The road from zero to studio spinout
Studios are known for their ability to create and launch new companies starting at day 0. Their ability to get from 0 to first clients might be their biggest competence. Going through all the ideation, validation, and shaping stages while deepening the partnership with co-founders are intense and rewarding months — all to ensure that we create a product worth shipping for a problem worth solving.
Core team.
Not many know that the studio core team becomes highly involved in building and launching a company months before it sees daylight. In fact, throughout the phases of building the company, our core team gets gradually more involved in every step of validating the business. Right before incorporation, in what we call the Shape phase, at least 7 different core team members add value to the business weekly.
So what do we strive to achieve in this critical Shape phase? While it’s many different things like naming strategies, customer journeys, shaping the first product, and even creating budgets, to me, it comes down to two things. Partnering with a technical co-founder and signing 10 launching customers. All the other goals are needed to achieve these two.
Attracting technical co-founders
Before founding the studio, I ran a software agency with mostly senior engineers. When the company turned 10 years old, one could say (we thought) we knew it all, but something was still missing. Lo and behold, Simon Sinek went viral with his Golden Circle and the one question to answer: why do you do what you do? Of course, I popped this question in every 1:1 with engineers after that. The results were stunningly and unsurprisingly similar. All of them wanted to create an impact and work on something that will change the way we work and get used by as many as possible.
Now in the studio life, we take this learning to heart. We only search for a technical co-founder once we know how and where we want to create an impact and what kind of product we believe could make that happen. This also means that the studio gets really involved in ironing out the founder-opportunity fit, beliefs, and whys before we go out there. We amplify the story that needs to be told.
Signing launching customers
While partnering with technical co-founders, we’re also testing out our hypotheses on how to go to market and what the first versions of the product should look like. Since the business co-founder has already spoken to around 100 companies in the Discover phase, we’re still talking to a few dozen of them who struggle to solve the problem we so much want to solve. After a few iterations of designing the product, landing pages, and changing the tone of voice, we usually find ourselves a first set of launching customers.
From my experience, this only comes to fruition if all other steps in the process have been taken. If we skipped something important, the studio core team is there to iron it out and make it work.
Studio involvement
So even though we haven’t even incorporated a company yet, above is just a tiny outline of 2 of the 42 goals the studio is involved with until incorporation. A big portion of the risk and cost, including some fees for the co-founders, until that point, are accumulated by the studio. From my talks to other studios, I’ve learned that opportunity cost to get one company off the ground varies wildly. When studio’s get this under control there basicly going lightspeed.
Lets say its expensive till then. We must remember that in any other circumstance, a company would have been formed at day 0. Studios don’t believe in doing that until the chances of success are high enough to incorporate a company. In countries and regions where winding down a company is hard, is even more logical to postpone further.
The opportunity cost for getting 1 company off the ground can range from 50–200k for mature studios. Depending on geography, ecosystem, scope and equity position in the launched companies.
By now, you’re getting my point, studio involvement is based on a per-need basis, gets more intense every step of the way, and is at its peak just after incorporation.
Incorporation vs spinout
So spin-out is incorporation? Well… no, not for us. This is where studios are different. We use all kinds of data points and scorecards to keep track of what we’re doing, but in general, I believe we would never incorporate a company if we don’t believe it has a chance of significant success. But a spin-out, for us, is defined by the fact that the company raises outside funding.
To get to that point, the fractional core team is involved in anything and everything to keep the company moving in that direction. Jokingly we believe that the co-founders should only focus on keeping momentum by selling and building the product, and the core team does the tedious stuff that’s left.
Getting external funding is loosely related to sales success but mostly related to the fact that everyone loves to use the product, and we know how to reach our ideal customer. In our environment, the first external funding is what US companies would earmark as pre-seed funding. So the goal is to get closer to product-market-fit, but we’re definitely not there yet.
So until that external funding moment, the studio financed the companies. For Builders, this can go up as high as 300–500k after incorporation. Most of the costs accumulated by the company from the studio are near costs and as efficient as they can be for the first few months.
External funding
Let’s assume that raising pre-seed funds has started and takes just 3 months. Next to building the company, it now becomes obvious the studio core team cannot be on the payroll forever. The external funding moment is the ideal time to create a dedicated team that will get the company to product-market fit. If one of the studio roles has become so intense that it needs full-time attention, then those roles are already hired before spin-out. While we’re raising funds, it’s our goal to create a perfect team to spin out, 3 to 5 hires.
Missing link
Feels like there’s a part of this journey missing. Yes, there is. It’s all the steps to get from incorporation to spin-out, which we call the Create phase. Even though one of the most critical months in designing and creating the best product more or less speaks for itself. The CEO runs the show and sells the product, the CTO builds the product and ensures the customers are happy and the Studio fulfils every role to keep momentum high.
Spin-out
Now there’s some runway to build the company, the core team gradually changes roles from being the operator to being the buddy of their peer in the company. Handovers are done, lessons are shared, and the company takes those to the next level. From this point, the core team works on very specific areas, where they can add above-average value.
For the studio partners, it’s a different ballgame. One partner, together with the CEO and CTO remains on the board to create an impactful company that will grow and prosper.
Opinions
During my studio life, I’ve heard many arguments that a studio should hold less equity on cap tables and that doing it yourself would work just as efficient. Whilst all of this is true is some unique stories, I’ve seen that most entrepreneurs prosper when the setting is right and the foundations are solid. Maintaining momentum, that relentless force forward, is a team effort. And if the team brings the fuel to start the fire and we get the dinner done in half the time together, I know where I would go and build.
