This post previously appeared in the Harvard Merchantry Review.

Three types of organizations – Incubators, Accelerators and Venture Studios – have emerged to reduce the risk of early-stage startup failure by helping teams find product/market fit and raise initial capital. Venture Studios are an “idea factory” with their own employees searching for product/market fit and a repeatable and scalable merchantry model. They do the most to de-risk the early stages of a startup.

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Outside a small university in the Midwest, I was having coffee with Carlos, a rising star inside a mid-sized manufacturing company. He had a track record of taking small teams and growing them into successful product lines. However, without a decade working for others, Carlos was interested in towers and growing a visitor of his own. I asked how much he knew well-nigh how to get started. He said that from what he read, the path to towers and funding a visitor seemed to be: 1) come up with an idea, 2) form a team, 3) start testing minimal viable products, 4) raise seed funding, 5) then obtain venture capital.

As he described his work in ingredient manufacturing and 3D printing, Carlos said he knew that there were seed investors in his town, but venture wanted was still largely on the coasts, and it was nonflexible to get their attention. He moreover wasn’t sure his idea was great. But he still had the itch to grow something small into a substantive company.

As we grabbed dessert, Carlos asked, “Other than raising money, are there other ways to start a company?”

I pointed out that there were.

Reducing Startup Risk
In the last two decades, three types of organizations — incubators, accelerators and venture studios — have emerged to reduce the risk of early-stage startup failure by helping teams find product/market fit and raise initial capital. Most are founded and run by experienced entrepreneurs that have previously built companies and who understand the difference between theory and practice.

I pointed out to Carlos that accelerators like Y-Combinator, Techstars, and 500 Startups offer a cohort of startups a six to 12-week bootcamp. But these squint for founders who have a technical or merchantry model insight and a team. Accelerators provide these teams with technical and merchantry expertise and connect them to a network of other founders and advisors. The culmination of this bootcamp is a “demo day” where all startups in the cohort have a few minutes to pitch their companies to venture capitalists and sweetie-pie investors. (In some cases the smatter provides initial funding themselves.) In mart for peekaboo an accelerator, startups requite up 5% to 10% of their company’s equity.

There are thousands of accelerators wideness the globe. The merchantry model for most of these accelerators is to select startups that can generate venture-class returns – i.e. grow into companies that can potentially be worth billions of dollars. For most accelerators, ticket is by using and interview. Some, like Y-Combinator, Techstars, and 500 Startups are unshut to all types of startups in any market, while others like SOSV, IndieBio, HAX, Orbit, dLab are increasingly specialized.

Incubators are similar to accelerators in that they provide space and shared resources to startups, but usually no or very small amounts of capital. Their financial models are based on membership fees that grant wangle to a shared coworking space, resources, and wangle to other founders and operational expertise.

Carlos stirred his coffee. “Accelerators don’t sound like a fit for where I am at in my career,” he offered. “I don’t have a killer idea, or a technical team, but I do know how to build, grow, and manage teams.”

The Alternative: Venture Studios
I pointed out there were organizations that might be a largest fit for his skills and passion to go out on his own — venture studios. Unlike an accelerator, a venture studio does not fund existing startups.

Venture studios create startups by incubating their own ideas or ideas from their partners. The studio’s internal team builds the minimal viable product, then validates an idea by finding product/market fit and early customers. If the idea passes a series of “Go/No Go” decisions based on milestones for consumer discovery and validation, the studio recruits entrepreneurial founders to run and scale those startups. Examples of companies that have emerged from venture studios, include Overture, Twilio, bitly, aircalla, and the most famous alum, Moderna,

I suggested Carlos think of a venture studio as an “idea factory” with their own full-time employees engaged in searching for product/market fit and a repeatable and scalable merchantry model.

How Venture Studios Work
Unlike an smatter or incubator, a venture studio doesn’t fund existing startups. It’s a visitor that creates multiple startups in-house, then finds entrepreneurs who take them over to grow them.

Most venture studios create and launch several startups each year. These have a greater success rate than those that come out of accelerators or traditional venture-funded companies. That’s considering unlike accelerators, which operate on a six- to 12-week cadence, studios don’t have a set timeframe. Instead, they search and pivot until product-market fit is found. Unlike an smatter or a VC firm, a venture studio kills most of their ideas that can’t find traction and won’t launch a startup if they can’t find vestige that it can be a scalable and profitable company.

Comparing Startup Funding Options
Venture studios are a good fit for entrepreneurs who don’t have an idea or team but would like to run and grow a startup. The venture studio’s employees have once identified a product, market fit and early customers — meaning someone else has eliminated many of the early risks of a new venture. In return for the lower risk, a venture studio typically takes a larger percentage of equity.

There are four main types of venture studios:

• Tech transfer studios, such as America’s Frontier Fund, work with companies and/or government labs to source ideas and intellectual property. They then transfer the IP and build the startup inside the venture studio.
• Corporate studios, such as Applied Materials, source ideas and intellectual property inside their own company. They then build the startup inside a separate corporate venture studio inside the company.
• A niche studio is a standalone venture studio that generates its own ideas and IP in a specific industry and domain – for example Flagship Pioneering , which is focused on health superintendency and incubated LS18 — the visitor that became Moderna.
• An industry zetetic studio, such as Rocket Internet, is a standalone venture studio that generates its own ideas and IP and is industry and market agnostic.

Today there are around 720 venture studios wideness the world – half are in Europe. In both North America and Europe, many venture studios in non-major cities are funded by government agencies to stimulate local growth, at times with matching donations from companies. These studios have variegated metrics than startup studios whose limited partners are private family offices or venture capitalists.

Why Would an Entrepreneur Join a Venture Studio?
While we were on our second cup of coffee, I told Carlos well-nigh the downside to joining a visitor created by a venture studio — how much equity/ownership they take.

In unrelatedness with an smatter that takes 5%-10% of a startup’s equity, venture studios take anywhere from 30%-80% of a startup’s equity. This is considering companies exiting a venture studios have been handed a startup that has de-risked of much of the early-stage startup process. (There’s a uncontrived correlation between the value of probity a venture studio takes and their weighing in how much they want their founding CEO to be an entrepreneur versus executor.)

Why would an entrepreneur join a venture studio and requite up the majority of their visitor rather than go to accelerator? Most accelerators tend to squint for a “founder type” — a stereotypical techie, fresh out of college, who once has an idea and cofounders.

Most people don’t fit that pattern. Yet many are increasingly than capable of taking an idea that’s been stress-tested and validated and towers it.

What To Squint for in a Venture Studio?
As we got up to leave Carlos asked, “How would I know whether the venture studio a good one?”

It was a unconfined question. While there are no hard-and-fast rules, I teach entrepreneurs to ask these four questions:

1. Is the studio run by a former founder and does it have former founders as full-time employees? The most successful venture studios are founded by entrepreneurs that have previously built companies with $10 M in revenue and had 100 employees.
2. What percentage of probity are they asking for? The wordplay will be directly proportional to what they think your value is. Firms asking for greater than 60% are unquestionably hiring an employee rather than a founder.
3. Do you want a studio with specific expertise? Studios that focus on specific niches and industries can build a deep seat of domain experts – e.g. founder, advisors, and mentors – who are experts in this one field
4. Do they have unbearable funding? Watch out for Zombie studios. If you’ve given yonder a majority of your visitor to a studio, it would be helpful to have them virtually for support without you’ve started. If they don’t have unbearable funding to alimony the lights on for several years, you’re on your own. Make sure your studio has raised increasingly than $10m in funding.