(Ad)ventures for startups

He who starts well…

In the beginning was the word: to startup. And the word was in San Jose (Silicon Valley).

From there, in the not-so-distant 1972, a way of doing startups spread that has been exported all over the world and has taken various forms, depending also on the geography of landing. Also because the starting point has proven to be irreplicable today in any other part of the globe (but this is another story).

Regardless of where a startup is launched, however, there is a constant: the need for liquidity to start a business. And in this, if one does not have their own resources, investors play a crucial role. Below is my personal perception of the situation in Italy (and half of Europe).

"Show me the money"

Funding dedicated to startups usually generates positive externalities and is destined to do so even more in the future. Among the key players in supporting and developing startups are funds of Venture Capital or even Corporate Venture Capital (created within industrial incumbents). I hope the legendary Family, Friends & Fools won't take offense, whom I greet with extreme affection, but as you continue reading you'll understand why you are not the protagonists of this post (but we still love you lots!).

Returning to Ventures (or VCs) then, we often refer to them as indispensable actors in the growth and evolution of a startup. When they come in, they often bring order and discipline where it is lacking or insufficient (practically always). It is often important to have a VC in the cap table even just to show future investors in subsequent rounds that the situation is already under control.

Are all Ventures the same?

No, but I also do not want to enter an arena that I personally do not know in detail. What I do know, however, is that I have often encountered VCs with a well-defined business model and mindset, which I roughly summarize this way:

• Typically, they do not do (very) early stage. Because they find still fragile startups with little traction, resulting in a (very) high probability of losing their investment;

• Only startups where the founder has control of the initiative. Even if it’s not early stage, the human factor remains an indispensable driver for scaling, so the Venture wants to see a track record and full commitment;

• Only startups with a disruptive growth path. The VC, since they invest in high-risk ventures, needs to balance the fund: they know that the vast majority of startups they invest in will not provide adequate returns, so they must find at least one initiative that grows enough to allow them to achieve a hypothetical double-digit multiple that covers potential other "failures" or underperformers.

Of course, by citing only the points above, I exclude many others that are not functional to the continuation of the reasoning. If anyone wants to delve into the logic of the Venture Capital world, I strongly recommend following, among others, the blog Silicon Valley Dojo (curated by the founders of Lombard Street) and studying the practical guide by Seraf (created by Launchpad Venture Group).

A different Venture is possible

Are we on the same page so far? VCs are essential players, investing high-risk capital to support innovative initiatives led by visionaries who often have everything to prove and who must grow by at least 200% year over year, possibly dropping everything at some point and moving to Silicon Valley.

On the other hand, for those who want to achieve secure returns, there are always Bonds (watch out for currency risk) and government bonds, but for some reason LPs don't seem to like those 🙂

Thus, Ventures try to contain risk by maintaining discipline and setting the boundaries listed previously. However, are we sure this path is ideal for all startups? Should founders, if they're not Elon Musk, be discounted? Should startups, if they don't become Uber, be considered zombies? Do LPs truly care if there's a unicorn in the fund? Must we really surrender as a system to the fact that we need to flood startups with liquidity, reading about million-dollar funding and billion-dollar valuations, only to discover that many unicorns end up in the graveyard?

Myself and all of Startup Bakery think not. Especially not in the Italian economic system, which extends to a good part of the old continent. For this reason, we have set up a different path with our Startup Studio (or Venture Builder), which is not solely financial but rather industrially driven.

Be careful, this does not mean that our Venture path is better or worse than the classic one, but only that it is an alternative path, which many potential investors, founders, and companies can look at with curiosity and even favorably.

So, what changes?

Basically, what changes is that the startups (the underlying ones) are created and funded by us in the startup studio. From scratch. But without reinventing the wheel every time. This allows us to cyclically increase the quality, solidity, and average sustainability of the spawned startups and not have to desperately hunt for unicorns around the world to achieve interesting multiples.

We, as a Venture Builder, inject 100k in pre-seed and 200k in seed into all the startups we spawn. A lot? A little? I don't know. To us today, it seems right and, furthermore, in Italy, we would like to have more company because by definition the Startup Studio operates on contained volumes (in relation to the capital raised). What we expect, however, is to sell the spawned startups to selected industrial partners at average values between 6 and 20 million euros (respectively in 2 and 5 years).

By doing so:

• For investors, potential double-digit multiples are generated with startups’ capitalization values at least an order of magnitude lower than those required by "traditional" startups;

• It offers the industry the opportunity to acquire (when not create) innovation at contained values and not suffer the hidden costs typical of integrating startups (they know each other from the start);

• It offers the startup a concrete acceleration path, sponsored by one or more industrial partners (with the right mindset) and guided by a co-founder who has meanwhile learned fully and on the job the logic of doing business.

So, in summary, we believe in what we invest in because we do it with our own hands and because the target of each startup believes in it, executing pre-orders first and then subscribing to our SaaS, thus validating each business idea and creating the long-desired traction.

But it is in series A that the knots come to the fore.

Series A: who hands me the ladder?

At this point, a VC begins to look at the startup (preferably with a skeptical look and the raised eyebrow of a Spartan veteran waiting from the top of a cliff to see which recruit will appear before him). If they decide to enter the cap table, they usually require that it, even after their entry, still be in the hands of the founders, who, through the money raised in the series A, must scale (the cliff was only there to warm up) and tackle subsequent rounds B, C, D, E… whatever more you have.

However, looking better at the cap table, there is a type of co-founder that VCs rarely see: the Startup Studio! This one seems to have convinced their partner to found in minority or to take a path quite different from the standard. Moreover, this new path, where the startup is sold to an industrial partner at values around 15-20 million, does not allow the traditional Venture to achieve the target multiples. Not even one of the 3 conditions listed as important for a VC is respected.

And so how can one proceed further?

In search of the lost multiple

As in the best stories, it is precisely when everything seems lost that the twist occurs that changes the fate of the protagonists. The two Ventures (Capitalist and Builder) are destined to meet!

A VC could start by checking the other initiatives in the Startup Studio's portfolio. Oh yes, because if it is true that the single initiative doesn't resemble even remotely a sprouted unicorn, when one broadens their gaze to the other startups in the Startup Studio, one notices that they are all created with the same solid foundations and therefore all have a higher likelihood of generating exits, albeit more contained compared to the "standard".

The two types of Ventures (Capital and Builder) need to know and meet each other more and more, to find common ground, perhaps starting from here:

• The Startup Studio is a guarantor of the quality of startups, as it allows for (also) more serene early-stage investments;

• The Startup Studio is a co-founder who, in addition to spawning startups, spawns entrepreneurs. In Startup Bakery, we set up the company ourselves. It would thus be strange for a third co-founder to own a majority. What happens is that, within a maximum of 12 months, the chosen co-founder becomes fully capable of leading the initiative, but always alongside us, even after a partial exit!

• The Startup Studio and the co-founder transfer shares to a selected industrial partner, which guarantees the startup's growth and not its suffocation. Now, even in Italy, companies have well understood that it is not beneficial to "assimilate" but to "include", allowing the startup considerable independence (perhaps created in a Corporate Venture Building program).

There are obviously many other differences in doing startups within a startup studio, but for the more daring VCs who have made it this far, I have just one word: thank you!

In conclusion

For once Italy can leverage its industrial traction to innovate, avoiding that initiatives born here are forced to emigrate, following the perverse mechanism of classic funding and ultimately bringing value (read GDP) elsewhere.

The local Venture (hopefully European) has the opportunity to truly become a "System": different, alternative, but equally effective compared to that born in San Jose, in the not-so-distant 1972.

We are here.