Risks and Advantages of Building Ventures with Corporates. Jordan Schlipf @ Rainmaking

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I’m shocked by the statistics shared by Jordan Schlipf from Rainmaking: When corporates attempt to build new ventures themselves, their success rate is only 8%, meaning 92% fail. For these 8%, it takes twice as long to reach scale compared to usual startups and requires 4 times the investment capital. Here are 4 reasons why it’s so ineffective and what to do with it (if you can help corps with the venture studio approach):

1. High salaries instead of equity reduce motivation. If ventures’ CEOs/founders are paid a high day rate, they behave like employees rather than entrepreneurs. To act like founders, they need a low base salary, equity from day one, and a focus on enterprise value creation. When Rainmaking partners with corps to build companies, they allocate 30% to founders (CEO & CTO by 12,5%, and 5% ESOP to key employees), 20% to studio, 50% - split between their fund and corporate based on investment contributions (50/50 or 2/3 corporate 1/3 them).

2. Wrong talent choice – internal employees rather than actual entrepreneurs or founder-minded individuals. For example, when Rainmaking partners with corps to build companies, attracts 2nd or 3rd-time VC-backed founders.

3. Wrong funding: too much or not enough money. Rainmaking usually invests alongside with corporates in 3 rounds during 5 years (UK case) (equally or 1:2 contribution):
– 1st initial round (12 months) - £600K
– 2nd seed round (18-20 months) - £1.5M
– 3rd round (2-3 years) - £4-8M
Targeting exit amounts from £40M to £150M in the UK, higher in the US. Acquirer – the same corporation that invests in a venture.

4. Decision-making follows corporate governance structures instead of startup governance. This is why Rainmaking strives to keep startups as independent from corporates as much as possible. Still, sometimes internal politics and career paths can lead to irrational decisions, such as shutting down promising ventures or stopping funding.

Other insights from the interview:

1. They target $1B-revenue corporations as partners.
2. 9+ companies in the portfolio; team of 8-10 people.
3. They do not syndicate deals with external VCs; they and the corporates invest together in every round from incorporation to exit.
4. Operates in Europe, the US, the Middle East, and previously APAC (sold to Bain & Company).
5. Having an investment committee that is separated from the studio itself leads to better investment decisions. Their structure (different teams):
– Fund vehicle: The capital raised is invested deal-by-deal, alongside Fortune 500 companies, with approval from an investment committee.
– Opco: The studio’s burn rate is approximately £1 million per year.

Mistakes:

1. Opened too many consultancy offices globally without achieving critical mass in each. 5-8 people lacked the critical mass needed for efficiency and growth and struggled to balance sales and delivery.
2. For years, they had a really badly run business: the revenues were doubling or tripling every year, but the profits only grew from $1 million to $1.5 million over four years. So, they focused more on co-building with a corporate business model than a consultancy.

Watch the full interview to know why it’s hard to raise capital for venture studios (both holdcos & funds), why it’s difficult to build ventures & implement the model in Asia + more examples, numbers & insights.

Sorry for publishing it so late (recorded ~1 year ago).

00:00:00 Intro
00:01:52 Venture Studio Family Community
00:03:07 Equity split
00:06:52 Costs & salaries of the team
00:10:15 Benefits of having a fund
00:14:50 Locations & scaling the consulting business
00:22:08 Marginal profitability of the projects
00:24:34 Exit valuation
00:31:18 About the path of Jordan Schlipf
00:49:11 Portfolio & Structure
00:51:11 Why is it difficult to build ventures in Asia?
00:57:30 Scalable model in RVS
01:03:15 Highlights of the interview

Jordan Schlipf:   / jordan-schlipf-0b855174  
Rainmaking / RVS: https://rainmaking.io/

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