Economics of a Startup Studio

Continuing with yesterday’s post on High Alpha Studio and Seed, let’s look at the hypothetical economics of a B2B Software-as-a-Service startup studio. Assuming $20 million to be spent over five years to build 20 startups, here’s what it might look like:

  • $4 million per year budget
  • Expenses
    • $3 million/year for 20 full-time employees plus four partners, including benefits
    • $250,000/year for office space (10,000 sq ft at $25/ft)
    • $50,000/year for office items (equipment, supplies, etc.)
    • $100,000/year for legal and accounting
    • $100,000/year for software
    • $100,000/year for miscellaneous
    • $300,000/year for marketing/advertising (this is for the products created, not the studio itself)
    • $100,000/year held in reserve for years after the five years to manage the studio’s responsibilities
  • 20 startups created
    • 10 fail (minimum respectable product built, beta customers signed on, and the plug pulled for one reason or another)
    • 10 raise outside financing (or at least raise money from the separate investment fund)
      • Average ownership stake before outside financing: 75% (assume 25% for the management team and employees)
      • Average ownership stake after outside financing: 56% (assuming 25% dilution)
  • Outcome needed to be successful
    • $80 million in aggregate equity value to generate 4 times the $20 million invested resulting in a 3x return to investors (roughly 1x of return goes to the partners in the studio – see Investor IRR on Paper to Raise Another Fund)
    • With 10 startups, that’s an average of $8 million in equity value per startup
    • With an average 56% ownership stake, that’s an average startup valuation of $14.3 million (so, $143 million in total value for the 10 startups)

While the studio would produce a number of startups, the reality is that the financial outcomes of the startups produced are more likely to be lopsided where one or two produce the vast majority of the returns and most aren’t worthwhile. Regardless, the economics of building a studio to build SaaS companies is appealing, especially in today’s hot market.

What else? What are some more thoughts on the economics of a startup studio?

One thought on “Economics of a Startup Studio

  1. Well, all this looks good from an academic standpoint but as an old Southern Bell employee quipped to me and my partner Cam Lanier when we started our long distance company in the early 80’s, “Anybody can make a million dollars raising dogs on paper”. The point was that doing something on paper is always easier than in real life. Managing 4 startups per year in 5 consecutive years would be HARD. Might even be impossible, I say.

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