Startup studios are a relatively new type of business. You might have heard of them before as “venture builders” or “startup factories.” There are only a dozen or so of them in the world, including the original one, IdeaLab, and others like Expa and BetaWorks. But I believe we’ll see more and more of them in the future because the model works.
The people behind these organizations are seasoned entrepreneurs, investors, and makers. They don’t get pitches, there is no Demo Day, and they don’t make investments in external companies. For the most part, ideas are in-house, built from scratch to validate a business idea and spin it off as an independent startup, with the studio retaining a portion of the equity.
When the startup studio I work with, Pioneer Square Labs, started — just nine months ago — there wasn’t a lot of open knowledge to draw from on how to run this kind of business. It’s similar to when Y Combinator and TechStars got started and the accelerator model wasn’t well understood. Many variations on the accelerator model have since been tried — some have failed, some have succeeded — and there is a body of information and expertise out there for the next entrepreneur trying to create an accelerator.
So I wanted to share some key lessons we’ve learned so far about running a startup studio.
Of the many lessons we’ve gleaned so far, I’ve chosen the following nine because they are easy to articulate and don’t feel obvious (that’s a dangerous statement since most of these will sound obvious after you read them, but when you are in the trenches executing a business, not everything is so clear).
1. Research goes a long way
I won’t go into our ideation process, but I can tell that it’s not uncommon for someone to propose an idea and then find that there are already three companies executing it. If you find no companies doing your idea already, you have to ask why and dig for data. Many times there are regulations that will block your idea, or, worst-case scenario, there is no money to be made.
However, that’s researching with the intent of not doing it, and one of the reasons big companies have a hard time innovating is because most arrows point to no. Sometimes, the best research yields a much better idea that hasn’t been done yet, or it reveals the money or interest is with entity X and not Y as expected, and that the industry in question hasn’t innovated in a long time. That’s the jackpot!
2. Stay close to the money
If I were to print a T-shirt in honor of Greg Gottesman, it would say, “Stay close to money.” What that means is, be part of the financial transaction, be the business taking the credit card number, or be the business delivering the core value to the customer.
Yes, some big businesses were built far from the money, like Facebook. But a startup studio doesn’t have the luxury of one-off hits or the time to prove demand for a product where the core metrics are long-term engagement and virality. Being close to the financial transaction makes it easy to prove or disprove a business.
3. Unsexy ideas get validated more quickly
I’d like to posit that the “sexiness” of an idea is inversely correlated to its chances of success. Why does this correlation exist? Just like with human beings, where the sexual attraction between two people can cloud their judgment, ideas that feel sexy sometimes cloud our decision on whether or not to pursue them.
“Sexy,” of course, is in the eye of the beholder. You might be lured in by an industry you find exciting (like travel, so you drive off the cliff of the travel industry), or a technology (bitcoin or chatbots), or by a person who has had significant success singing the merits of a new idea. All those things can affect good judgment.
On the other hand, when you look into an idea in a non-sexy industry (healthcare, banking, insurance), or that uses just conventional technology, and where there is no billionaire singing its praise, if most people on your team agree it feels worth pursuing, then you can be confident it’s worth pursuing.
4. Look for a collision of ideas
The best ideas don’t come out of the blue and hit you in the head with a Eureka moment. Some philosophers believe there are no new ideas, and all ideas are just a combination of previous ideas. And that’s where things get interesting. The best idea is usually a combination of previous ideas, an evolution of another idea, or an already successful idea applied to a different domain.
Which brings me to the point I want to make: The only way to have great ideas is to play with and explore a lot of ideas. For a little inspiration, watch Steven Johnson’s video.
5. Average sucks
Imagine you and your team are rating two ideas. Each person gives a score of 1–5 (1 being awful and 5 being great). Which idea is best: idea A with an average of 3.2 or idea B with an average of 3.5? You just don’t know. The aim is not to find consensus but to find ideas that resonate with a good portion of the team. If everyone gave idea B a 3.5 but for idea A you had a few people give it a 5, a few give a 3, and a few give it a 2, idea A is the better one to test.
So the goal is not to convince everyone an idea is good or even find an idea that clears an arbitrary average threshold but to find an idea where a few people would have the motivation to explore it (more on that in #7 below).
6. Diversity is king (and queen)
It would be very hard for someone living in isolation in the middle of a forest to come up with an idea for a product that people want. Not as extreme, but in a similar vein, it’s going to be hard for a roomful of white dudes in their mid-30s, who all went to the same college, live in the same city, and have the same problems to come up with a product that solves a problem for people who don’t match their profile. If you agree with my point #4 above — that good ideas come from the collision of other ideas — it’s easy to see why diversity in thinking, background, and experiences is the best source of raw idea-material.
Gender diversity is important, but so are all other dimensions of diversity, including life experiences, age, religion, political views, background, etc.
7. Uncommitted, but passionate
A few months ago I wrote about the analogy between a romantic relationship and building a startup and said that, like choosing a spouse, choosing a startup idea should only be done after an extensive period of low-level engagement (dating). This low-level of commitment is especially important in the early days. You don’t want to fall in love with an idea that prevents you from seeing its flaws. You want to feel a great desire to understand the idea without making a full commitment to it.
The “un-commitment” is also the number one reason I believe some people cannot work at a startup studio. It’s unsettling how quickly things can change on an idea you are pursuing. Maybe a critical distribution partner decides they won’t partner anymore. Maybe a key domain expert who was the driver behind an initiative suddenly decides to pursue a corporate job. Maybe a piece of technology that was assumed would take a few weeks to build turns out to be a six-month effort and won’t fit into the startup studio model. Too many things can go wrong, so, hard as it may be, you have to be able to keep the relationship at arms-length.
Always be recruiting. It’s surprising how quickly things can go from 5 to zero or from 5 to 10. This month you might be killing a project, and next month you may have a new spin-off just waiting for the right CEO + CTO team. The only solution we’ve found to this so far is not to wait until things are ready before engaging potential CEOs and CTOs, knowing well that the effort might not lead anywhere (on either side).
9. Entrepreneurs ∩ idea people = small set
If there is one thing I’d like you to take away from this post it is this point: We mistakenly assume that good entrepreneurs are good creators (idea people). The media bombards us with this love story of how one night someone had a magical “a-ha” moment, founded a startup, became a fantastic leader, and a few years later were a billionaire. It’s a myth on top of another myth.
Ray Krok didn’t found McDonald’s. Howard Schultz didn’t found Starbucks. Elon Musk didn’t found Tesla! Get over it. It’s fine. A lot of exceptional entrepreneurs — even ones who have been successful in the past — struggle to find great ideas to pursue. A lot of them don’t feel the need to be there on the day of inception, but they develop a passion for someone else’s idea and have a mental plan of how to take it from point B to point Z.
And we know that it’s not the idea but the execution that matters.