Research suggests that venture studios require between $2M and $10M in funding, which covers the launch of 10-15 companies. On average, this implies an investment of between $133K to $1M per company. Importantly, these companies typically go on to raise further rounds of venture financing, before eventually failing or succeeding.
The immense success enjoyed by venture capitalists over the past decades has fuelled the influx of capital and funds, as well as a discourse that taking VC money is the way to build a company. The rise of venture studios is adjacent to this development, and to this day we experience that most venture builders focus on churning out businesses that can take on future funding. This is owed, largely, to the economics of a venture studio that has raised funds. As soon as limited partners are introduced into the equation, returns must be outsized to compensate for risks, management fees, and carried interest, pushing venture builders to pursue VC cases. It is a self-reinforcing loop that results in a power law distribution of returns as we know it from traditional VC, albeit with a slightly higher probability of success due to the venture studio’s operating blueprints.
Bifrost does not invest in venture studios, but startup studios. There are multiple important similarities and distinctions, but notably, we believe that the startup studio is the way to build companies under capital constraints.
Category
Portfolio Company Services
The startup studio in the context of Bifrost, is not bound by such constraints. We believe that the operating blueprints of a studio are just as viable in the context of creating healthy businesses as they are for the venture path. In fact, we find that many companies pursue VC, when they could be profitable and reinvest to maintain a low double-digit growth rate. There are countless examples of businesses generating hundreds of thousands or even millions of dollars in annual revenue, with profit margins in excess of fifty percent. If you don’t believe us, we encourage you to spend an afternoon on acquire.com. We feel strongly that the next generation of such businesses will spawn from the startup studio model.
The entire Bifrost team has invested in or worked at venture-backed companies, and we believe there is still a lucrative future for such ventures, so it’s not to say that VC is dead. We are also very open to our own build cases eventually going down the VC path, but we have optionality to ensure that only those cases where there are truly returns to scale are put on that trajectory. For the others, we will have a field day every year when the dividends roll in.
bifrost solve
By now, you may think: anyone can build a profitable business, but can they scale it to a point where things get really interesting. You’re right to be sceptical. Building a company that does a few hundred thousand in revenue and half of that in profit is great, but not life changing, particularly not if you have 2 or more Founders. This is where profitability in the context of the startup studio becomes a beautiful symbiosis. Having reached a revenue and profit threshold, the business can continue to grow at modest but healthy rates, while profits are ploughed back into the studio, or paid out as dividends. The studio recycles learnings and processes from building the company into building more companies, and the process goes on. By this point, the studio is no longer dependent on external funding.
This process will continue, until the studio finds an idea that is both profitable and extremely scalable, at which point the return is higher from ploughing capital into that idea than the studio.
The example outlined above may sound improbable. How can you run multiple companies at once, achieve +50% profit margins, and create a perpetual company creation engine? At Bifrost, we believe that there is a confluence of factors that put us in the hurricane’s eye of the capital efficiency era. Productivity gains from AI agents and SaaS tools mean that you no longer need to build a large team to achieve great things. Talent is also available globally, at a fraction of the cost in some locations, meaning that you can, in fact, build teams under capital constraints. This talent, in turn, is also empowered by AI and SaaS, creating a powerful productivity to cost equation that is exponentially increasing with time.