By Prince Osuagwu
In recent years, more investors and firms are harkening on to money as a major source of early funding for their budding enterprises. However, investment expert, Adedeji Olowe has a different thinking. For him most often, even with money, many budding businesses still don’t get to the finishing line because money is not the single most important thing companies need.
He challenges entrepreneurs to accept the reality they need other kinds of support to build high-growth ventures even at the early stages. They must be ready to roll up their sleeves and help portfolio companies execute, and create venture builders especially at the early stages.
A venture builder, sometimes called an incubator, a startup studio, or venture studio, is an organisation that develops new companies or startup ideas and dedicates resources and teams to nurture the product until maturity.
Venture builders develop companies at the early stages, potentially valuable companies without the high valuation that blocks investors from joining their rounds. The role of the venture builder is to spot enterprising startups and ideas, validate them and then market them to investors looking to enter specific markets or industries.
They take different forms. But two models stand out, with the major difference between them being the origin of the idea.
In the first model, venture builders are out chasing innovative startups for investments. The goal is to tap into a wide variety of ideas from entrepreneurs, pick winners, and help them grow their businesses leveraging the builder’s in-house resources. This model overlaps with traditional VC investing, but the difference is the investor’s level of involvement.
However, the second model is slightly more popular. Here the venture builder conceives the idea for a startup or a bunch of ideas in-house and then assembles a team to execute these ideas while supporting them with much-needed resources, expertise, infrastructure and network.
One familiar venture builder is Rocket Internet, which has incubated many startups, including publicly traded food delivery company, HelloFresh and Jumia Group, the Pan-African retailer and its basket of marketplace services. Other notable venture builders include Founders Factory, a startup studio that has built over 35 companies from scratch and GreenTec. There are also famous examples of corporate organisations deploying the venture builder model. One organisation is Opera which housed OPay for a few months in 2018. Alphabet, the parent company of search engine, Google has also deployed significant resources on moonshot projects, including Waymo, the driverless car startup.
But the venture builder approach isn’t without its drawbacks, and it does receive a fair amount of criticism. For one thing, they seem expensive and may not necessarily be the best use of financial and human resources for venture firms—many of which tend to have lean teams focused on deal-making and due diligence.
However, Olowe said: “A good way to get around this criticism is to limit the number of startups entering their portfolio. Unlike accelerator programs and VCs that tend to back dozens or even hundreds of startups each year, venture builders are most optimal if they support a few companies annually. Three to five is fair enough to ensure the builder provides the best value with the resources they render.
“The venture builder model certainly offers merits for early-stage innovation. One notable rationale is they test and validate ideas quickly in-house. After all, according to CB Insights, 42 percent of startups fail when due to a lack of product-market-fit. Venture builders engage in few core activities: business ideation, building teams, capital allocation and team operations.
“Each of these activities is key. And like regular startups, builders must prioritise similar growth development models such as prototyping and leveraging design thinking and agile process management. Execution and speed are equally crucial to the venture building model to validate ideas and scale quickly.
“These resources aren’t cheap. Venture builders typically invest seed-stage funding in new ideas in return for a significant chunk of equity or a majority. This makes sense and could return many multiples during exits. Otherwise, new enterprises looking only for money, may never get and even when they do, it may not sustain their businesses because ideas are more durable than liquid cash” he added