Startups: From Solo to Multiplayer, From ad-hoc to Systematic

TLDR

• Startups in a competitive environment have extraordinarily high failure rates.
• Venture Capitalists and Grant Programs are shouldering the high failure costs despite the fact that there are proven ways to mitigate the risks of failure.
• Venture Studios provide a collaborative approach that increases the pool of skills and resources that startups can draw upon.
• The success rates for Venture Studio startups are dramatically higher than incubator, accelerator graduates, or grant programs.
• Investors can benefit from more secure returns on investment by investing in Venture Studios and startups within Venture Studios.
• Startups can benefit from a collaborative environment where their peers have a vested interest in their success, and where mutuality dominates the culture.
• The RnDAO model is leading the way both in terms of choosing startups with potential and in terms of supporting startups in reaching success.

What is wrong with Startups today?

The world’s most successful startup accelerator, Y Combinator, has a 98.75% failure rate in producing unicorns. That’s right. Only 50 of the 4,000 YC graduates succeed in producing unicorns. Much of this failure is because startups today are built the same way that artisans built cottage industries in the 20th century: a single person taking on all of the business roles. Each founder is expected to do everything themselves —raise funds, identify problems, build teams, and sell solutions. This approach to entrepreneurship is not only extremely challenging but also ineffective, leading to low success rates. 

While the media loves to celebrate big funding rounds, it rarely covers the news of startups that quietly shut down (nor why they do). Venture capitalists rely on spreading bets across many founders, knowing most will fail, which creates misaligned incentives for sustainable startup growth. VCs also push startups to "go big or go home" which leads many entrepreneurs to burnout and end with little to show for their effort.

After going through the venture-building process ourselves, we began searching for a better way. We found a new movement that benefits both founders and investors. 

Enter Venture Studios, (also called Startup Factories or Venture Builders). Venture Studios transform the startup game by switching from solo to multiplayer mode, and from ad-hoc to systematic processes. Let's dive into how they work.

What is a Venture Studio?

Venture Studios represent a fundamental shift from traditional venture capital and accelerators to a long-term relationship involving all of the areas startups need to succeed. 

In practice, Venture Studios provide:

1. Research & Idea Generation: Venture studios actively identify and generate new business ideas, either internally or through collaboration with entrepreneurs.
2. Team Formation: They help assemble the founding team, often by bringing in experienced operators and subject matter experts.
3. Hands-On Support: Venture studios provide operational support across the startups who participate in the group, reducing the overhead for all.
4. Funding: Studios provide initial funding to get startups off the ground.

Venture Studios combine the formal support provided by the staff of the studio itself, as well as the informal support of other founders who are part of the Venture Studio. Venture Studio teams can reinvest lessons from one startup to the next as well as leverage economies of scale to bring in specialist talent.

Early-stage startups with more than double the success in less than half the time

Venture Studios aren’t just a good idea: the results speak for themselves. 

Venture Studios by design are more capital-efficient and have a lower failure rate for entrepreneurs. As a result, the number of Studios is growing rapidly. About only 40 studios operated globally between 1995-2005 up to 700+ by 2022, and the Global Startup Studio Network (GSSN) reporting a 625% growth globally in the last 7 years.
As this new model matures, the number of well-known ventures born from these Studios has grown too. Some popular names are Dollar Shavers Club, Moderna, Tweet Deck, Beyond Meat, Medium, Gify, Bitly, and Lift.

Importantly, Studios are not necessarily focused on Unicorns. They do produce a fair share, but where Studios excel is in creating medium-size businesses in the $10-300 million range.

