Startup Studio Final Report Public Copy

November 24, 2015

Report by: Cachaça Consultancy LLP

Daniel Feeman

Tom Riddle

Linsey Jaco

Margaret Avery

Chris Hess

Chirag Patel

Acknowledgements We would like to thank all outside contributors to this report and our data collection

efforts, particularly those studios who were active participants in our in-depth

interviews and survey requests.

StartUp Studio 2.0 2015 CC, Limited

1 This document is the proprietary property of American University

Table of Contents Executive Summary ....................................................................................................................... 2

Milestones ................................................................................................................................ 2

Data .......................................................................................................................................... 2

Market Opportunity .................................................................................................................. 2

Industry Norms ......................................................................................................................... 3

Way Forward ........................................................................................................................... 3

Research Objectives ..................................................................................................................... 4

Overview ..................................................................................................................................... 4

Methodology .......................................................................................................................... 4

New Venture Landscape and Performance Indicators ....................................................... 6

Commonalities ........................................................................................................................ 6

Differences ............................................................................................................................... 7

Performance Metrics for New Ventures .............................................................................. 8

Current Trends of Startup Studios ................................................................................................ 9

Demographics ........................................................................................................................... 9

Players in the Market .............................................................................................................. 9

Studio Product Trends ............................................................................................................. 11

Competitive Landscape ......................................................................................................... 12

Key Success Factors ................................................................................................................ 12

Basis of Competition............................................................................................................ 14

Operating Trends in Startup Studio 2.0 ................................................................................ 15

Future Opportunities in the Market ........................................................................................ 18

Opportunities ........................................................................................................................... 18

Challenges ............................................................................................................................... 18

Conclusion .................................................................................................................................... 20

Appendices .............................................................................................................................. 21

Appendix A – Survey ........................................................................................................... 22

Appendix B – Survey Results .................................................................................................. 24

Appendix C – Interview Guide ............................................................................................. 25

Appendix D – Summary of the Differences Between Incubators, Investors and

Accelerators ............................................................................................................................. 26

Appendix E – Basic Recipe for Startup Studio.................................................................... 27

Appendix F – Porter’s Five Forces ...................................................................................... 28

Appendix G – Blue Ocean Strategy ................................................................................. 30

Appendix H – Portfolio Analysis ............................................................................................. 31



Executive Summary

Cachaça Consultancy seeks to conduct market research and data analytics for the

development of an industry overview report as the final product for completion of

American University’s requirements for Masters in Business Administration. As a part of

the engagement, Cachaça Consultancy has performed the necessary background

research on the startup industry pertaining to studio models, structures, and strategy,

in order to provide an industry overview report which includes the following:

Industry and market research and findings

Opportunities for future studio models

Areas of focus for future studio models

Milestones

Assignment of Industry Report as Final Deliverable (10/15/15)

Report Format Selection & Sign-off (10/23/15)

Report 1st Draft - Internal Submission (11/10/15)

Report 2nd Draft - Internal Submission (11/17/15)

Internal Final Draft Completion (11/22/15)

Final Report Submission to Client (11/24/15)

Data

Cachaça Consultancy collected qualitative and quantitative data using a two-

prong approach: a questionnaire and targeted direct interviews. For the

questionnaire Cachaça Consultancy reached out to numerous studios through

various platforms (Twitter, LinkedIn, cold-calling, and email) to collect operational

and strategic data through a collaboratively developed survey. Upon participation

by existing studios in the survey, a follow-up item included a phone interview,

during which studios had the opportunity to provide supporting details. This data

allowed us to identify industry trends using quantitative analytics and verify our

hypotheses against the qualitative data.

Additionally, we received data from another researcher, Attila Szigeti, who conducted

research on 51 studios and 212 of their portfolio companies. We vetted our hypothesis

and findings against Attila’s research to identify trends over time and validity of results.

Market Opportunity

Startup studios are a relatively new idea (five years in the making), meaning there is

tremendous opportunity for newcomers. However, this also means that there is no

standardized model, as each studio is created uniquely depending on the resources

available to the particular studio.

Opportunity is ever-present, and the industry is capable of handling flexibility in

strategic vision (selective thesis) and diversity in size (the number of portfolio

companies that a studio can handle at once), therefore it is difficult to make a

specific recommendation on the development of a new startup studio and its

operations. That being said, from our research we have identified the below criteria

which should be addressed to create a sturdy foundation for a studio:

What are the sources of funding?



What is the end goal? (spinoff, sell off the portfolio companies, hire another

company to manage them, etc.)

How many products can ideally be worked on at any one given time?

Industry Norms

From our research, we found that trends existed in three main areas within the

industry, (i) thesis, (ii) region, and (iii) founding.

Majority of studios had a well-developed market-driven thesis which functioned as

the studios guiding principle. Studio followed the thesis as if it is a written law. The

thesis identified their target market and vision. Those studios which had loosely defined

thesis learned the consequences of being too broadly focused and tend to not hold

a strong position in the market.

Regionally, we found that majority of the studios are located in the United States and

Europe. However, studios are spread throughout the world and continue to rise up in

different countries such as South Africa, Russia, China, and others. A recent trend, has

shown several universities, such as UT Austin, Harvard, and the University of Chicago,

are developing startup studios that follow in line with the trend of universities

developing programs dedicated to the incubator or accelerator model.

One of the biggest finds from our research was that the majority of relatively successful

studios follow one of two foundation models which follow the methods used by

Tesla and Edison. This notion is based on the research laboratories each man founded

Nikola Tesla with Wardenclyffe Tower, and Thomas Edison with Menlo Park (discussed

in detail in the Competitive Landscape section).

Way Forward

Cachaça Consultancy will present the results of its research in a usable report for

American University. While a specific recommendation regarding founding and

operation of a startup studio is difficult to make considering the maturity of the

industry and a significant sample size of data, this informational report should serve as

an overview of the new venture industry as a whole highlighting common practices,

industry trends, and potential areas of opportunities specific to startup studios.



Research Objectives

Overview

Our team consisted of 6 members, all MBA students at American University’s Kogod

School of Business. The project was part of our capstone class, Strategic Decision

Making, taught by Professor Parthiban David. We were led by Daniel Feeman, the

Project Manager. Tom Riddle served as the Assistant Project Manager. The remaining

members, who served various roles throughout the project, are Margaret Avery, Chris

Hess, Linsey Jaco, and Chirag Patel.

Our team was assigned to perform an in-depth study of the startup studio industry.

Tasked with this analysis, it was necessary to gather both quantitative and qualitative

data. To do this, we employed a two- pronged approach: a survey and an in-

depth interview regarding operations with startup studios. Gathering this data would

allow us to identify trends using quantitative analysis and verify our hypotheses

against the qualitative data. We would take the quantitative data from the surveys

and run various analyses. Using regression analysis and other techniques, we would

identify industry trends, which would be the basis for several hypotheses about the

industry. Specifically, we hoped to identify the optimal conditions for startup studios to

succeed.

