The forms of developing technological entrepreneurship in today’s world are quite diverse. A lot of people have heard of business accelerators, technology parks and incubators. But Hungarian researcher and entrepreneur Attila Szigeti has told us about one more model that isn’t as famous but is gaining popularity very fast: a startup studio model.
Attila Szigeti. Entrepreneur. Researcher. Co-founder of Hungarian startup studio Drukka. Author of the first and as of now the only book on the topic of startup studios as a means of creating and developing innovative projects: «Startup Studio Playbook».
- Attila, could you tell us why you took up startup studio research? What made you want to write a book on this topic?
In 2014 I quit my job, and at that time I worked in IBM and Citigroup, and these are very large IT companies. I wanted to start creating something of my own; I really looked for more personal freedom. So I hurled all my efforts into founding my own company. However, one year later this project failed and I realized that I have to start anew. I took the failure calmly; I thought it was good as gaining the necessary experience. I was ready to build a new company but this time I did not want to open an ordinary IT company. I had a desire to create something innovative, something that has large potential. At the same time I understood that it was risky so I began thinking about how to reduce the risks. In the same year, 2015, I first met Tamas Bohner, the founder of Drukka that at that time was just a small business development agency. Tamas also invested his own money into some startups and he often came across a situation when the teams of these startups did not listen to his experience and his business expertise. And that is why most of them failed. So when we met Tamas also looked for better opportunities for venture investment. We had several inspiring examples before our eyes, such as a Los Angeles startup studio called Idealab, as well as eFounders from Paris and Rocket Internet from Berlin, so we decided that we would find a way to replicate their success in Hungary. That is why I took up my research: I interviewed founders of large startup studios, collected blog posts on this topic, analyzed the information that I had found and tried to figure out how to launch all the processes that would help us to create startups using this new method. After some time we had our first success, so I decided to share the results of my research and my observations with other entrepreneurs. And this is how «Startup Studio Playbook» was born.
- What exactly is a startup studio and how does it function? Are there any fundamental differences in the work of different startup studios: for instance, European and American ones?
Startup studios are organizations that constantly, cycle after cycle, create and «grow» innovative companies. In other words, a startup studio is a manufacturer of startup enterprises. Its goal is to create a product, build a business model and put both the product and the model inside a new company, and after that let it develop by itself. If we compare this to the incubator approach, for example, then we will see that startup studios have a much higher level of control over the businesses they create and involve a much larger volume of work for each of the startups. This is because incubators invest a relatively smaller amount of money into the companies they grow, but they also have less equity in these companies. Besides, incubators work with business teams from outside, while startup studios create their own ideas for startups, bring together their own teams, raise their own investments. Startup studios are like parents who give birth to a baby, then raise the baby themselves, make their own decisions for him/her and prepare their child for an independent life as an adult. While an incubator is more of a kindergarten, where you put your child for some time, but the one responsible for the child’s education and upbringing is still you.
There are many types of startup studios, different from each other in approaches: for instance, in ways of funding or business philosophy. There are studios that only create 2-3 startups per year, but they pay a lot of attention to these startups. And then there are others like our own Drukka that functions as an entire factory, mass producing new businesses. We create 10 or even more startups a year. And I cannot say that one approach is better than the other, they are simply different and have different goals. All depends on what exactly you want to create and why. But anyway, these differences have nothing to do with geography, with the country that a startup studio is based in.
Traditionally the expression startup studio is used when referring to companies that launch new startups in the IT sphere – either software or hardware. But it turns out that entrepreneurs involved in the innovative production sector can work in a similar format as well. A good example of that is the Russian nanotechnology center called TechnoSpark. These guys know their market very well, they know all the big players in this market and they have a strong team that is well-versed in this technology. And they have the resources to create new businesses. But most importantly, they actually create a lot of ambitious startups.
- What are the advantages of startup studios compared to «one-off» venture entrepreneurship? And who benefits the most from these advantages: the government that is able to build up its innovative activities by creating startup studios or someone else?
I think that the startup studio method is at the same time the alternative to the traditional, or, as you say, «one-off» venture entrepreneurship, and its logical continuation. But we must remember that the startup studio format is not suitable for everyone. If you are an entrepreneur who is completely focused only on one idea and wants to see this exact idea come true, then it’s better for you to pick a team and choose the traditional way of doing it. But if you enjoy the very process of creating companies, when you find ideas, turn them into pilot projects and experimental prototypes of a product, and then you start trading stock, you sell the project and start all over with some new idea, ad infinitum – then a startup studio is the way to go for you.
