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Startup Studio Final Report Public Copy

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Startup Studio Final Report Public Copy

  1. 1. November 24, 2015 Report by: Cachaça Consultancy LLP Daniel Feeman Tom Riddle Linsey Jaco Margaret Avery Chris Hess Chirag Patel
  2. 2. 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.
  3. 3. 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
  4. 4. StartUp Studio 2.0 2015 CC, Limited 2 This document is the proprietary property of American University 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?
  5. 5. StartUp Studio 2.0 2015 CC, Limited 3 This document is the proprietary property of American University  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.
  6. 6. StartUp Studio 2.0 2015 CC, Limited 4 This document is the proprietary property of American University 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.
  7. 7. StartUp Studio 2.0 2015 CC, Limited 5 This document is the proprietary property of American University 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.
  8. 8. StartUp Studio 2.0 2015 CC, Limited 6 This document is the proprietary property of American University 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
  9. 9. StartUp Studio 2.0 2015 CC, Limited 7 This document is the proprietary property of American University 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.  Differentiation factors: 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.  Differentiation factors: 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.
  10. 10. StartUp Studio 2.0 2015 CC, Limited 8 This document is the proprietary property of American University  Differentiation factors: 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.  Differentiation factors: 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/)
  11. 11. StartUp Studio 2.0 2015 CC, Limited 9 This document is the proprietary property of American University 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.
  12. 12. StartUp Studio 2.0 2015 CC, Limited 10 This document is the proprietary property of American University 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.
  13. 13. StartUp Studio 2.0 2015 CC, Limited 11 This document is the proprietary property of American University 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.
  14. 14. StartUp Studio 2.0 2015 CC, Limited 12 This document is the proprietary property of American University 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
  15. 15. StartUp Studio 2.0 2015 CC, Limited 13 This document is the proprietary property of American University 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
  16. 16. StartUp Studio 2.0 2015 CC, Limited 14 This document is the proprietary property of American University 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
  17. 17. StartUp Studio 2.0 2015 CC, Limited 15 This document is the proprietary property of American University 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.
  18. 18. StartUp Studio 2.0 2015 CC, Limited 16 This document is the proprietary property of American University 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.
  19. 19. StartUp Studio 2.0 2015 CC, Limited 17 This document is the proprietary property of American University 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.
  20. 20. StartUp Studio 2.0 2015 CC, Limited 18 This document is the proprietary property of American University 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
  21. 21. StartUp Studio 2.0 2015 CC, Limited 19 This document is the proprietary property of American University 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.
  22. 22. StartUp Studio 2.0 2015 CC, Limited 20 This document is the proprietary property of American University 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.
  23. 23. StartUp Studio 2.0 2015 CC, Limited 21 This document is the proprietary property of American University Appendices
  24. 24. StartUp Studio 2.0 2015 CC, Limited 22 This document is the proprietary property of American University 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 lj1669a@student.american.edu. 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.
  25. 25. StartUp Studio 2.0 2015 CC, Limited 23 This document is the proprietary property of American University Funding/OperationalStrategy 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?
  26. 26. StartUp Studio 2.0 2015 CC, Limited 24 This document is the proprietary property of American University Appendix B – Survey Results See redacted summary of responses to survey in separate attached pdf.
  27. 27. StartUp Studio 2.0 2015 CC, Limited 25 This document is the proprietary property of American University 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 portfoliocompanies/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
  28. 28. StartUp Studio 2.0 2015 CC, Limited 26 This document is the proprietary property of American University 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
  29. 29. StartUp Studio 2.0 2015 CC, Limited 27 This document is the proprietary property of American University Appendix E – Basic Recipe for Startup Studio21 21 Szigeti, Attila . The Big Startup Studio Study: Part 1 Number Crunching. 2015.
  30. 30. StartUp Studio 2.0 2015 CC, Limited 28 This document is the proprietary property of American University 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
  31. 31. StartUp Studio 2.0 2015 CC, Limited 29 This document is the proprietary property of American University 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
  32. 32. StartUp Studio 2.0 2015 CC, Limited 30 This document is the proprietary property of American University 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
  33. 33. StartUp Studio 2.0 2015 CC, Limited 31 This document is the proprietary property of American University 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.
  34. 34. StartUp Studio 2.0 2015 CC, Limited 32 This document is the proprietary property of American University 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
  35. 35. StartUp Studio 2.0 2015 CC, Limited 33 This document is the proprietary property of American University 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 businessesopportunities. 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.
  36. 36. StartUp Studio 2.0 2015 CC, Limited 34 This document is the proprietary property of American University 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.
  37. 37. StartUp Studio 2.0 2015 CC, Limited 35 This document is the proprietary property of American University 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.

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