November 22, 2022
In our recent webinar series held in October 2022, our guest speaker Farhad A. Mohammadi, CEO at Mamazen, gave his insights on why the startup studio model is an emerging asset class.
Make sure to follow us on LinkedIn and join our LinkedIn group not to miss the next webinar sessions. If you want to watch the full conversation, make sure to watch the recording of the webinar. The recordings of previous sessions are available within StudioHub premium membership packages. But now, let’s dive right in …
Why are Startup Studios becoming so successful? According to Farhad, the popularity of startup studios is due to their ability to address common reasons for startup failure, such as an inexperienced team or a lack of market need for the product. Startups studios typically rely on experienced founders which helps to mitigate some of the risks inherent in starting a new venture. Additionally, by doing pre-validation work, startup studios can ensure that there is actually a market need for their product or service. This reduces the chances that the startup will fail due to a lack of demand. What makes startup studios even more interesting is that they can access and make startups investable even during the phase called the “valley of death”. With Startup Studios, investing in startups in the 0 to pre-seed stage becomes a structured process. The typical risks of failure of an early-stage investment are mitigated and reduced. From an investor perspective, it’s clear what makes Startup Studios interesting: they have a lower failure rate. If we look at the numbers, usually studios have a success rate that can go from 30% to 50-60%, 3 times that of traditional startups.
Startup Studios are able to produce quicker exits than traditional startups. This is because they are able to validate ideas much faster and then spin out the product within a few months. This reduces the amount of time it takes to go from zero to seed by around 24 months. Let’s see the numbers Farhad gave. Usually, startups take 36 months from zero to seed. An experienced studio can do the validation phase for 30 or 40 ideas in three months. Once the validation process is completed, a founder is selected and an MVP is constructed. The founder acquires shares in the startup and equity is allocated partly to the Studio and partly to the founder. It takes 3 to 5 months to come up with an MVP on something that the market really needs.
Then from that point on, it's possible to spin out the product in six to nine months, and then have the funding. This means Studios are reducing those times from 36 months to 10-12 months to go from zero to seed. And also it has been proven that Studios usually take 12 months from seed to Series A, 12 months less than traditional startups. Therefore, Studios take three years less to take a startup from zero to a Series A round, and this is why usually founders are interested in building Startups with a Studio.
The dual entity model is a model where a VC fund or investment vehicle works in tandem with the studio. The best way to do this is by the VC fund making the first investment in the studio, taking a small percentage of the studio. By doing this, the VC has indirect shares in every company that the studio builds. The percentage taken by the fund in the Studio is usually between 10 to 30%. This percentage depends on the studio, your track record, how long the Studio has been out there, the network, and so on.
As said, the VC has an upfront investment in the studio, but it also has a pre-emption right of refusal for every company that comes out from the studio. This assures them of a good equity stake that is better than what the market offers and also allows them to have access to an exclusive deal flow. Their investment also doubles as they have a stake in the studio. And since startups in the studio have a higher success rate, there are more exits and home runs, which results in a better return on investment for the VC.
Farhad Alessandro Mohammadi, CEO at Mamazen, 14 years of experience in the digital field. Previously managed Bakeca.it internal and external sales team.
He coordinated Glamoo.com sales team as Commercial Director (Exit to Pagine Gialle). Former Co-Founder of Pony Zero, a company that went from zero to 6 million in revenues in 5 years (Exit in 2018).
He founded Mamazen Startup Studio in late 2018, the first Startup Studio in Italy. Mamazen, before anyone, imported this business model from the USA to Italy.
Business Angel, member of “Club degli Investitori” he is also a member of the Advisory Board of StudioHub.
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