Initial research on the industry was gathered from existing sources. Specifically, we

utilized several databases and tech journals, most notably Tech Crunch, Seed-DB,

and the Seed Accelerator Research Project, as well as various articles about and

websites of startup studios. However, there is one important point to note regarding

our data gathering attempts. Highlighted in the Small Business Administration’s paper

on the industry, “As the data landscape survey suggests, the available data upon

which new metrics might be developed is limited. Open source data are not

validated and validated data are often restricted for use through regulations or

cost1.” This is primarily due to several factors. First, the vast majority of startup studios

are privately-held companies, meaning there are no official filings available to the

public. Another impediment is that the industry itself is still emerging, so there is no

comprehensive history or analysis that truly captures the industry. Lastly, as the paper

also cites, the information given by the databases is not “for the purposes of informing

public policy or academic research.2” As a result, we recognized the need to

generate our own data about startup studios.

Methodology

We were initially had a comprehensive list of startup studios in the United States, as well

as well-known studios in Europe. This data contained mostly demographic

information, such as the names of the studios, the years of formation, their physical

locations, website addresses, and names of their founders and CEOs. It also

contained some data regarding the number of portfolio companies that they had

created, the amount of funding they had received, and the number of employees

that they had. This information was vital in providing us a broad understanding of the

industry and learning about some of the major players. Most importantly, it provided

us with the contact information necessary to send out our surveys to the studios.

The survey (found in Appendix A) was created by several members of the research

team with the intention of gathering both qualitative and quantitative data. The

survey was also designed to identify potential studios that would be interested in our

1 Innovation Accelerators: Defining Characteristics Among Startup Assistance Organizations by

Demwolf, Auer, and D’Ippolito. Optimal Solutions Group LLC. 2 Id.



follow-up interview. Using the contact information provided by the client, we sent out

survey requests to approximately 95 studios. Our hope was that we would have at

least 50 responses from the studios, which would draw a good representative sample

to build our quantitative data base around. Unfortunately, we did not receive the

desired response from our initial offering. Thereafter, we pursued an aggressive

campaign to get more results, namely through the use of Twitter, LinkedIn, and other

platforms. However, we eventually determined that the effort put into getting the

survey responses did not adequately provide the results we hoped they would. In

total, we received only ten survey responses. A summary of those responses can be

found in Appendix B.

At that time, we knew we would be unable to perform the quantitative analysis that

we desired. Instead, we would have to identify trends from the limited data we

received and validate them against the qualitative data gained from the interviews.

One boon we did receive from our social media efforts was that we were able to

identify several studios that were willing to provide interviews. Using the interview

guide found in Appendix C, all team members participated in securing and

conducting interviews. In total, we performed 5 interviews, which helped us gain

deeper insights into the current state of the market. Still, the information provided was

limited by the desire to keep proprietary information private, as well as the fact that

there was little to no information available to validate the claims made by the

interviewees.

Perhaps the best information received was given by Attila Szigeti, a Hungarian native

who works at Drukka, an agency/startup studio in Budapest. In addition to taking the

survey and giving an interview, Attila provided us with raw data he had been

collecting on the startup studio sector of the new venture industry. While it did not fill

in all of the gaps we had hoped to achieve with the survey, it certainly gave us

sufficient data to delve deeper into the trends of the industry, particularly relating to

launches and funding. Reviewing this data, we were able to formulate theories

regarding two methods for succeeding as a startup studio. The theories of the Menlo

Park Method and the Wardenclyffe Tower Method, are detailed later in the

Competitive Landscape section of this report.



New Venture Landscape and Performance Indicators

Before delving deeper into the startup studio sector it is important to have a base

understanding of the startup or new venture landscape as a whole. This report looks

at new ventures from the perspective of technology based ventures from startups

that are seeking out internal or external funding and/or other startup assistance

resources.

From the emergence of startup ventures various forms and methods on how best to

fund, build and grow a new venture have been utilized. Needs such as capital

requirements, access to networks and mentorship are just a few examples of the

different types of resource assistance that play a key role in how any startup venture

decides to grow their product and/or company. Through all stages of startup

development the various factors as reflected in the Porter’s Five Forces Analysis found

in Appendix F must be considered. In early stages of development, startups seek out

investors depending on what type of resource assistance the startup needs most. The

major investor players in the industry include venture capital firms, angel investors,

incubators, accelerators and startup studios. Each player offers a slightly different mix

of resources to the startup or is best positioned for different stages in the startup

development as depicted in the graph below and is described in more detail later in

this section. Graph 1 reflects that overlaps do exist among the scopes of the different

type of investors which means it is extremely important that the startup identifies the

right mix of resource assistance needed.

Graph 1 - Startup Early Stage Investor Resource Matrix

Source: https://www.quora.com/What-is-the-typical-business-model-of-a-Startup-Studio

Commonalities

No matter the type of investor, all endeavor to grow the initial idea into a successful

product or company that will produce an attractive return on investment by

providing some mix of resources. Resource assistance can materialize in the form of

financial capital, human capital, or operations support. Some investors achieve this

https://www.quora.com/What-is-the-typical-business-model-of-a-Startup-Studio



by sole investment others by creating environments where the venture can succeed

thanks to collaboration among experts and other assistance resources. Others take it

a step further and combine all these attributes together to provide a comprehensive

environment that provides the new venture with capital, expertise, networking and

shared resources in an effort to grow it to a scalable success.

Differences

Over time the needs of startup ventures have changed and so the industry must

evolve. It has done just that, especially, in the light of the cost of experimentation

falling. The various types of investors for startups share various commonalities but their

differences are what highlight their core competency as well as justify why one form is

better than another in specific scenarios. A side by side comparison of investor

attributes is depicted in Appendix D - Summary of Differences among New Venture

Investors. Details of each and their distinct attributes are fleshed out below:

1. Venture capital firms are commonly known as the most traditional form of new

venture assistance and provide financial resources which are normally large

investments for early to mature startups.

Differentiation factors:

o Provide large investments

o Implement strong governance to include requisite board seat and has influence on subsequent financing rounds

o Lack of resource synergies due to one product/company focus

2. Angel Investors are common at very early stages of startup growth and provide

financial resources which are normally in the form of small investments. In some

scenarios angel investors also provide a minimal level of advice to the outside

entrepreneur.


o Limited influence on strategic direction of portfolio firms

o Lack of resource synergies due to one product/company focus

3. Incubators are organizations that provide business support services such as

physical space, internet service, etc. at below-market prices and at times provide

small amounts of initial seed capital to facilitate growth and success of startups.

This type of investment can be found both in the private and public space most

notably in universities in the latter.


o Philosophically their objective is to nurture new ventures by sheltering

them from outside market forces and giving them room to grow.3

4. (Seed) Accelerators are organizations/programs that combines elements of

investors and incubators aka financial and human capital resources. They are

limited-duration programs that help cohorts of entrepreneurs with the new

venture process by providing small amounts of seed capital, working space,

networking, educational and mentorship opportunities and access to qualified

investors at the end of the intense program through the “demo day” event. Over

time the majority of accelerators have evolved from having a generalist-like focus

to becoming industry-vertical focused programs4. Y-Combinator is the most

commonplace accelerator example in the United States. Accelerator programs

are becoming more and more popular in the university setting as they gain

notoriety for being successful in the private space.

