How Venture Builders Are Reshaping The Startup Ecosystem

Photo credit: https://apac.engiefactory.com/

On the rise in Southeast Asia and Singapore, venture builders work like factories producing startups en masse. They lower the risk for investors as well as the opportunity cost for entrepreneurial talent.

As startups continue to gain traction, the startup ecosystem is rapidly evolving. One of the most interesting trends rippling through the ecosystem is the rise of venture builders.

Unlike accelerators and incubators that support existing startups, venture builders create, develop, launch and scale startups from scratch. 

Think of them as startup factories that systematically produce a large number of startups. By reducing the barriers of entry for entrepreneurs with shared resources, expertise and capital in return for equity, they are breeding a new crop of startups, some of which with the potential to disrupt industries and transform the way we live. 

As of 2022, there were 724 venture builders operating globally. And this is just the start. 

Indeed, in Southeast Asia and Singapore, venture building is still in a nascent stage. “The space has definitely been growing in the past years. We see a strong acceleration in corporate venture building in Singapore,” said Caroline Guyot, co-founder and managing director of ENGIE Factory Asia-Pacific, a venture builder leading the climate-tech space.

ConnectOne speaks to insiders on the potential of venture building and its impact on the startup ecosystem.

BETTER ODDS FOR STARTUPS

The startup can also tap on the mothership network and presence to grow and scale. This gives it credibility in attracting talents and securing commercial and strategic partners. They also enjoy the ‘exclusivity’ to be part of the mothership portfolio ecosystem to mutually support each portfolio company.

- Saim Yeong Harng, Founder and CEO of CardsPal

There is no question that founding a startup is an extremely high-risk, high-stakes and arduous endeavour – nine out of 10 startups are destined to fail.

Venture builders mitigate this risk through diversification. Many venture builders develop several businesses, sometimes in multiple industries such as sustainability, fintech, Web3 or healthcare. Alternatively, they could find a niche and build several businesses within a single industry – these are known as start-up studios.

There are multiple benefits to churning start-ups in large numbers. Besides risk mitigation, this enables the venture builder to acquire crucial domain expertise in the space.

In industry segments that are more opaque and more difficult to penetrate, a venture building model where there is a closer community or network allows founders to lean in on certain corporate relationships,”

- Bolong Chew, co-founder and CEO of Solar AI Technologies

“In industry segments that are more opaque and more difficult to penetrate, a venture building model where there is a closer community or network allows founders to lean in on certain corporate relationships,” said Bolong Chew, co-founder and CEO of Solar AI Technologies, a startup that provides rooftop solar-as-a-service to residential and small commercial properties functioning under ENGIE Factory.

How most venture builders work is by generating lots of ideas before honing in on promising ones. “Venture builders then test these solutions quickly and validate them before investing too much in the company,” said Guyot. 

“Although this might require more heavy lifting to move the idea from 0 to 1, it results in a higher chance of success as you decide to invest in the solutions that are really taking off,” she explained. 

The venture builders then put together a founding team to run the startup, and support founders with funding and resources. 

“Extended resources include tech, risk, compliance, governance and legal expertise,” said Saim Yeong Harng, Founder and CEO of CardsPal, an award-winning lifestyle deal aggregation mobile app backed by Standard Chartered Bank that is currently focusing on event technology which enables e-ticketing and event registration for B2B customers.

“The startup can also tap on the mothership network and presence to grow and scale. This gives it credibility in attracting talents and securing commercial and strategic partners. They also enjoy the ‘exclusivity’ to be part of the mothership portfolio ecosystem to mutually support each portfolio company,” added Saim.

For these reasons, a good venture builder increases a startup’s odds for success significantly. Well-known startups founded by venture builders include Lazada, Zalora and Food Panda under Berlin-based Rocket Internet, as well as Venmo, Kickstarter and Tumblr under Betaworks.

In fact, according to the Global Startup Studio Network, “Elite venture builders and racer studios can create startups with more than a four per cent chance of becoming a unicorn (valued greater than US$1B). Studios with these exit rates include Idealab, Rocket Internet, Science Inc. and Betaworks.” 

WEIGHING OUT THE TRADEOFFS

Pick the right culture and a place where you feel you can dream big with your startups, be supported through the difficult times and respected if things get complicated.

