VC Studios vs Funds
Lars BuchLars Buch • 1st • 1stVenture & Operating Partner | Tech Investor | Corporate Development and M&A Advisor | Board MemberVenture & Operating Partner | Tech Investor | Corporate Development and M&A Advisor | Board Member4mo • 4 months ago
The ideal dual entity Venture Studio setup in detail. Thanks Max Pog
Two tiers of private studios out there…the ones with own follow-on/growth fund and…the rest.
Max PogMax Pog • Following • FollowingJoin 1,000+ LPs & GPs at the LP, Family Office & FoF virtual Conf on Nov 26 - details in the featured post. 4x entrepreneur.Join 1,000+ LPs & GPs at the LP, Family Office & FoF virtual Conf on Nov 26 - details in the featured post. 4x entrepreneur.4mo • 4 months ago
I had calls with investors considering allocating $5-20M+ a year in venture studios. Here, I explain the differences between investing in holding companies of venture studios and in their Funds.
The holding company is the main studio entity that receives common stocks in the startups it launches. For new studios, this might be the only entity from which the team operates and funds new ventures.
As studios mature, they raise a sidecar studio Fund for pre-seed/seed investments. The Fund receives preferred shares. After deploying the capital of Fund I over 3-4 years, the studio raises Fund II for the next 10-15 companies launched by the studio, and so on.
When startups are launched:
– The HoldCo typically receives 10-15% of common shares for its operational/co-founding role.
– The Fund can receive 15-20% of preferred shares for its investment.
Advantages of Investing in HoldCos:
1. If the structure involves a single HoldCo entity (and studio partners will not launch a new HoldCo in several years), investors gain exposure to all future startups launched by the studio, potentially 30-60 companies over the next decade.
2. Investors own a GP stake in the studio. Studio Funds I, II, & III over next 10 years will generate management fees and carry for the HoldCo.
3. The HoldCo creates startup equity at minimal or sometimes even no cost. If management fees from sidecar funds cover costs of the 10-person studio team, the HoldCo gets equity in startups "for free" and doesn't need to fundraise.
Cons of Investing in HoldCos:
1. Usually, you can invest in HoldCos only during the early stages, which is more riskier. Late-stage investments in HoldCos are either not available, or costly, or difficult to value.
2. It might be hard to get returns from startup exits, as studio management will decide on whether to distribute profits, and if yes – what % of it. It might be good for investors if the agreement obliges the studio HoldCo to distribute profits from startup exits at a minimum level of 50%, 60%, or even 80%.
Advantages of investing in studio Funds:
1. It’s similar to investing in a typical VC fund as an LP. Because a studio invests in its own startups, it reduces risks when making investment decisions, as the studio has full information about its companies. In contrast, external VC funds often face risks even after DD because there might still be unknown factors about the companies they invest in.
2. Investors receive preferred shares and immediate distributions from startup exits.
3. Liquidity: It is often easier to sell LP positions in studio funds on secondary markets compared to positions in HoldCos.
Cons of Investing in Studio Funds:
1. Investors gain exposure to only the next 10-15 startups launched over 3-4 years.
2. Losing 20-25% of capital for management fees over 10 years, plus 20% carry.
If you are interested in investing in venture studios, let me know, and I can provide deal flow and conduct due diligence. Conclusion in the comment.