Addressing challenges of Venture Studios

Not everything is rosy. When considering investing in Venture Studios or startups created by a Studio, it’s important to understand the potential pitfalls of the model. The following list allows investors (or founder considering joining a studio) to assess the risks and find out whether a mitigation strategy or solution is in place:

• Taking too much equity: Venture Studios profit by taking equity in their startup members. However, if they take more than 25%-30%, they enter the zone where they disincentivize subsequent investors. We ballpark our model closer to Entrepreneur First, a battle tested model where the parent company takes 10% equity. 
• Not my idea: Traditional entrepreneurs go through many hardships building something when no one else believes, so they need deep conviction. Studios rely on validation methodologies instead of conviction, systematically testing multiple ideas in a short period of time. Bringing in founders earlier, to validate the idea gives them a chance to convince themselves and others or keep pivoting, until something truly resonates.
• Over-protection: To ensure that a startup can function without the support of the Venture Studio, Studios setup an active program to help founders establish in-house functionalities for when they leave the umbrella of the studio.
• Team breakdown: founder teams can fall apart with devastating consequences as arguments about equity split become toxic. Venture Studios are particularly exposed to this risk but can mitigate it by guiding teams to explore critical alignment questions in a structured process. Additionally, mechanisms such as Dynamic Equity (aka Sweat Equity - equity is not split in advance but allocated dynamically based on labor, assets, and capita invested) can help mitigate (more on this further below).‍
• Cash flow: venture studios require significant funding to keep operating for years before a successful exit. To address this, some Studios diversify by running a product or development agency that provides cashflow, others start by building cashflow-generating businesses before going for growth ventures that can exit.‍
• Operational complexity: Taking a more hands-on approach requires a Studio to develop methodologies, talent pools, and other resources. Because of this, Venture Studios take time to set up and mature. Some studios develop specializations (e.g. focusing on a specific vertical) to reduce operational complexity.

Venture Studios working with Funds and Grants

Ventures Studios and VC funds can work well together. Studios benefit from a close relationship with a Fund by reducing the time it takes for their ventures to fundraise., VC Funds benefit from the deal flow and reduced risk of investing in a venture that’s been properly validated. Because the Studio develops deep expertise in its area of specialization, they can provide valuable insights for Funds to refine their investment thesis.

Similarly, grant programs can work synergistically with Venture Studios. Grants programs lack the systemic processes that ensure startup success, and by investing in startups within a Studio, grants programs are improving their rates of choosing winners.  Grants programs can boost projects in the studio looking to develop public goods (i.e. are found to be valuable for an ecosystem but lack an effective business model). This synergy allows larger-scale experimentation with solutions that can benefit ecosystems as a whole.

Higher success rates for founders and investors

Venture Studios reinvest learnings from one startup to the next, improving outcomes for startups and investors. The next step that RnDAO took was to diversify risk for the founders themselves, so that even if their own startup doesn’t benefit, they reap some of the rewards of having contributed to those startups that participate with them in the Venture Studio.

Diversification for founders

The startup game is rigged against founders. Investors enjoy diversification across a portfolio of bets; however, founders are betting only on their own personal startups. We developed a model that gives good founders a better chance, allowing each founder to hold a stake in the other ecosystem members. This means that they are more likely to want to help one another, and also that founders end up with some upside when any of the participating startups succeeds.

As we researched different models, we found inspiration in the Kindred Capital approach, where every founder becomes a co-owner of the fund. Particularly in areas such as CollabTech, this model aligned with the founders we wanted to attract.

Supporting zebras

Many founders want to build solid, profit-generating businesses (zebras) more than chase an unlikely moonshot based on capturing market share at all costs (unicorns). However, most early-stage investors fund unicorn bets, while funding for zebras is scarce. This represents an underserved opportunity for investment. Founders who try to make their zebras look like unicorns are more likely to fail, and pressure from investors to look a particular way limits the opportunities these zebras can pursue. 