As for the advantages, they are as follows. Firstly, in traditional technological entrepreneurship, if you tried to bring some idea into life but failed, you usually let your team go and assemble a new team for your next project. While in most startup studios you only have one team that can work on several projects consecutively or even simultaneously. That is, if your first startup is a failure, you toss your team another idea, and they try again, thus gaining valuable experience. As a result, in 1-2 years you will have a team that has already experimented with about a dozen different ideas. And by that time they will already understand how it should be done, and your risks will be significantly lower.
studios can be more cost-effective than traditional entrepreneurship. Because
in the traditional model you have to pay the members of your team their
salaries and sometimes equity. But at the same time you take full advantage of
this team’s potential. So you pay for their time but you are not sure that it
is spent effectively. While in a studio you can have a team that will be doing
several projects at once, and that means their time is used more productively.
And if you have 10-15 startups a year, then the average cost of one startup
will come lower than in a traditional business.
And thirdly, in «one-off» entrepreneurship, to get funding for each project you will need to meet investors, build their trust, etc. That takes a lot of time. In a startup studio all your financial issues are centralized. Of course, for the very first startup you will need to take the exact same steps: attend events, exhibitions, build relationships with investors, exchange business cards, etc. But if you get that first project going, and it is successful, then it’s going to be much easier after that, because your investors will already know who you are and trust you, and the negotiations with them for every new project will be much shorter.
- What is the fundamental difference between startup studios and major innovative companies such as Google, Apple, Samsung, etc.? Because inside those corporate giants there are also innovative projects being launched and their teams can also move from one project to another. It’s true that these companies do not have a goal of creating and then selling some new business, but that’s what often happens.
In a way the companies you have mentioned are indeed a little similar to what startup studios do. But the difference between this sort of innovations inside large corporations and inside startup studios is as follows: in the former case you depend on the corporation you work for and you have to follow its goals and approaches, while in the latter you are independent. Because even if large corporations give you some freedom over your projects, they still have some goal, some corporate culture, not to mention internal conflicts, processes, bureaucracy, etc. And you are bound by all that. In certain rare cases a startup company created inside a corporate giant can separate and start sailing free, but more often this does not happen, and you remain a part of the corporate machine.
And by the way, there are good examples of how large companies can cooperate with startup studios. Because creating one’s own startup studio in a large corporation is a good thing but it requires a lot of initial investment: you need to assemble a team, you need to create one or even several businesses, but the hardest part - you need to set up a system of management and control over this all. This is why sometimes it’s more viable for them to start cooperation with some already existing startup studio that already has a team and experience. While the corporation, in its turn, has access to customers and the market and has industry experience. Very often such cooperation succeeds, and some good things come from it.
Sometimes a startup studio is created jointly by several large companies and then goes on living its own life. One of the examples of this is a Mexican startup studio InnoHub that was created by three large Mexican corporations (a financial one, a telecommunications one and a logistics one), because they saw that they had a lot of small and medium clients that could be satisfied by launching several small business projects. So InnoHub works with these clients, building startups for their needs. While the corporations have resources that can be used to support this startup studio. And because each of them has a share in all the newly created startups, they get some commercial profit from this as well.
- So, does this mean that large companies are interested in the existence of startup studios?
Well, they should be interested, because the startup studio method is one of the ways of developing innovations inside these big companies. Of course, there are a lot of other methods as well: innovations inside the corporation, traditional venture investments, there are plenty of options here. But there is one important aspect of this that large companies should really think about. According to one recent research, about 90% of startups or small companies purchased by large corporations ultimately fail. The thing is: when a large company buys a ready business it often happens so that the corporate culture, the views and philosophy of the giant company and the small company clash with each other and turn out incompatible. They work very differently; they have radically different approaches and principles. And due to that it becomes almost impossible to successfully integrate the new business into the large corporation. Startup studios offer a solution to this problem, because they create new companies from the ground up, and the customer corporation is able to custom engineer the new business as they see fit.
- Where do startup studios get their ideas for creating new companies?
I would say there are two primary trends here. The first one is searching for empty niches in a certain market, in a certain area of focus. For instance, the German company Rocket Internet that I have already mentioned specializes in e-commerce. And they find a relatively large market, an unoccupied niche in this sphere, and then they create a company and start to aggressively promote it. The second trend is studying what is successful abroad, in other countries, in other markets, and creating something similar to that. For instance, here in Drukka we see what new startups and business models are successful in the USA and simply try to do the same but in Hungary. Of course, that is some sort of copycat business building, but commercially it gives us one distinct advantage: the use of a business model that has already been tested by someone somewhere and has yielded good results significantly reduces the risk of a failure.
