Can the studio model build a billion dollar company? Santa Monica's Zuma Ventures is the latest to try

By Michael Carney , written on October 22, 2014

From The News Desk

Accelerators are so 2011, or so it now seems. Few, save for Y Combinator, have managed to generate true venture caliber returns for the limited partner backers. And there’s only a handful who have shown themselves capable of consistently recruiting and graduating successful and sustainable companies. So its no surprise that many would-be investors are looking for new models to find leverage in backing early stage startups.

Angel investing or raising a micro-VC fund are always options, but each lacks the hands on company-building thrill that many entrepreneurs turned investors crave. Thus, the new model du jour seems to be the technology studio. Part fund, part incubator, part technology platform, these company building shops are cropping up in markets across the country. New York has Betaworks, Los Angeles has Science, and the Valley has Giant Pixel and Kevin Rose’s N-O-R-T-H, among others.

The latest group to jump on the studio bandwagon is Santa Monica-based Zuma Ventures, an upstart founded by David Carter and Allen Hurff. Carter is best known as the co-founder and CEO of Vertical Technologies (acquired by Zebra), Thoughtstar (acquired by iManage) and S5 Wireless, and more recently as a co-founder of the Venice-based Amplify.LA accelerator. Hurff was the EVP of Engineering at MySpace and more recently an entrepreneur-in-residence at Science, with which Zuma will now be competing. Carter and Hurff will be joined by Apple, Adobe, and Disney veteran Richard Wolpert as a Venture Advisor and a handful of support staff.

Zuma is withholding details of its capitalization at this stage, but Carter tells Pando via email, "We are an operating company and do not have a fund element at this time. No, we do not receive management fees and structurally run like a traditional tech company." The near-term plan, Carter adds, is to “build 3 companies internally and not fund external ventures during [Zuma’s] first phase.”

Under the studio model, Zuma will create companies “from ideation to eventual launch as an independent entity,” Carter says, adding, “Internally, Zuma looks, acts, and functions like a technology company although we work on several projects/companies simultaneously with the ultimate goal of creating stand-alone companies with independent management teams.”

But underlying this parallel entrepreneurship, the thing that differentiates studios from incubators is a shared foundation of technology and services that will support all the companies created. In Science’s case, this means a data and audience analytics platform, customer acquisition capabilities, and more recently mobile development frameworks and consumer intelligence. We have yet to see what Zuma will build to support its future startups, but given Hurff’s experience with Science and, before that, Myspace, it’s likely that the group has plenty of ideas in mind for areas where the parent organization can create leverage for its future portfolio companies.

There are a few big risks with the studio model of company building. The first is, what will Carter and Hurff do if one of the companies created under Zuma emerges as a breakout success? Will they choose to turn their full time attention to that project at the expense of any others? Given their pedigree, any outside LPs in Zuma might prefer this outcome. But as individual companies raise their own funding rounds, new investors will expect Zuma to continue providing support and resources to the companies they birthed. It’s a true Catch-22.

Similarly, given the considerable role that Zuma will play in conceptualizing and building these future companies at the early stages, there are questions as to how the studio will structure the equity ownership for future independent management teams. Incentivizing non-founder executives has proven to be a thorny challenge for studios in the past and Zuma has yet to articulate how it plans to address this issue. Carter tells Pando:

We are swinging for the fences in regards to recruiting a management team.  In order to attract and properly incentivize a top team, we are planning on 20 to 30 percent equity for the CEO and an extra 15 percent for his or her team. We consider the CEO a co-founder and are interested in entrepreneurs with at least one successful exit and domain expertise.
Finally, while parallel entrepreneurship is certainly a fantasy of many founders who’ve tasted success previously, it’s a model that simply rarely works in practice. Throwing out Steve Jobs and Elon Musk, two outliers in every sense of the word, you’d be hard pressed to find an example of a founder building multiple companies simultaneously where one or more of the companies didn’t suffer as a result of this divided attention. Startups are just too hard, too intensive, and too binary to divide your focus.

And even with multiple “founders” in Carter, Hurff, and Wolpert, Zuma may risk making similar tradeoffs for its ambitious model. Sure the plan is to bring in outside management to lead each of Zuma’s subsequent startups, but in many ways that already erodes the value of having this type of experienced team involved at all. The more companies a studio like Zuma founds, and the more success each one finds, the less time Carter, Hurff, and Wolpert will be able to dedicate. It may fall into the good problems to have bucket, but it can be a problem nonetheless.

One thing that has changed dramatically in recent years is that the cost of starting companies has plummeted considerably. As such, it’s never been easy to slap together a few MVP (minimum viable product) versions of a new product ideas, launch them into the marketplace, and see what sticks. It’s also more desirable than ever to work in a startup (save for maybe a brief window in 1999), versus a more established company, making it easier to recruit talented teams than at many points in the past.

These two factors combine to make now an ideal time to launch a studio. And with LA continuing to prove itself as a legitimate startup ecosystem, the timing couldn’t be better for Zuma, founded by two local success stories, to plant its flag in the region. But assembling a few million bucks, renting an office, and throwing a couple ideas on the whiteboard is the easy part, at least relatively. Proving that you have the vision and the execution ability to turn those ideas into sustainable companies is another thing entirely. We have yet to see a $1 billion-plus company emerge from a technology studio. Carter and Hurff will be hoping that, even with its late start, Zuma can be the first.

[illustration by Brad Jonas for Pando]