- Caroline Guyot, co-founder and managing director of ENGIE Factory Asia-Pacific

For the would-be entrepreneur, working under a venture builder will dramatically lower the opportunity cost. They can continue to draw a salary during the entrepreneurship journey, enjoy mentorship and benefit from the venture builder’s startup playbook. 

But these come at a considerable price. In return, venture builders take a very large equity – typically between 30 and 80 per cent. This is markedly more than accelerators that typically only take five to 10 per cent, according to Harvard Business Review. 

That is why, finding a good founder to run the startup within a venture builder can be the hardest part of the process, said a venture capitalist and accelerator who commented anonymously. 

“No good founders are going to want to do that. As a founder, if I have to do most of the work. I want the most equity. I don't want to share it with people who started the startup in the first few months and probably won't be helpful after that,” he said.

It is virtually impossible for venture builders to find founders with a proven track record. That is why many tend to hire project managers, corporate professionals and consultants with an entrepreneurial mindset and hunger for success. Maximilian Bittner, the founder and CEO of Lazada group from 2012 to 2018 for instance was an engagement manager with McKinsey & Company before his entrepreneurial run. 

Some of the entrepreneurial talents picked by venture builders might not have embarked on entrepreneurship journeys otherwise. You could say that by spotting and supporting a new generation of entrepreneurs, venture builders are radically transforming the startup ecosystem.

However, it is important to ensure that there is strong founder alignment in how a venture building model is set up, because eventually, founders are the ones who have to be responsible for the business.  “Some of the biggest tensions that I see are alignment of the venture builder to the founders,” shared Chew of his general observation. 

“This is especially so if a venture builder is structured like a consulting outfit or an external team and stays very strategic. In such cases, the solutions or the hypotheses might be wrongly or insufficiently validated. Founders however  need to be very operational and hands-on, and adapt or pivot where necessary,” he explained, adding that it is extremely  important for venture builders to be very hands-on and operational to deliver value to the founders.

“Venture builders will provide support, partnership, funding and networks, but it doesn’t mean that the founder’s journey will be much easier. Each startup is a hectic ride, so I always tell founders to choose investors they enjoy working with,” added Guyot.  

“Pick the right culture and a place where you feel you can dream big with your startups, be supported through the difficult times and respected if things get complicated,” she said. 

BREEDING STARTUPS IN A BEAR MARKET

In the current economic context and following the recent venture capitalist crisis, corporate venture builders and investors have an even bigger role to play. They can bridge the gap between ideation to acceleration, making it safer for venture capital to invest while product-market fit and commercial traction is achieved.

- Caroline Guyot, co-founder and managing director of ENGIE Factory Asia-Pacific

At this point, it is important to note that the venture building scene is quite diverse as well. 

Some venture builders such as Rocket Internet are independent, while some such as Science Inc are owned by venture capital firms. Some such as BMW Startup Garage and Samsung NEXTare owned by large corporations, and others are run by corporate enables that partner with corporates.

Corporate venture builders in particular are a growing trend. In a climate where large corporates are constantly disrupted by startups, multinationals know that innovation and growth are existential needs. 

Hence, to mitigate the risks of change and reinvention, many multinationals have turned to venture building to create nimble startups aligned to their business goals rather than adapting their core business.

“As corporates focus on venture building, they build a portfolio of startups around  their strategic goals, the new market opportunities and the innovation signals, hence de-risking the investment," explained Guyot.

“Corporate venture builders have become a model for entrepreneurs to test and implement new ideas with hands-on support. Using a range of venture building processes and equity structures, corporate venture builders offer entrepreneurs a methodology and possible exit paths,” she said.

This model can be a game-changer in a bear market.

“In the current economic context and following the recent VC crisis , corporate venture builders and investors have an even bigger role to play. They can bridge the gap between ideation to acceleration, making it safer for VCs to invest after product-market fit and commercial traction is achieved,” Guyot noted.

“As it is becoming more uncertain for entrepreneurs to raise funding, having an established corporate investor in the early days also helps to build credibility and shows strong backing,” she also added. The cost of equity for investors is also lower during a bear market, making it a win-win for all.