As a general rule, here is how we search for our ideas: we brainstorm to come up with about 20 different ideas, and then within the next few days we analyze them and discard the bad ones. For instance, after a couple of days we have thought things over and left only 10 ideas out of the initial 20. So we take these 10 ideas and begin experimenting with them at minimal costs: we create some experimental product prototype and try to figure out the demand for it. Sometimes we do it the following way: we create a landing web page for the supposed product that looks like this product is already being produced. Then we advertise the product in Facebook and Google and on the basis of the data we collect from this we calculate the approximate demand, the costs and the return on investment for the supposed business. If everything goes well, and we are satisfied with the data, we make a decision about launching the startup. After that we sometimes hire a skilled and experienced entrepreneur as the CEO of this new business. That is, we provide him/her with the idea and the team, and the entrepreneur manages the new company. His/her equity in the new company is usually about 25%. And I want to mention something else in this regard: a lot people say that your share in a startup launched for you by a startup studio is always lower than if you create a company traditionally. But that is only true regarding the initial stage of this new company’s development. Because it is almost always stated in the contract that if a startup is successful, and the company reaches certain goals, then the entrepreneur’s share in it is increased (by decreasing the startup studio’s equity, of course). And that is how the entrepreneur is financially motivated: he/she is directly interested in the project’s success, in the highest possible results.
- Let’s say I have a good idea for a startup and a team of friends who are ready to help me out with it. I could start looking for investors for my project and would probably find them. But now I know there is the startup studio format that can theoretically relieve me of such trouble. But can I actually come to a startup studio with my own project and have them work on it together with me?
Some startup studios do work with other teams, and you can really come to them with your own idea and your own team, and if they like your project they will help you with business connections, resources, marketing, investors, with everything they can help you with, depending on your agreement with them. And, contrary to developer agencies, they will not take any money from you but instead will join your project as co-founders. What share of your project will belong to the startup studio depends on their contribution to your business. However, most startup studios prefer not to work with third party teams at all, trying to look for ideas by themselves instead.
- How difficult is it to create a startup studio? What needs to be done to make this studio successful?
I think that creating a startup studio is much harder than creating an ordinary business, because a startup studio is some sort of a factory that produces businesses, so by creating one organization you kind of create a dozen of them at once. The main success factor here is probably the human factor. The founder, the owner of a startup studio should be able to make very hard decisions. For example, you have 5 great ideas for startups, but you only have enough resources for 2 of them. If you make a wrong choice, it can lead to financial problems or produce conflicts inside your team. Then again, solving conflicts and making peace inside the team is also your prerogative, or otherwise your team will break up. In other words, the entrepreneur behind a startup studio needs to possess strong leadership qualities. And of course you need to have considerable financial means. We have calculated that if you want to create a successful startup studio, then you need to have enough money to create about 10-15 startups within the first 1-3 years. And it is these 10-15 startups that will form your portfolio. After that you need to gather up your patience and wait till the moment when your first startup is successful. Then you will be able to sell it and get your first return on investment. You also need to remember that a startup studio team must have at least 15-20 people: developers, marketing managers, lawyers, accountants, etc. And you need to pay salary to all of them, and give equity to many of them.
Where do you get such financial resources? You have several options here as well. Sometimes a startup studio’s team members fund everything by themselves, sharing the expenses. Sometimes you can manage to get investment from a large company, but then you will probably have obligations to it. And of course there is the traditional method of raising capital from venture investors. The latter option is the most problematic one for startup studios, because most investors still do not have any experience of investing into studios. Most of them do not even know what a startup studio is, so you will have to spend a lot of time to build their trust.
Most of the successful startup studios (Idealab, Science, Rocket Internet, eFounders, etc.) were created using their founders’ own resources.
- You have mentioned successful startup studios all over the world. And what about the ones in Hungary?
In Hungary there are three very effective startup studios now, and each of them has at least 3-4 successfully created and working companies. The first one is Lab Coop that started out as an ordinary technological startup but failed. But the team did not want to quit and decided to explore some new opportunities instead. At first they did developer projects for their customers, but then invested the money they earned on that into the creation of new businesses, thus becoming a startup studio. It’s interesting that every team member of Lab Coop (and they have about 30 of them) owns equity in each of their startups, so they share all the expenses and the income equally. Secondly, it’s Innonic Group, a studio that specializes in startups in e-commerce. They only open 3-4 companies a year, which is to say they work quite slowly but they are moving very steadily and have a high quality control. The third startup studio is our Drukka. In 2015 we launched about 10 startups, and 6 of them were successful. At first we invested our own money, but recently we created our own small investment foundation to raise funding for our startups. Interestingly, our investors put their money into the foundation as a whole, not into some specific startups, so at first they do not even know what projects their money is going to be used for. Because we make all the decisions about the newly created businesses ourselves. But as soon as they conclude an investment agreement with us, they get complete information on the startups their investments are used for, and depending on that at some point (at the beginning of the second or third round of investment) they can decide whether to continue funding or not.
- What are your plans for the near future, both in your business and in your research?
Of course I am going to continue my work with Drukka, where I am responsible for generating and evaluating business ideas, as well as for selecting and hiring the future companies’ CEOs. As for the research work, I am planning to work on the second edition of my book in the next 6-9 months, and I have just launched a crowdfunding campaign for that purpose. Besides, I will be organizing training courses and meetings for entrepreneurs who are planning to open their own startup studios, because there is great potential for that in many countries, including Russia, which I visited several times recently.