Startup Studio Insider Shares The Different Startup Studios Funding Models
A new business is founded every day, however, not many emerging startups manage to stick and thrive in the long run. Some fail before they gain enough momentum, while others die before they even develop a product. To be counted among the few successful ones requires something unique. In many cases, that something is usually a startup studio.
A startup studio is basically a company that specializes in creating startups. Startup studios can contribute significantly to the growth of your business, but you need money to develop, test, and implement your idea. One particular feature that startup studios contribute to minimize startup failure, is their capability of providing early funding and support, allowing the remaining operational elements to flourish and be taken care of by the team of founders, instead of focusing all their time in getting enough capital to succeed. Startup Studio Insider, a top publication that is dedicated to unveil the power that startup studios are providing to emerging founders shares the different methods that startup studios employee to get investment funds. Let’s take a look below:
1. Fund model
In the fund method, the startup studio pulls funding from different investors, such as angel investors, venture capital firms, and sometimes government grants. About 2.5 to 5 percent of the investment is used for internal management – paying for the overhead, office space needs, founders’ salaries, etc. Once you are able to cover for the long-term operations, you can use the remaining money to finance a new startup.
This model is unique in that VCs invest in the startup ventures being launched, rather than the startup studio itself. As a result, the studio gets to own 100 percent of the studio without having any equity in the venture.
There is something known as “carried interest” in this method, which involves carrying the studio’s interest to ensure that its new startup venture thrives in the future. Basically, each startup venture brings 20 percent of all its profits and dividends to the studio.
Pros
- Simple model
- The 20 percent carried interest provides security over any startups the studio launches
- Startup studio maintains full ownership of the studio
Cons
- The management fee may not cover all of the studio’s operational costs
- VCs get all the equity of the ventures the studio launches
2. Holding entity model
With this model, investors invest directly in the startup studio itself. The VCs get equity based on their investment amount, but they do not participate in the running of the studio. However, they are still regarded as business partners, so they can influence the studio’s project selection, hiring, and operations.
When the studio creates a new startup venture, the profit from that venture is divided according to the equity structure. If, for instance, a VC firm has 20 percent equity in the studio, 20 percent of all the startup’s profits will go to them.
Pros
- Incentives between the studio and VCs are aligned by shared equity
- Both the VCs and studio get to profit from the startups launched
- It is relatively easy to explain this model to investors
3. Non-Dilutive model
If your business receives any capital that does not require you to give up ownership or equity, this type of funding is referred to as non-dilutive. Unlike dilutive funding models that require the business owner to give up some percentage of the ownership, the non-dilutive method utilizes a newer principle: revenue sharing.
With revenue sharing, investors use a flexible repayment structure to pay back the investment in the long run, while still maintaining complete control and ownership of the company. Investors are attracted to this type of funding because the initial investment tends to bring a bigger return over time.
Pros
- There is a mutual interest in ensuring the long-term growth of the capital ventures you launch
- The startup studio does not give up control or ownership in exchange for the investment
- It provides a customized and flexible schedule for repaying the investment
Cons
- It can be difficult to convince investors about long-term financial stability
Fundraising for a startup can be a challenging process. The key is to find the right investors that share your vision and are willing to help you actualize it. Startup studios can help provide capital that will get the project running until the startup is able to stand on its own.
Whichever startup studio fundraising model sounds like the best fit, remember that startup fundraising is crucial for getting businesses off the ground. We hope you found this article helpful, and we invite you to learn more about startup studios here.