3 Cohen, Susan, and Yael V. Hochberg. Accelerating Startups: The Seed Accelerator Phenomenon.

SSRN Electronic Journal SSRN Journal. 4 Id.




o Philosophically their objective is to speed up market interactions in order to facilitate the ability to adapt and learn quickly for new ventures. 5

o Focused human capital education program for outside entrepreneurs

to understand the success factors in building a startup venture

Cohort based network

o Fixed duration program vs. continuous nature of incubators, angel and

venture capital investments

5. Startup studios are the most recent evolution of startup venture investors. Studios

are companies that aim at repeatedly building portfolio companies in parallel.

The building process is based on a reusable infrastructure of resources and a

cross-disciplinary core management team. See Appendix E for a visual depiction

of the basic recipe for startup studios.


o Shared infrastructure allows studios to capture economies of scale.

o Building portfolio companies in parallel takes advantage of network effects for market traction as well as future investment options.

Performance Metrics for New Ventures

Whether a new venture is looking inward and monitoring the performance of its own

portfolio companies or looking outward and considering the addition of a new idea

or portfolio company there are a few general performance metrics that all new

ventures and their potential investors consider key.

General key performance indicators of startup ventures6:

Financial metrics include monthly revenue growth, revenue run rate, gross and

net margins, burn rate and runaway.

User metrics highlight the key factor in any business’ success, the user. They

provide insights into the proportion of mobile traffic, understanding user

engagement or decay (cohort analysis or churn) and measure user growth

rate by word of mouth instead of by paid acquisition (k-value).

User Acquisition and marketing metrics reflect the level of significant resources

being utilized to acquire a customer and the respective payback period. Net

promoter score is used to measure the level of satisfaction of your customer

and their likelihood to recommend the product or service.

Sales metrics such as magic number, order velocity, average sales cycle and

long term value help the venture understand the efficacy of sales channel

efforts.

Market metrics accentuates the potential of the limited time and resources of

the target customers through total addressable market metric and average

wallet size.

5 Id. 6 Crichton, Danny. The Complete Quantitative Guide To Judging Your Startup. Tech Crunch. Jan. 31,

2014.

(http://techcrunch.com/2014/01/31/the-complete-quantitative-guide-to-judging-your-startup/)

http://techcrunch.com/2014/01/31/the-complete-quantitative-guide-to-judging-your-startup/)



Current Trends of Startup Studios

Demographics

Based on our research and assessment of the startup studio sector, we found that a

majority of the studios are located in the United States and Europe. However, studios

are spread throughout the world and continue to rise up in different countries such as

South Africa, Russia, China, and others.

Uniquely enough, there is a new trend within the industry that is taking place on the

university level. The current trend of innovation has led several universities, such as UT

Austin, Harvard, and the University of Chicago, to create programs dedicated to

incubators and accelerators. Many of these programs are dedicated to fostering

innovation and assisting current students and alumni with their startups. These

programs are dedicating resources, legal counsel, and space to further promulgate

startups and business ideas.

The core support of these programs includes management expertise and technical

expertise. Each program is built around an environment of shared resources that

provides startups with access to capital, networking connections, human resources,

marketing, developers, design and sales.

Harvard Business School's Rock Center for Entrepreneurship recently announced that

it will form the HBS Startup Studio this December. The focus of this studio will be on a

select few alumni venture program. This program will require that at least one team

member be an alumni of Harvard and be located at the programs New York City

office. Additionally, the selection will also be based on several other criteria such as

growth potential, funding and revenue streams. 7

In the “Anatomy of Startup Studios” Attila conducted research on 51 studios and 212

of their portfolio companies. From this research he found the following trends:

From 2010, the funding of these portfolio companies has increased by 48%

percent year-over-year

These studios have raised roughly $4 billion in venture capital since 2008.

These studios have created 15% more companies

14 portfolio companies have been acquired at approximately 3 years

after creation.8

Players in the Market

Table 1 details the major players in the startup studio space. The top three companies

in terms of funding are Rocket Internet, Science, Inc. and Idea Lab.

Rocket Internet, based in Berlin, Germany, has founded roughly 22 companies since

its founding. A majority of these companies operate as B2C (business to consumer).

Their model has been based on the "borrowing" or, rather stealing of proven

businesses ideas. In obtaining these, ideas, they grow the companies and stay out of

countries, such as the United States, that have strict intellectual property laws. Of all

the studios, they have the largest source of funding at $2,577,900.9

7 Vanni, Olivia. Harvard is Taking on NYC with its Upcoming HBS Startup Studio. BostInno. 10/08/15. 8 Szigeti, Attila. Anatomy of Startup Studios: A behind the Scenes look at how successful venture builders. 9 Szigeti, Attila; The Big Startup Studio Study, Part 1: Number Crunching.



Science, Inc, is a Los Angeles, based digital media and commerce startup studio. The

business gained notoriety for its portfolio of companies which include Dollar Shave

Club and DogVacay. It's portfolio companies have primarily been modeled around

B2B (business to business) and B2C. Since its founding, the company has developed

16 companies primarily focused on the retail space. Additionally, the company has a

track record of only developing ideas that have a proven ability to efficiently use its

revenues to facilitate its expansion and growth after initial rounds of funding.10

Idealab is a Pasadena, California based startup studio founded in 1996 by Bill Gross.

Of all the studios, they are one of the oldest, having been in operation for over 20

years. Their average funding per year is $3,640,000. Their model is based on the

scaling of small/local businesses to become major players in the market. The company

has developed 10 companies over the years in a variety of different sectors and

of different models. 11

Table 1- Top Three Startup Studios in Various Categories

TOP 3 BY COMPANIES (TOTAL) TOP 3 BY FUND/CO

STUDIO COs FUNDING STUDIO COs FUND/CO

Rocket Internet 33 $2,577.90 HFV 2 $ 171.50

Science.inc 16 $ 314.90 Rocket Internet 33 $ 78.12

IdeaLab 10 $ 72.73 Archimede Labs 3 $ 38.55

TOP 3 BY FUNDING (TOTAL) TOP EXITS (TOTAL)

STUDIO COs FUNDING STUDIO COs EXITS

Rocket Internet 33 $2,577.90 IdeaLab 10 4

HFV 2 $ 343.00

Science.inc 16 $ 314.90 TOP 3 BY EXITS (%)

STUDIO COs EXITS

TOP 3 BY CO/YR Disrupted 2 50%

STUDIO CO / YR FUND / YR Founders 2 50%

Rocket Internet 3.67 $ 286.43 RedStar 2 50%

Science.inc 3.20 $ 62.98

Boot Ventures 3.00 $ -

TOP 3 BY FUND/YR

STUDIO CO / YR FUND / YR Rocket Internet 3.67 $ 286.43

HFV 0.67 $ 114.33

Science.inc 3.20 $ 62.98

10 Id. 11 Id.



Studio Product Trends

Table 2 reflects the trends found in product categories the Szigeti’s portfolio analysis

of 51 studios. The most frequently developed product line pertained to E-Commerce.

From 2005-2014, we observed that 35 out of 212 products, or 17% of the products

developed, were of the E-Commerce type. The next most prevalent product type

was “Mobile,” mobile software, advertising, media or payments. Of the products in

the data set, 26 were of this type comprising 12% of the developed products.

