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Unit Economics

Founders - Start Your Venture Now

If you’re a current or hopeful startup founder, and creating a venture is new to you, you are likely deeply concerned about the economic climate in which we find ourselves. You might believe that you have many of the ingredients of a truly great startup: an important unmet need, customers with real pain points, a large and growing market opportunity, a differentiated breakthrough solution, and terrific co-founders who share your grand vision.

That said, you know that we are in an economic storm, and you feel you need to wait it out before making any bold bets.

Potential customers aren’t buying.

Venture capitalists aren’t investing as much.

You’re risking using your life savings and forgoing a stable salary.

Your family may suffer.

Candidly, you’ve never navigated such an environment, and you don’t know how.

My advice - don’t make this mistake. Don’t wait it out. This is the time to build your venture if you can find a co-founder who believes both in you and your startup’s vision and possesses the resources to carry you through this storm.

The co-founder I am writing about is a Venture Studio. Venture Studios are emerging as a valuable new model in the venture ecosystem. Their primary purpose is to work with founders and build a venture together. Below are some of the resources that a great venture studio might assist you with:

  1. Coaching and Mentorship
  2. Stipend (and patience - even in an economic downturn!)
  3. A large network of subject matter experts
  4. Recruiting via insights into “how to build a winning team”
  5. Demo and Prototype Development
  6. Market Development
  7. Business Development
  8. Culture Development
  9. Tools to track progress
  10. Venture Capital deal terms
  11. Introductions to Angels, Venture Capitalists, and other investors
  12. Credibility with the investors that you are going to be a great investment
  13. And much more …

Like any co-founder, you need to ensure that the Venture Studio has outstanding coaches and mentors, that they have had great success in the past, that they believe in you and your vision, and have the resources to help you, support you, and invest in your startup.

No doubt, a Venture Studio will take equity in your company. This is because they will work hand-in-hand as a co-founder with you. As a co-founder, they will likely ask for a decent chunk of equity, as any co-founder would ask. This is what you should expect for all the resources they provide you and the fact that they’ll roll up their sleeves to build a category-defining startup with you.

At Stanford Research Institute (SRI), I served as President of SRI Ventures, one of the first Venture Studios established back in 1992. Our team built ventures through the economic crises of both 2000 and 2008.

As an example, from June 2007 to January 2008 we built the venture plan for Siri. We were at the beginning of the “Great Recession,” and we hired the person who would become Siri’s future CEO (Dag Kittlaus) as an EIR (Entrepreneur-In-Residence). The goal was for Dag to help us build the Siri venture. Dag had left Motorola after the decline of the RAZR Motorola phone and the subsequent major cost-cutting. If the economy had been good, I’m pretty sure we wouldn’t have been able to recruit Dag. My guess is that he would have stayed at Motorola.

SRI Ventures funded the development of Siri, paid a stipend to Dag and other co-founders, and provided funding to SRI researchers to work with the Siri team and build the venture. We worked together to develop the value proposition, put together the venture pitch, and identify great venture capital investors, including Gary Morgenthaler at Morgenthaler Ventures and Shawn Carolan at Menlo Ventures. At SRI Ventures, we knew the best of the best venture capitalists in Silicon Valley and opened doors for the Siri venture. The founders were relatively unknown to the VC world. But SRI had enormous credibility.

The moral of this story is: I’m sure Siri would not exist today without the support it received from SRI Ventures.

But let’s talk again about the equity part of this issue. Many founders may be reluctant to share substantial equity with a venture studio, such as we did at SRI. Here is the most important answer to this issue - an answer that most people don’t understand:

If you build your venture with the help of a venture studio, your first investment round will share equity with the venture studio. So, of course, you’re likely to have less personal equity at the initial round than if you didn’t work with a venture studio.

But after the initial round, your venture will have a higher probability of success due to the support it received from the venture studio. In most cases, later investment rounds will have higher valuations and less equity dilution.

In summary, I believe that if you're a new founder and are considering starting your venture, you’re most likely to create a high-value venture with a venture studio. And your equity is likely to be diluted more in the seed stage but less in future rounds.

With a venture studio, you’re more likely to have 20% of a $10B unicorn than 50% of a $100M venture.

So here’s my advice to the founders who have a vision and a mission to build a great venture: start now.

Full disclosure: I am an advisor to Platform Venture Studio https://os.platformstud.io/about, which seeks great founders of transformative ventures.

Your Venture Coach


Norman Winarsky

Dec 8, 2022  - 148 views

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