business the more you can be situated elsewhere

 which is why Combinator used to force everyone to move to Mountain View or San Francisco

 for the initial batch but then let them scatter back to their hometowns later.

 Hey, thanks Naval, that's very insightful, saved me probably hours of researching and

 The follow-up question, not a follow-up, but the question that pops into mind when you

 said there are operational help and there 

 are other sort of help that you can get from

 a traditional venture capital firm that are available cheaply, not cheaply, you didn't

 mention cheaply, but available at market rate, how does one leverage that and what

 are these help that are needed to make things happen?

 Okay, so let me be blunt here, nobody helps you operationally, no matter what they say.

 When they say operational help, what they really mean is some very 

 like a CFO type setting up your organization, which is now really 

 cheap and easy thanks to Angelus Stack or Stripe Atlas or what have you.

 Setting up your cap table, doing some basic back office finance 

 for you, but they're not going to help you build and run a business.

 Nobody actually does that, to the extent these venture studios do that, they don't 

 do a great job because every business sort of needs its own dedicated and focused people.

 Rent to CFOs and finance help and back office 

 help are commonly available all over the Bay Area.

 There's a bunch of businesses that do it and I can link to some of 

 them later, but the reality is that is not the gating item for you.

 If you're building a business, the hard part is, especially a tech 

 business, is finding great engineers and great product people and 

 building a product and nobody can help you with that except yourself.

 That's your job. Everything else frankly is trivial.

 हाई नवाल। हाई नवाल।

 And for DTC brands, all of them are struggling a lot these days.

 They were never really going to be that profitable to begin with.

 And it's just gotten significantly more expensive to do marketing acquisition.

 Like when people see an ad on their Instagram for a physical product,

 one of the first things I know they do is like search Amazon for a dupe.

 And even like open store, which I think was 

 atomic venture studio spin out is struggling.

 I went on their new shopping platform was pretty disappointed. Honestly,

 it's basically anything I can get on Amazon, but somehow five times the price tag.

 but all of these brands are basically scaled by a few branding agencies in New

 York. For example, like red antler agency has 

 been behind a lot of fast growth brands like hinge

 ramp to the point where they're basically referred to as an additional co-founder.

 Technology companies build their own distribution even back in the day when, 

 for example, packaged consumer software was sold through a small number of 

 retail outlets like Best Buy and Fry's Electronics and Walmart or what have you.