Following this was Sotware, Meida, fashion, Apps, Big Data and travel respectively.12

Table 2- Startup Studio Product Categories

PRODUCTS

NUMBER OF PRODUCT

LINES

PERCENTAGE OF

PRODUCTS (out of 212

products)

E-Commerce 35 17%

Mobile (software, advertising,

Media, Payments)

26

12%

Software 25 12%

Media (PR, Social, Digital,

Advertising)

19

9%

Fashion 10 5%

Apps 9 4%

Big Data 9 4%

Travel 8 4%

Games 7 3%

Music 6 3%

Financial 5 2%

News 3 1%

Transportation 2 1%

Recruiting 2 1%

12 Id.



Competitive Landscape

Key Success Factors

There are inherent problems associated with measuring a startup studio’s

performance solely with a set of observed characteristics, individually or as an industry.

Even using outcome metrics based on open-source or non-obligated reports creates

issues. Amongst other problems, these metrics often do not measure what is important

to the individual studio, the products/companies, or subsequent investors, especially

in situations where funding is entirely private. With that in mind, the list makes two key

assumptions: that these measurements are internal to a startup studio, and the

information can be accurately collected and tracked.

Funding

Funding is the key question in all ventures because no matter what the idea or work,

without funding, there won’t be any movement forward. There are two critical time

periods where funding questions need to be addressed:

Initial: The studio must identify whether it has sufficient funding to pay for

office space, the core team of employees, and the ability to generate

and foster ideas.

Follow-on: The point at which outside funding from a VC is needed; the

studio must also assess whether it has the capabilities to secure funding.

Location

Location is vital because the physical location can affect the ability to recruit talent

and resources. Specifically, the startup studio must decide whether it should be

located where other studios already exist, or whether it should venture into new

territory with a beachhead location. The Small Business Administration saw this point

as one of the most important factors in the innovation ecosystem because studios

react so differently based on what location they begin in. Clients, needs, and talent

can all depend heavily on location. For instance, if the client base or idea base is

meant to service Level I Trauma Centres, it is unlikely to be successful in Nevada or

South Dakota, the two most isolated locations for Level 1 Trauma Centres.13 Thus it is

important to ask the question “Where?” early on in the founding process.

Studio Structure

The method used to found a given studio is a critical decision, as this will greatly

affect the structure of the studio. The two main methods that we have identified are

the Menlo Park Method and the Wardenclyffe Tower Method. An in-depth analysis of

these methods will be discussed later. Once the method has been determined, it

must be paired with the appropriate model based on the structure, as well as available

resources. These models, detailed in this section, are the Builder, Investor, and

Incubator models.

13 University of Pennsylvania, Access to Level 1 – 2 Trauma Centers.

http://www.traumamaps.org/Trauma.aspx Accessed on November 14, 2015

http://www.traumamaps.org/Trauma.aspx



Strategic Partnerships

Are you a VC, is there a VC partner available or is there a school you can attach to?

Building strategic partnerships is one of the most basic business tools in any industry.

The use of a partnering strategy is important because it will supply the studio with two

important inputs: funding and ideas. Without these inputs, the studio won’t be able

to produce and will fail. Therefore, startup studios should either include a VC in their

formation or identify a potential VC partner to work with. One variation involves

building through a university, such as the Harvard Innovation Lab.

Name Recognition

Name (or brand) recognition often refers to the founders, but it could also be the use

of a company that has ex post facto moved into the studio industry. Two notable

examples of this are Uber and Expa, which launched startup studios after the

companies became successful. This is important to measure, as it can relate to past

successes of a founder or to the field the studio will be working on. In either case, it is

paramount that the studio not overestimate their position within a field or

overestimate the name recognition of a founder. Often times, it will be a successful

company, not a founder, that has name recognition and the founder may not have

the legal ability to lean on that company’s name recognition.

Focus

Most startup studios must decide whether their business focus will be B2B, B2C, or

SaaS. This can then be drilled further into certain industries/markets. Some studios

refer to this as their “thesis”, but it actually speaks to what their strengths will be. If

mentoring is the strength of a studio, then an incubator model may work best. If

passion for a specific field (Trauma Centre efficiency) is the strength, then a builder

model may be best.

Output

The output of studios varies wieldy and depends heavily on the method and model of

the studio. The basics of output come down to how much can be produced and

what resources are needed for production. The balancing comes down to resource

allocation, which in turn requires an acute understanding of the requirements for

ideas and the ratios a studio can afford. This will shape the studio’s goals for ideas

going to market.

Success rate

How many ideas do you need to make that output realistic, what is the survivability

rate? Startup studios must determine how many ideas are needed for a realistic

success rate, as well as the survivability of that rate. In simple terms, this is the ratio of

ideas to successes. The level of what constitutes a successful ratio is a definition that

management and strategic partners will need to decide for each studio depending

on the structure and model of the studio.

Success

Defining success is one of the most difficult questions presented to a studio, as it will

have an impact on the founding method required and the operation model the

founders select. A success can be defined in any number of methods – sold off, spun

off, or kept as a small profit producer. The studio could choose to be geared towards



quick exits if the funding isn’t available for sustaining an idea over a long period of

time, or keep it in-house if sufficient resources can be allocated to it.

Basis of Competition

Direct competition in a secretive industry is often a difficult question, but the simple

answer is yes. In 2014, Susan G. Cohen and Yael Hochberg published one of the first

pieces on the startup studio industry - Accelerating Startups: The Seed Accelerator

Phenomenon. They noted that, depending on the definition used by researchers of

the industry, there were at least 300 and possibly more than 2,000 such entities on six

continents.14 The aim of the paper was not necessarily to explain the competitive

landscape, but rather to seek an understanding of the dearth of research and

available data while explaining (in short) what startup assistance organizations do.

To the question of competition, Business Dictionary refers to a competitor as –

“Any person or entity which is a rival against another. In business, a

company in the same industry or a similar industry which offers a similar

product or service. The presence of one or more competitors can

reduce the prices of goods and services as the companies attempt to

gain a larger market share. Competition also requires companies to

become more efficient in order to reduce costs.”15

The startup studio industry competes for talent, ideas, and funding. There should be

no mistake that studios are competing with each other beyond the stated tangible

items above; ideas are the life blood of the startup studio market. In this way, they are

not unlike GE and Kenmore as they attempt to solve issues with microwaves. Ideas

tend to be solutions to everyday problems such as hailing a cab, funding a project, or

getting beer delivered to your office. Recognition of these problems and finding a

working solution is itself a competition. Being the second studio with an idea gets you

labelled as a copycat and could lead to an all-out failure of a good idea. The

function of a studio, at its most basic level is to limit risk of a startup failure by

spreading and sharing resources; original ideas are vital to preventing failure.

The future of competition in the industry may very well hinge on the availability of

data and the changing landscape of regulation. Recently, academic institutions like

Harvard and the University of Texas have started studios, allowing for people to

donate to the school (as a tax write-off). These schools then use the funds in the

studio in exchange for equity in the idea. While this may not mark a catalyst shift in

the industry, it demonstrates the fluid nature of the industry and the soon-to-be

available research output from those institution. The startup studio industry is relatively

new, but it is gaining attention from researchers and regulators alike. It has been less

than 18 months since the Small Business Administration’s first published attempt at

understanding and measuring the industry. What can be safely assumed moving

forward is that more data will become available both from academic research (as

more universities use the studio models) and from regulatory bodies such as the SBA,

the Department of Commerce, and the IRS.

