Article
-
12.6.2024

Why Venture Capital Firms Should Lean Into Startup Building

Matthew Bushery

Venture building isn’t just something Fortune 500 companies, leading research universities, and state agencies are exploring today. Some venture capital firms and their VC funds are now turning to venture creation as a viable, secondary business model.

These organizations, including Sequoia Capital, Lightspeed Venture Partners, and Sutter Hill Ventures, remain committed to finding up-and-coming companies to invest in and empowering their existing portfolio companies to thrive.

At the same time, they know there are opportunities for venture building, based on observed market gaps and needs through their own research.

Of course, not every investment firm has the budget, bandwidth, or institutional knowledge to build new companies internally. That's why working with an external venture-building partner is an increasingly attractive avenue.

What holds many venture capital firms back from building their very own startups

Proprietary deal flow is rarely that. There are almost always other VCs exploring the same startups your firm looks into. (Even those in stealth mode you think you learned about first.)

However, this is the case when you build your own companies.

The trick is knowing how to get new startups off the ground in a quick, efficient, and scalable way. And that requires knowing — and overcoming — common venture-building constraints.

One such constraint? The notion of building new companies is simply 'off-thesis' for VCs.

Venture capital investment is VCs' bread and butter. They know how to spot seemingly great early-stage companies with a likelihood of sustainable success. And they may even have former CEOs on staff with experience bringing new startups to market.

But many of these firms just can’t afford dedicated personnel to undertake the rigorous process of venture building within their current AUM business model.

"Many of today's largest venture capital firms are savvy investors with a keen eye for detecting market gaps and discovering highly profitable startups to back," said High Alpha Innovation Director Ryan Larcom.

"However, creating new companies from scratch is just outside their comfort zone, and not something they're interested in embracing," Ryan added. "At least not without the help of a proven venture builder."

Venture funds, yours likely included, have ample business development expertise to help PortCos after their formation and launch. (Skills that can also be used to identify new startup opportunities). But assessing, validating, and de-risking early-stage concepts and creating companies on their own is often outside their wheelhouse.

Add on a lack of in-house knowledge and budget to take on transformative venture creation that also hinders any potential for business development, and it’s easy to see why many VCs ignore venture building as an alternative business model.

Augmenting the traditional VC approach with venture building: A framework for venture capital firms

These limitations can prevent venture building. But they can be overcome, and internal startup development can become a reality for venture capital firms.

All that's required is a mentality shift — and the right external partnership.

Ryan recently told Print Magazine how, once companies know where they want to focus their venture-creation efforts and ensure there is "enough space" to innovate there and differentiate from existing market options, it's all about getting hyper-focused on the tactical.

Leverage the jobs-to-be-done framework

The jobs-to-be-done framework ultimately provides a richness of research that can augment the top-down market gap analysis your venture capital firm already undertakes when evaluating existing startups to possibly invest in.

Your venture capital firm is great at spotting top-down market gaps based on your due diligence and pitch screening.

But conducting a bottom-up analysis of a given industry or vertical is crucial to learn the underlying, unmet customer needs that yield startup opportunities.

These needs fall into three buckets:

  1. Functional. A practical outcome (e.g., "Help me save time, money, and resources.")
  2. Social. A relational outcome (e.g., "Help me better connect with this specific group.")
  3. Emotional. A 'feeling' outcome (e.g., "Make me less stressed out and more focused.")

As long as these needs are widely held by a large segment, deemed important, and are areas in which the target audience in question is willing to spend money to solve, you've found a potentially profitable problem to solve.

Rapidly evaluate and advance business ideas

Your VC, like many others, often seeks the one 'right' opportunity in the market. But this can lead to analysis paralysis. Program-stage forcing functions implemented by the High Alpha Innovation team help us and our partners make rapid, yet informed decisions with an abundance mindset.

The approach enables us to prioritize concept validation (whether a viable business opportunity exists) and ensure we focus on the ideal space where maximum value exists.

Agree on a business idea. Move full speed ahead to productize. Execute. That’s our goal with partners, and what VCs can achieve when working with High Alpha Innovation.

Our approach allows companies to “benefit from the speed and learning agility of a startup, the knowledge and scale of a large organization, and the experience of a high-growth organization in creating companies,” Brent Cross, the former Director of Transformational Innovation & Commercialization of OSF Innovation Studio, explained when deciding to partner with HAI.

A key task within the innovation journey where our team of venture-building experts excels and can help your VC is assessing, testing, de-risking, and validating concepts to ensure only the best ones are explored and advanced.

Building non-consensus insights, based on dozens of customer discovery calls, and de-risking ideas with our team helps our partners build conviction, narrow down the list of contending concepts, and go to market with the winning option.

And this all happens within a matter of a few months, not a year or longer, which often occurs with organizations — VCs included — without the infrastructure to build new companies independently.

Find founders with the relevant backgrounds

Your principal(s) likely have a broad network of proven executives who've helped shepherd companies from pre-seed to series funding and, in some instances, even initial public offering.

This network is worth tapping into, as you get closer to launch. But solving for a highly particular problem with a new tech startup often requires founders with the right mix of business experience and niche industry expertise.

Consider Athian:

  • High Alpha Innovation partnered with Elanco, an animal pharmaceutical company, to launch a new company that addressed sustainability/climate change concerns.
  • To help farmers modify their agricultural practices and meet target GHG emissions goals, Athian needed a CEO with intimate knowledge of both farming and the livestock value chain.
  • After an exhaustive search by High Alpha Innovation's talent acquisition team, we were able to find Paul Myer, someone who fit the bill above and has since taken the reins of the startup to help solve an increasingly complex problem.

Finding early-stage entrepreneurs like Paul who deeply understand the landscape tied to a startup you intend to launch and build credibility through access to customers/SMEs that help us rapidly assess opportunity.

Build advantaged startups and back strong bets

Building a strong portfolio — whether you're a corporation, university, non-profit, or venture capital firm — requires placing as many bets as possible at the lowest possible cost per bet.

Success is ultimately earned after launching a selection of companies using 'near-perfect' info (from accrued experience through innovation experimentation and careful analysis of startup concepts).

Not every startup will become a unicorn. All venture capital firms, yours included, know this all too well.

But a commitment to appraising company ideas regularly and bringing the top ones to market with the aid of a venture-building partner (ideally through the venture studio model) is how your VC can augment its outside investment efforts and add more strong bets to its portfolio.

Embracing the studio model gives your firm the richest possible data and insights to gain the confidence to both launch and invest in new startups that are advantaged from day one.

Sign Up For Our Newsletter