There are many things that make a startup successful, but one of the most significant keys to success is having sources of capital to develop, test and validate your startup idea. While the process of raising money for a startup can be daunting, startup studios have effectively set up core structures that allow them to finance their operations and startup creation efforts. Startup studios function by providing capital to startups that help get the ideas off the ground and fuel them all the way to launch and beyond.
Startup Studio Insider, a top resource blog for startup studios and founders, provides some of the most prominent fundraising methods for startup studios:
- Fund Model
With the fund model, the startup studio is responsible for providing funding that is composed mostly of venture capital firms and angel investors or even government grants. For the capital raise, a part of this investment goes towards managing the studio internally such as founders’ salaries, office space needs, overhead, and others, while the remainder is allocated to develop a new startup venture.
This method also includes a term called “carried interest,” which is a way to carry the interest of the studio to ensure that the startup studio venture exceeds the goals and expectations in the future. As such, startups can feel secure that post-launch efforts are conducted appropriately.
- Holding Entity Model
With the Holding Entity Model, investors put their money directly in the startup studio in exchange for equity in accordance with how much they invest. As such, investors are seen as business partners with the studio, and therefore, they have a say in the studio’s operations, hiring, and project selection.
Once the new startup is created, the startup studio and the investor split the money earned in accordance with their equity structure. While this model is oftentimes easier to explain to investors and get them on board to join in the project, one of its downfalls is that studios can lose autonomy on how to spend its money and the studio’s role is diluted to a degree.
- Non-Dilutive Model
Non-dilutive funding refers to any capital a business owner receives that doesn’t require them to give up equity or ownership. As it’s name details, non-dilutive introduces a relatively new method to the traditional financing space: revenue sharing. This type of funding is effective and attractive for investors because the longevity of the investment will eventually generate a bigger return.
As such, the model is more centered around the company’s growth rather than equity, which helps to align the interests of startup studios and investors they choose to work with.
In Conclusion…