As the data begins to emerge regulators will likely react to what is reflected in that

data. Attention from regulatory entities could mean new taxes, more/less tax breaks

or just regulation on operations and reporting data. Both at this time are complete

unknown impacts on competition – what we can safely assume is that the nature of

14 Cohen, Susan, and Yael V. Hochberg. "Accelerating Startups: The Seed Accelerator Phenomenon."

SSRN Electronic Journal SSRN Journal. 15 Businessdictionary.com



competition in the industry will likely change in the coming years, meaning new

studios will need to be agile enough to respond to those changes.

Operating Trends in Startup Studio 2.0

Founding

While conducting interviews and research into the founding of startup studios, a two-

pronged hypothesis occurred to the researchers: Tesla vs. Edison. More to the point,

the hypothesis refers to the research laboratories each man founded; Nikola Tesla

founded Wardenclyffe Tower while Thomas Edison founded Menlo Park. Each

research lab produced work that to this day impacts our lives, but from the founding

to the day-to-day operations, they were very different.

The founding of Menlo Park came from Edison selling his quadruplex telegraph to

Western Union. The money he received allowed him to build a research laboratory

and attract other scientists and engineers to work under him in the lab. While working

at the Menlo Park research lab, workers were offered the opportunity to work with

Edison, although not always directly. The benefit of working in the lab was that they

could pursue their ideas without worrying about funding, bench space (office space

today), or a lack of other like-minded people to trouble shoot ideas with. The downside

was that Edison’s name was on every patent that left Menlo Park. In other words, the

employees received his credibility and he received equity. We observed that several

studios used a method similar to that of Menlo Park. The Menlo Park Method is so

named to identify those startup studios where the founders were previously successful

in their own right and then decided to launch the studios. For example, Idea Lab

came after Bill Gross founded GNP Audio in 1977 after a project at Caltech in which

he found a new way to design speakers.16 Another example is Expa; the studio

founded by Garrett Camp (the founder of StumbleUpon and Uber.)17

The founding of Wardenclyffe Tower by Nikola Tesla was very different. He had ideas

of the work to he wanted to do but funding was nearly non-existent. In the past, this

method has been referred to as bootstrapping, but this term is more appropriate

when discussing a traditional startup rather than a studio. The key difference is the

dynamics that change between the investors, founders and produced ideas.

Wardenclyffe Tower funding was ultimately secured through J.P. Morgan, who was

granted 51% of all patents that came out of the research laboratory. Tesla still had to

work on other projects to keep funding for the research lab at Wardenclyffe. Although

the tower ultimately succumbed to financing problems, it is a good representation

of a studio without a founder who already has substantial funding (or the ability to

readily obtain funding). The Wardenclyffe Tower Method also serves as a cautionary

tale. Several studios use consultancy work to fund the studio side of their operations

and attempt to provide all of their own funding, although those interviewed have

received funding from venture capitalists on a few companies/products.18 Studios

organizing under this method aim at being able to fund projects from idea to seed

without help from outside ventures.

Operating Models

Beyond the founding of studios, the operations of these methods tend to vary,

although they often intersect. The current market loosely defines three operating

16 Bill Gross, Bio, eCorner Stanford University Entrepreneurship Corner.

http://ecorner.stanford.edu/author/bill_gross Accessed November 8th. 2015 17 Tsotis, Alexia. Garrett Camp Distills His Uber and StumbleUpon Expertise Into New Holding

Company Expa. TechCrunch. May 2, 2013 18 Interviews conducted with studios.

http://ecorner.stanford.edu/author/bill_gross



models for startup studios – Builder, Investor, and Incubator. The models have

emerged from the observational community (i.e. journalists such as TechCrunch).

However, according to a 2014 study by the Small Business Administration, the terms

actually all boil down to “startup assistance organizations”, which are typically

privately-held and not obligated to release any information.19 The operations of these

studio are often closely held because the ability to vet ideas and move them to

viable companies is considered one of the most basic forms of competitive

advantage in the market.

As SBA realized when researching and defining the startup studio industry, the models

listed below are actually part of an “innovation ecosystem”, where each studio (or

“startup assistance organization”) operates just slightly differently from the next. The

distinctions between these organizations is often blurred because the studio’s design

is meant to assist in fitting and meeting local conditions, whether or not the studio is

defined as an incubator, a venture development entity, a corporate accelerator, a

social accelerator, or any other type. There is also an inherent issue with researching

the models listed below. The issue again revolves around each studio not being public

entities, so even those who discuss their operating models are not doing so

under legal obligation. They are therefore unlikely to expose what they believe to be

their winning formula; it could even be advantageous to mislead academic or

economic understanding of the industry to preserve their competitive advantage.

Below is a brief summary of the models and examples of studios that employ them:

Builder Model Focuses on creating and developing companies, mostly

from internal ideas, and providing critical resources (Rocket Internet,

eFounders).

Investor Model Brings in early-stage external startups and helps them grow

by providing both funds and expertise (Betaworks, Science).

Incubator Models Focuses on developing external companies by

providing mentoring and operational guidance (Spook studio and

Founder.org).

Operations

The operations of a studio can be boiled down to three basic factors; capital, core

management structure, and funding. Founders need to have funds available for their

studios, which can come from personal wealth, partnerships, or agency work.

However, a lack of funding is a complete non-starter. Even working in a garage

creates bills and a studio will need a method to pay those bills. A good idea will

never become a good company/product without the requisite funding.

The core management structure within studios varies wildly, but the importance of

that management structure can’t be emphasized enough. The management

structure will set the tone and framework for the entire studio. For example, the

decisions made to move ideas forward, deal with unsuccessful attempts, manage

human resources, and operate other areas of the business will ultimately relate back

to the core management structure within the studios.

After securing funding and crafting the management structure, the studio will need to

focus on how many ideas they are capable of producing in a given time period.

Each idea is a draw on resources; the portfolio analysis in Appendix H outlines how a

19 Dempwolf, C. Scott, Jennifer Auer, and Michelle D'lppolito. "Current State." In Innovation

Accelerators: Defining Characteristics Among Startup Assistance Organizations, 7 - 9. College Park,

MD: SBA Office of Advocacy, 2014.



management team can evaluate the viability of an idea prior to committing

resources for exploration. Such portfolio analysis methods are important, particularly

for a new startup studio with limited resources.



Future Opportunities in the Market

Opportunities

When, where and how to create a successful startup studio is dependent on the

resources available to each particular studio. A trend among successful startup

studios is that one of the founders has already succeeded. This trend makes the

environment not particularly promising to those entering the market without any prior

experience. However, there are new startup studios created regularly and many

founders of these studios haven’t previously succeeded in the business, they just have

to find the right niche.

Since the idea of a startup studio is a relatively new idea, the industry in five years will

include a significant amount more of startup studios than there are today. There will

also be more studios that open in Europe and abroad, in the type of atmosphere

where entrepreneurism can flourish and grow. The startups that have had prior

success will continue to create products that are successful and well received.

Of all the different types of analysis we took a closer look at in class, Blue Ocean

Strategy would be the hardest to implement in the current startup studio environment.

