Venture capital is increasingly incubating its own startups

Venture capitalists are known to spot and invest in promising start-ups, but an alternative approach is growing in popularity: incubation.

Why is this important: With more expensive startup investments and stiffer competition, some investors are setting up startup studios or incubation companies – a trend that is expected to continue to accelerate.

The big picture: Recent public listings from companies like Snowflake and Hims have put incubation and start-up studios back in the spotlight.

  • Start-up studios have evolved since Idealab’s inception in 1996 – from offering shared office and server space to providing efficient systems for quickly testing (and rejecting) ideas.
  • They tend to combine in-depth market research, networking with potential entrepreneurs and other potential future employees, and capital to seed promising ideas.

What they say : “Overall the studio structure is really smart in a world where a lot of capital is flowing into the downstream market, said Heather Hartnett, CEO of Human Ventures. “And the profile of returning to be there early is excellent.”

Between the lines: It’s about getting large stakes at a low price.

  • “Our goals include a proprietary deal flow, which enables meaningful ownership in large companies without paying exorbitant prices,” says Brian Schechter, who heads the incubation program at Primary Venture Partners. He adds that the first three incubated companies of the New York company will return its first fund “several times”.

At New York, which appears to have more startup studios than any other region, this model can fill some resource gaps and strengthen startup training. (Yes, New York’s startup scene is strong now, but it hasn’t always been so.)

  • The arrival of startup studio Atomic last year in Miami should have a similar effect.
  • And studios can act as their own business clusters, especially when focusing on a particular industry like fintech or healthcare tech. “If you have founders who are building [companies] together it’s not 1 + 1 = 2 – it’s 1 + 1 = 10, “Hartnett explains.

Yes, but: Not all start-up studios and incubations are created equal.

  • The main criticism is that some studios are taking too much equity (sometimes more than 50% to 60%), leaving the founders with not high enough stakes to do a grueling job. Ditto with on-board control.

The bottom line: Venture capital firms will go to great lengths to find good investments – and that increasingly means helping to hatch businesses themselves.

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