The Calm Company Fund pioneered an innovative investment contract based on a SAFE with an additional side letter for profit sharing. The contract enables investors to profit from both exits and from ventures that focus on profitability. Tailoring the investment approach to prioritize profitability enables a faster path to returning capital back to the fund. Meanwhile, the flexible nature of the contract and spread across a portfolio of investments still allows for the possibility of outlier returns. In 4 years of operation, with about $20million under management, and about 70 companies in portfolio, the Calm Company fund produced:

• 4 successful exits
• A failure rate of only 6%
• 12 companies profitable enough to be paying quarterly back into the fund
• Payouts to investors in the fund (i.e. Limited Partners) within only 4 years of operation.

This approach to investing demonstrates that funding zebras can be highly profitable within a short period of time.

Dynamic equity (aka Sweat Equity)

Founding team members have different levels of commitment and availability. Over time, team members may switch in or out of a startup due to unforeseen circumstances. Therefore, fixed equity splits at the founding stage can end up being problematic by the time the startup acquires real funding. 

The Slicing Pie methodology uses  Dynamic Equity: progressive allocation based on contribution. With more than 100 implementations, there's enough data to show the approach solves many of the issues of allocating founder equity.

We've tested this approach for two years in RnDAO and our contributors liked it so much that one of our teams decided to productize it.

Prototyping the RnDAO model

We started RnDAO in 2022 as a community focused on CollabTech research. We then refined a vision for a product ecosystem where ventures that hit certain milestones would become co-owners of the whole ecosystem. In a year of bootstrapping, we grew to include 3 ventures (TogetherCrew focused on community analytics, MeetWithWallet focused on team scheduling, and the now defunct Level1 focused on learning and development).

Then, between Q3 2023 and Q2 2024, in partnership with Arbitrum, we launched a Venture-Studio “light” program. Six entrepreneurs received a stipend for 3 months to research a business challenge with us and then start a venture. The program also included $50k of funding for 1 external venture to join the RnDAO ecosystem.

The RnDAO core team worked closely with the founders, ensuring they remained focused on validating a meaningful problem and market opportunity. We helped teams find and apply for grants, made introductions to potential customers and helped them find talent and streamline operations.

With the 6 entrepreneurs and despite not having additional funds, the program resulted in the founding of two new ventures (CollabBerry and Harmonica). The appeal of a collaborative ecosystem also led to three new ventures (Cofound3r, Farstar, and Simscore) joining and contributing equity without us having the capital to invest in them.

From this experiment, we refined our approach, but most importantly we got a first taste of the network effects working in practice. Not only did the collaborative ecosystem of projects attract others to join, but the collaboration itself reaped rewards such as:

• TogetherCrew developed an onchain identity platform which MeetWithWallet is now preparing to integrate. 
• The CollabBerry team became one of the first users of SimScore as they found it helped them to analyze user research data. 
• The CollabBerry team helped SimScore to create their website in a way that better communicates the value they found as users. 
• The MeetWithWallet team then became one of the first users of CollabBerry.

Projects were helping each other to test, iterate based on feedback, and find opportunities!

We also did all of this without raising any funding from investors. Our use of dynamic equity enabled the team to bootstrap leveraging multiple contributors.

We’re excited about the RnDAO model because it provides:

• Systematic and rapid identification and testing of ideas.
• Better support for ventures, reducing the failure rates and achieving faster growth.
• Superior capital efficiency, due to dynamic equity in RnDAO and RnDAO ventures.
• Risk diversification for founders and a supportive environment for everyone.
• Attracting other ventures to join for benefits other than capital investment.
• Legal setup for ventures to return capital early to investors and RnDAO itself.
• Access to an underserved pool of investment opportunities.

What’s next?

The individual hypotheses were developed and tested by others, we have combined them and replicated positive results at a small scale. Now, we’re preparing to grow the RnDAO ecosystem.

• If you're an investor, join our investment network (instructions below).
• If you're an aspiring founder or founder of an early-stage CollabTech project, get incubated by RnDAO.
• If you're a designer, developer, product manager, marketeer, or otherwise looking to contribute, find your next gig in our ventures.

All these paths start with you joining our Discord channel and making an introduction in the intros channel. We'll soon reach out to have a call with you.

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