Creating uncontested market space and making the competition irrelevant are

two main areas where any startup would struggle. Since there are no true pre-

requisites to creating a startup, anyone (who has the funding) can start a studio

and test their luck in the environment. Of course there are those that have had

previous success and will continue to be well known in the market and therefore hold

a bit of the market share but there isn’t one single studio that will be capable of

eliminating completion entirely.

In order to identify the best path for a startup studio to take, they should address the

following high-level questions:

1. What are the sources of funding?

2. What is the end goal? (spinoff, sell off the products, hire another company to

manage them)

3. How many products can ideally be worked on at any one given time?

4. Who are these products intended for? Make sure not to just focus on the potential

buyer/long-term audience, the near-term customer is just as important for buy in and

to help shape/mold the product

5. How can the current gaps in the market be utilized to do something new? Focus on

an area that other studios have yet to focus on yet (see example Blue Ocean

Strategy in Appendix G).

Challenges

As already mentioned, one of the barriers to success in the startup studio environment

is that gaining a competitive advantage is extremely challenging. With new studios

constantly being formed and the on-going, ever-evolving creation of inventive

products, getting ahead of the curve is possible but can be very short lived. In

addition, having a founder who is known in the startup studio world and who has had

previous success is a huge advantage. Those studios who aren’t bringing a successful

founder to the table can succeed but will have to work harder to do so. Just as is

true with any business strategy these new studios need to identify any current market

gap and do their best to fill that void either based on cost or quality differentiation.

Doing so will involve a lot of up front research and preparation so that they can get

going quickly once the studio is formed.

As can be expected, startup studios fail. Other than those who have decent funding

and have had prior successes, becoming a studio that is very profitable is an up-hill



battle. Unfortunately, the failure rates of studios is hard to identify because all

information is self-reported and even throughout the conducted interviews, the studios

were not particularly forthcoming with this information.

Another challenge in the startup studio is available funding. The VC landscape over

the next five years is hard to predict, if the market continues to do well (or at least

stabile) there is the likelihood that VCs will invest their money in slightly risky projects

such a startup studios. If the market starts to pull back then there’s the risk that VC

money will no longer be a possibility.



Conclusion

The startup studio sector is certainly a sector to be followed over the coming years,

particularly as it continues to grow as an emerging sector in the new venture industry.

While information is not easily attainable due to several factors, we believe that we

have gathered enough qualitative and quantitative data to provide an overview of

the industry and make several assumptions of its operations. We supplemented our

analysis by focusing on new ventures as a whole to understand the relationship

between factors such as capital (both human and financial), the generation of ideas,

the classification of firms within the industry, and performance metrics. This allowed us

to set the stage for further analysis.

From the general framework of new ventures, we delved deeper into the startup

studio sector. Our analysis included insights into the demographics of the sector, the

major players currently at the top, and what some of the critical factors were in

determining whether a firm was successful or not. We also identified the wide array of

products and services that startup studios engaged in, identifying 14 different

categories which was comprised of various products. This understanding then led us

to investigate the competitive landscape.

Within the competitive landscape, we focused on several key success factors:

funding (both initial and follow-on), location, structure, partnerships, name

recognition, focus, output, success rate, and success. Each of these factors play a

critical role, and startup studios must examine each one individually and how it

relates to the aggregate strategy of each firm. We then analyzed the basis of

competition, as well as current trends in the industry. This led to the formation of our

major classification on how startup studios are founded – the Menlo Park Method

versus the Wardenclyffe Tower Method. We then studied how these two different

methods would have an effect on the three operating models: Builder, Investor, and

Incubator. This analysis presented a clear framework of the sector in its current state,

leading to our final analysis of future opportunities.

With the sector at such a young age, there are a lot of questions to be answered

regarding what shape the sector will take, and many of these questions will be

decided by the major existing startup studios. The primary goal is to identify the best

method for growing the success rate of the studio, but this hinges on the method of

founding, the operating model, and the emphasis placed on the other success factors

detailed above. However, our findings indicate that it is difficult to establish a

true competitive advantage at this stage in the, so each firm must determine the best

method to marry its structure to the relative importance of the various success factors.

While no comprehensive answer exists concerning the best way to found and

operate a startup studio, we hope that our analysis provides sufficient insights into the

industry so that a studio can understand the various methods, models, and factors to

be considered in their drive to found Startup Studio 2.0.



Appendices



Appendix A – Survey

We are a team of MBAs doing research on the growing trend of 'startup studios' for

our capstone project at American University. To further understand the nuances of a

studio we would greatly appreciate your input in the following 10 minute survey. We

understand that some of the questions may include information that is sensitive in

nature. While the results will be completely confidential individually, we will only take

aggregate data to identify trends and potential gaps in the industry. We kindly ask

that you only answer the questions that you feel comfortable answering. We would

rather have some responses than no responses!

Kindly note that we are referring to any new projects or companies that are being

built, invested in or incubated within a startup studio as “projects” in the following

survey.

We are happy to provide the anonymized data to any studio who is interested, once

it is available. If you have any questions or comments please feel free to contact our

team member Linsey Jaco at [email protected].

Ideas/Opportunities

1. How do most of your projects originate?

2. What is/are the most common method(s) for sourcing ideas and

opportunities in your studio?

3. What are the top three criteria that your studio uses to vet potential

projects?

1.

2.

3.

Test/Evaluation of Product Concepts

4. Do you have a max number of opportunities you will take on at one time?

5. What is the average timeframe to jumpstart projects?

1. 1-4 weeks

2. 2-6 months

3. 7-11 months

4. One year or more

6. What is your annual volume target for launching products?

Scalability

7. What are the top three criteria used to determine if a project is worth

scaling?

1.

2.

3.

mailto:[email protected]



Funding/Operational Strategy

8. Which of the following best classifies your strategy:

1. Build

2. Incubate

3. Invest

9. How many people comprise your management team / chief decision

making committee?

10. Do you use external experts or consultants to help create or steer

concepts? If so, in what manner?

11. Which of the following capital contributions do you currently employ:

1. Human

2. Financial

3. Infrastructure

12. Which of the following is the ultimate goal:

1. IPO

2. Selling off the company

3. Spinning off under the helm of an employee

13. What is the typical equity split between the studio and outside investors?

Is it the same for every project or do different structures exist based on

estimated project potential project?

14. What type of geographical constraints exist for your studio operations (i.e.

sharing resources)? If constraints exist, how do you overcome them?

15. Does your studio have a specific target for volume of projects annually?

Additional Questions

16. What would you describe as your competitive advantage in the studio

market?

17. Would you be interested in communicating with us directly to further

increase our understanding of both the studio industry and your company

specifically?



Appendix B – Survey Results

See redacted summary of responses to survey in separate attached pdf.



Appendix C – Interview Guide

General Questions:

1. Can you describe your studios culture or value system in one sentence?

2. Does a vertically focused thesis or a broad focused thesis fit your studio? Why?

a. Follow up question: Which is preferable for your studio? Source core

management talent with different backgrounds or source talent that

matches closely with the thesis?

b. Follow up question if thesis is broad: what approach does the studio

take to assess multiple external landscapes/competitive landscape?

3. What is the average number of support staff you have? Are they direct

employees or contracted?

a. What strategies does your studio employ to ensure that viable projects

have adequate resources to grow at an accelerated pace.

