Traditional venture capital funds are focused on home runs. Their math simply requires at least one of their investments to be a home run - with a single investment returning 1x or 2x the entire value of the fund. The larger the fund is, the bigger that home run needs to be. Large venture funds require unicorns - $1+ billion exits - to generate the needed returns for investors. 

But there are only so many unicorns out there - about 38 per year. For any given startup, there’s a miniscule chance of becoming one of them. That’s what makes venture investing so hard - and so exciting. 

Venture studios like Novy are playing a different game. Of course, studios certainly love unicorn-class outcomes. Santa Monica-based studio, Science, incubated Dollar Shave Club before its reported $1 billion exit to Unilever. But studio economics don’t require unicorn outcomes to provide very strong investment returns to investors. 

In fact, studio economics can be much better for investors (and founders) than traditional VC. Why?

• Higher ownership stake: At exit, venture investors together typically own ~50% of the company. So any single venture fund usually owns less than 10%. Studios own much more - usually over 30% - and up to 90% in some scenarios. Thus, a studio might own 3-9x more at exit. That’s a big deal!

  
  

• Control and influence: Because of that higher stake, studios have much more control and influence in the portfolio companies they’re co-founding. The experienced team at a studio can have more impact and help drive the company forward, faster, which is in everyone’s best interest.

  
  

• More options to bet on: Because studios own so much more, it also opens up many more investment opportunities. A $100 million exit for a studio can be as good as a $1 billion exit for a VC. And there are many more $100 million exits than $1 billion exits, so studios have more flexibility to take bets.

• Co-founder valuation: Studios are usually the first investors in a new company, where its valuation is lowest (and risk is highest).
  
  

• Speed: Despite the fact that studios are investing very early - usually co-founding a company almost from the start - studios can greatly accelerate progress. A 2022 study by GSSN estimated that studio-backed startups go from formation to Series A twice as quickly - shaving two years from the company’s timeline: 

  
  

That speed comes from a few things: 

1. Because the initial investment is substantial, companies can skip the painful and time-consuming step of raising money from friends, family, and angel investors to get started, as well as raising a traditional “Seed” round. Instead, they can proceed straight to Series A. This saves a lot of time at the most critical moments of the company’s formation, but it also significantly reduces dilution for early investors. 
   
   

2. Studios also give their portfolio companies a drastic head start with dedicated resources and experienced talent, right from the get-go. This greatly reduces mistakes and time-consuming inefficiencies, especially for first-time founders. 

3. Studios bring a proven, relentless focus on growing value and driving the company to exit that many first-time founders are just figuring out how to do.

These ultimately drive:

• Better IRR: If this speed gets the company to exit faster, that could mean a higher IRR (Internal Rate of Return) for investors - they’d be getting their money back sooner.
  
  

• Less dilution: The experienced studio team and earlier significant capital investment can let companies raise less capital overall, or even skip entire funding rounds.  

Illustration

So let’s do some math to illustrate these ideas in a simplified, hypothetical scenario. 

In this example, we’re comparing:

• A typical venture-backed company, starting with friends / family / angel investors, and progressing through Seed, Series A, and Series B rounds. 

  
  

• A Novy-backed company, skipping the Seed round, but with the same Series A and Series B rounds, with Novy starting at 33% ownership - the lowest stake we contemplate.

  
  

• Both sell for $100 million. 

In this hypothetical example:

• Novy’s proceeds are higher than any of the investors in the ‘Typical Scenario’; 

  
  

• Novy’s proceeds are $21M - a larger amount than it raised from its investors - this would be a home run for Novy; 

  
  

• For the hypothetical venture funds, the results are different. The earlier investors - the friends and family, and Seed investors - are likely to be very happy, with 20x returns. In this example, the company manages a respectable, but modest, exit, at $100M. This is a base hit for Series A and B investors. Certainly everyone would be better off at a $1B exit, and that would be the goal when possible.

  
  

• The founder is better off with Novy, even with the initial dilution being higher, because they’re diluted less over time;

  
  

• Most likely, the Novy scenario will reach exit faster, having skipped an entire investment round, getting money back to investors (and to the founder) faster. 

  
  

  
  

While every scenario is different, and investing in startups is a high-risk investment in every case, we’re excited about the potential of an investment model like Novy.