4. What are the top three factors used to valuate projects? Do you use one of the

traditional valuation frameworks for startups20: (1) multiple methods (2) bottoms up

5. What performance metrics does your studio have in place to evaluate projects in

the short-term, mid-term, long term?

6. How would you describe success for a project/portfolio company and the studio

itself in the short term, mid-term and long term?

Trying to understand the SWOT breakdown of the studio:

1. Beyond best talent describe top 3 strengths/areas of improvement for your

studio?

2. In consideration that the concept of startup studios is relatively new (2007), how

do competitors impact your approach and how do you expect the competitive

dynamics to change over time?

3. What are key lessons learned on how you operate from failed attempts of

portfolio companies/projects?

For those operating outside of their native country:

1. What strategy do you employ to counteract the challenges of operating in

different regions?

2. What successes have you seen from an operations stand point in the opportunity

of crossing into emerging economies?

Recognized Future Obstacles:

1. In general the studio gets a higher portion of the division of equity. In your

experience, has this been a deterrent or an obstacle when fundraising for a

viable project?

2. It seems to be common that a studio loses key talent when spin-off opportunities

arise. Does this hold true in your experience? If so, how do you combat the exit of

good talent in spin off projects

20 Different valuation frameworks for startups. https://www.quora.com/How-do-I-value-my-startup

https://www.quora.com/How-do-I-value-my-startup



Appendix D – Summary of the Differences Between Incubators, Investors and

Accelerators

Attribute Venture

Capital Firms

Angel

Investors

Incubators Accelerators Startup

Studios

Involvement

Duration

Ongoing Ongoing 1-5 yrs 3 months 1-3 years

Cohorts No No No Yes No

Business

model

Investment Investment Rent; non-

profit

Investment; for-profit

& non-profit

Investment

Incentives Equity Stake Equity Stake No Equity

Stake

Equity stake Equity Stake

Selection

frequency

Competitive,

Ongoing

Competitive,

Ongoing

Non

competitive

Competitive,

Cyclical

Competitive,

Ongoing

Venture

stage

Early or

Intermediate

Very Early Early or

Late

Early Early or

Intermediate

Education

offered

None None Ad hoc, fee

based

HR/Legal

Seminars/Mentorship Shared

Resources

Venture

location

Off-site Off-site On-site Usually on-site On-site

Mentorship As needed

(dependent

on investor

capacity)

Minimal,

Tactical

Intense, Peer and

Expert-based

Collaboration

as Co-

founder

University

Affiliation

No No Option Option Option



Appendix E – Basic Recipe for Startup Studio21

21 Szigeti, Attila . The Big Startup Studio Study: Part 1 Number Crunching. 2015.



Appendix F – Porter’s Five Forces

Assumptions: New Venture industry includes startup businesses facilitated by venture

capital investors, angel investors, incubators, accelerators and startup studios.

Supplier Power – can suppliers drive up prices?

Industry Perspective

o Entrepreneurs who cannot or do not want to bring the startup

operational on their own

Analysis: although a lot of entrepreneurs exist the likelihood of

success is low therefore they are seeking out the resource

assistance investors

Startup Studio Perspective

o Subset of above: CEO and CTO co-founders with entrepreneurial spirits

Analysis: Individuals that have the entrepreneurial spirit and are

willing to get on board with equity division and overall

operations structure are a unique breed

Buyer Power - can buyers drive down prices?

Industry & Startup Studio Perspective

o Investors

Analysis:

Investors have high power since they determine the

valuation of startup which could drive down the “price”

of the startup

Initial investment for equity in startup could be seen as a

high switching cost

o Individual consumers and business consumers (individual product

level):

Analysis:

Can vary by product/service area but in general

startups are trying to break into the industry based on

price or quality differentiation

Low switching costs

Rivalry – how many competitors can do what you do?

Industry Perspective

o Although some overlaps exist among investors, each competitor in the

new venture landscape offer a slightly different mix of resource

assistance and/or prove to be useful at different stages of a new

ventures development

Startup Studio Perspective

o Claim their overall talent resource is what sets them apart from their

competitors and the speed at which they can scale an idea.

Substitutes – ability of consumer to find alternative to do the same thing

Industry and Startup Studio Perspective

o Each competitor in the new venture landscape can act as substitutes

for each other to an extent since overlaps exist in the mix of resource

assistance offered

o Standalone existing companies offering similar products



Threat of New Entrants

Industry and Startup Studio Perspective

o Risk and cost of building a scalable startup alone acts as a natural

barrier to entry

o As confidence in different type of investor models increases the

barriers of entry will slowly reduce as the shared economies

infrastructure creates economies of scale and network effects. Rivalry



Appendix G – Blue Ocean Strategy

Startup studios who are new to the industry could utilize the Blue Ocean Strategy to

identify particular attributes that can be combined to identify new strategic positions

and to fill in gaps where other startups have yet to make any progress. See examples

below:

Boundaries of Competition How to Grow

Industry Create products/services in areas that

other startup studios have yet to focus on

Strategic Group Combine strategic groups to create a

product that no one else in the industry has

yet to offer

Buyer Group Don’t focus solely on the potential buyers

of a product, who else could be an

influencer (i.e. people who use the

products)?

Scope of Product or Service

Offering

Potentially develop products that span

across and combine different service lines

Functional-emotional orientation

of an industry

How can the products invoke emotion in

the user? Don’t just focus on functionality

Time Time is tricky in this example, perhaps the

studio could focus on their timing of

product delivery or the amount of time it

takes for them to create new products



Appendix H – Portfolio Analysis

Portfolio Analysis Background

The strategic plan has come and gone in an organization and they have begun work on new ideas with the hopes of making them into companies. Now, how do you

develop a model within the business operations to best serve success to the

overarching framework? Every product or service has a constituency and a claim on

resources, each one draws something whether it is a winner or a losers. Portfolio

analysis has been devised to help bridge the gap between strategy formulation and

strategy implementation. In other words, it helps you make the hard choices of

where to put your money. Studios aim at repeatable successes through the use of

shared resources and repeatable models. Depending on the operations model and

the founding method the studio will use the tool in different ways. As the analysis is

discussed here, the assumption is that the studio must produce revenue if not profit in

order to fund future ideas. The assumption is important because a benefactor could

float poor ideas for any number of reasons from humanitarian to pet projects, thus

skewing the analysis.

What Portfolio Analysis Is

Portfolio analysis is a systematic way to analyze the products and services that make

up a studio’s business portfolio. Through interviews and research is was found that few

studios utilize a portfolio approach to spinning up their ideas. This guide is meant to

allow studios that opportunity within their means. Within the studio there are

companies which make up the portfolio. Those companies start as ideas within the

core group with the goal being that those ideas become standalone companies.

As a general rule the goal of a portfolio analysis is to establish where any organization

should spend their money – or any resource. Traditionally there are two evaluation

metrics in a simple portfolio analysis; Market Growth and Market Share. The analysis is

the separated into four quadrants that make up the analysis; Dogs (low share/low

growth), Question Marks (high growth/low share), Stars (high growth/high shares), and

Cash Cows (low growth/high Share). While this analysis is a useful tool for established

companies or firms with multiple products or services it can be complicated to use for

a startup studio. However, if we re-categorize the quadrants we can see that the

relationship and analysis become helpful for studios. Even assisting with a product

development flow.



Studios break away from the normal dynamics of established companies or even

standalone startup companies. The goal of a startup studio is to replicate the ability

to build companies. In order to do this the studio has to recognize early on in the idea

phase what the potential of any idea is and what its relationship is to the source

funding available to the studio. A Wipe out could cripple a studio and take up

precious funding from potential unicorns and exits. It is also important to realize the

ability for an idea to move fluidly from a unicorn to an exit or directly to an exit.

Advantages and Disadvantages of Portfolio Analysis

Portfolio analysis offers the following advantages:

Encourages core management team or individuals to evaluate each of the

studio’s ideas individually and to set objectives and allocate resources for

each.

Stimulates the use of externally oriented data to supplement intuitive

judgment.

Raises the issue of cash flow availability for use in expansion and

growth.

Portfolio analysis also has its limitations: It is not easy to define potential for any one idea.

It provides an illusion of scientific rigor when some (if not many) subjective

judgments are involved.

Considering both its advantages and disadvantages, portfolio analysis should be

regarded as a disciplined and organized way of thinking about resource allocation.

It is a subjective tool and is not a substitute for the judgment of the core

management in the studio.

10 Steps in Portfolio Analysis for Studios – A Guide for Startup Studios

Step 1: Identify Lines of Ideas Possibilities

The first step in portfolio analysis is to identify the lines for producing ideas and what

level those ideas are likely to achieve. The guideline to keep in mind is this: if we were

a corporation instead of a studio, which products or ideas would be logical to be



grouped together as possible. This step could be simplified if the studio only creates

ideas within a focused segment or industry.

Step 2: Group Lines of Ideas

There are typically lines of business in large company however studios don’t fit the

same molds as many companies do.

The first is core business which are the vital creation of ideas which lead to the

creation of companies. These are the ideas that directly support the objectives in the

strategic plan and have a priority claim on resources. In essence the core business of

a startup studio is the method by which they produce and test ideas. This typically

cannot be sold off, rented out or otherwise used to generate revenue.

The second line is support functions that make it possible to deliver the core business

benefits to members. In a startup studio these could range from office space to

computers. Things that could be rented out, sold off or otherwise used to generate

revenue. It is important to limit the drain these has on resources need for the core

business. Thus the studio needs to avoid being an office manager for space and

computers.

Step 3: Compare Core Businesses with Strategic Plan

Once the studio has separated out core businesses, compare those ideas to the

strategic plan. An idea must directly support the goals that are defined in the

strategic plan. Evidence for the idea should be directly related to moving the idea

into a unicorn or exit position. If an idea does not support the strategic plan, it should

be discontinued or phased out and its resources transferred to support other core

businesses opportunities.

Step 4: Define Products and Services in Each Line of Business

Once ideas have been tested for relevance to the strategic plan, the next step is to

subdivide those that are relevant into their component products and services; such as

B2B, B2C, or SaaS. Each idea would then be compared to the other ideas within

that segment. This step won’t apply to all studios as many are focused on one

segment or only on passion, when this is the case segmentation and defining product

line becomes less of an issue.22 However, understanding that the draw on resources is

still there and that similar ideas can still become complements is important for the

studio.

Step 5: Apply the Evaluation Matrix

The evaluation matrix is a graphic device that simplifies the process of analyzing all

the ideas in the studio’s portfolio of products and services. In running its ideas through

the evaluation matrix, the studio makes several assumptions.

Assumptions

1. Since the need for resources is competitive, particularly in a studio, they must

view the problem of securing resources in a competitive context.

2. It is preferable to provide good companies to a focused market than to

provide mediocre or poor companies to a large a market.

3. Depending on the studio there is a need to review the ideas for potential or

passion. Several studios base this step on essentially only pursuing ideas

passion from the core team. So this guide assumes a passion for the idea.

22 Based on interviews with five studios there are some who are segmented and others who follow

passion and do not segment their products in this matter. It will vary widely by studio.



Evaluating Program Characteristics

The evaluation matrix helps a studio determine the answers to the following questions

about each idea in their portfolio:

1. Is it a good fit with our other ideas?

2. Is it easy to implement?

3. Is there poor alternative coverage in the marketplace?

4. Is our competitive position strong?

5. Are we passionate about the idea?

6. Can we garner market traction for the idea?

For a program to survive the competition for the association's resources, there should

be a positive response to all these questions. No program is in a strong position unless

it is superior to all ideas in that category. If it is not, it should be classified as being in a

weak position.

The effect of these generic strategies is to serve the client base with a small number

of strong, excellent providers rather than with a larger number of fragmented

providers competing for limited dollars.

Step 6: Determine Idea Fit

Using the Program Evaluation Matrix, the first step is to determine whether the idea

under review fits the studio’s strategic plan and priorities. The screens for good fit are:

1. Congruence with strategic plan and purpose of the studio.

2. Focus on core concerns that are of vital interest to the studios target

customers/market.

Step 7: Determine Ease of Funding and Implementation (Is this an easy idea?)

The criteria for determining whether an idea has the prospect of relatively easy

funding and implementation are:

1. High appeal to groups capable of providing current and future support.

2. Stable source of funding. (This should be a question for all studios even before

this point)

3. Market demand from a large, concentrated, growing client base.

4. Appeals to strategic partners.

5. Measurable and reportable results.

Step 8: Determine Availability of Alternatives

This is the first step in a competitive analysis but it will be key in the decision to allocate

resources. Determining alternatives means asking the studio if anyone else is

offering similar products or service to the proposed idea. Ideas should be classified

according to two alternatives:

1. Low coverage: If there are few comparable similar products or service

elsewhere.

2. High coverage: If many similar products or service are offered elsewhere.

Step 9: Assess Competitive Position of Product or Service

The following criteria should be considered in determining whether an idea is in a

strong competitive position. Competition is not limited to other companies or studios.

Companies can and do compete directly or indirectly through the delivery of many

products and services which may cover the idea proposed. Criteria for a strong

competitive position are:

1. Dominant market share or strong prospects for achieving market dominance.

2. Better quality/value/service than competitors.



3. Superior ability to produce and market this program.

4. Cost-effective delivery options.

5. Strong match between the idea/company and the future needs of customers.

Step 10: Determine Fit

Ideally, the studio will have two types of ideas:

1. Well-fitting, easy ideas where the studio has a strong position and competes

aggressively for a dominant position.

2. Well-fitting, difficult ideas with low coverage that the studio has the unique,

strong capability to provide to important stakeholders.

Applying these steps will reveal the studios current portfolio situation. The ideal would

be to have a portfolio that has primarily winners (i.e. unicorns or exits), and contains

enough winners and profit producers to finance the growth of other potential

winners. In reality, however, there will probably be ideas that never progress past the

idea stage and even perhaps a small number of wipe outs.

Summing Up

Portfolio analysis is an important aid in a studios quest to identify its specific

competitive role. This role should be so well suited to the studios external and internal

environments that other studios or companies are unlikely to challenge or dislodge it.

In today’s competitive world, successful studios will have three characteristics in

common, and portfolio analysis will have an important role to play in helping studios

achieve them.

1. They will innovate as a way of life.

2. They will compete on value in meeting customers’ needs, not on price.

3. They will achieve leadership in related niche markets.

Startup Studio Final Report Public Copy

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