The Venture Studio Valuation Trap
Why Fund Frameworks Beat Company Valuations
Even the most successful venture studios, ones that have created billion-dollar companies, consistently face a fundamental challenge when raising capital: the valuation trap. This plays out predictably across the industry - months of negotiation as studios and investors wrestle with competing frameworks for valuing a venture studio holding company. The discussions inevitably end one of two ways: either accepting deeply compromised ownership structures or completely restructuring the raise to sidestep valuation entirely.
This challenge persists because investors and studios keep forcing company valuation frameworks onto what are essentially fund vehicles. The solution is surprisingly simple - venture studios should be evaluated as fund vehicles, not companies. When a venture studio raises capital through a holding company designed to fund and hold a portfolio of companies, that entity functions like a fund. And no one asks for the valuation of a fund. Where this gets messy is when the studio raise is in to the permanent studio entity. Regardless of legal structure, venture studios should be evaluated more like funds than companies. When viewed through this lens, even the thorny question of permanent studio ownership (GP stakes) becomes manageable through return allocation frameworks rather than traditional valuation approaches.
Why Fund Treatment Matters
Recent data from Vault Fund shows that venture studio performance is not materially impacted by choice of investment vehicle structure. What does matter is speed to capital and alignment with investor preferences. Studios that insist on company-style valuations often face:
Extended fundraising timelines
Compromised ownership structures
Misaligned incentives
Regulatory risk
The Unique Circumstances of Studio Vehicles
Venture studios face a unique set of operational and economic circumstances that distinguish them from both traditional venture funds and operating companies. While venture funds typically focus solely on capital deployment and portfolio management, studios must build and maintain significant operational infrastructure to execute their company creation mandate. This fundamental difference drives three key factors that make studio vehicles distinct:
1. Multiple Value Creation Roles
Unlike traditional fund managers who primarily allocate capital, studio teams actively create value at multiple levels. They function as entrepreneurs, identifying opportunities and shaping initial concepts. They operate as hands-on builders, providing active company building and operational support. And they serve as investors, deploying capital and managing portfolio outcomes. This multi-faceted role requires different skills, resources, and incentive structures than traditional fund management.
2. Operational Infrastructure Requirements
The company building mandate demands substantial upfront and ongoing investment in operational capacity. Studios must maintain core teams with diverse skill sets, fund shared services that support multiple portfolio companies, and develop robust infrastructure for company creation. This operational foundation represents a significant portion of capital deployment, creating a different economic profile than traditional funds where nearly all capital goes directly into portfolio investments.
3. Extended Value Creation Timeline
The studio model typically requires longer runways before generating portfolio returns. Building companies from scratch, rather than investing in existing ones, extends the path to proof points. Studios often need multiple cohorts to demonstrate their model's effectiveness, requiring sustained operational capacity across longer time horizons than traditional fund deployment periods.
Addressing These Circumstances
The venture studio ecosystem has evolved several approaches to address these unique circumstances, as revealed by extensive research examining over 140 studios globally by the Vault Fund. Each approach offers different trade-offs between operational flexibility, investor alignment, and regulatory complexity.
Traditional fund structures or dual-entity approaches completely sidestep valuation through standard fund economics. While these vehicles require larger raise sizes, typically $25M+ to support standard management fees, they align well with institutional investors familiar with fund structures. The added complexity and setup costs often make these impractical for newer studios, but they represent a clear path for more established platforms.
Fund-like holding companies offer an alternative for smaller raises, providing similar economics without the full overhead of fund structure. These temporary vehicles, designed around specific cohorts, maintain fund principles while offering greater flexibility in timing and operations. This approach has proven particularly effective for studios building initial track record.
For permanent studio entities securing GP stakes, the same framework of skipping valuation in favor of return allocation proves powerful. Rather than struggling through traditional valuation exercises, these raises focus on precise mechanisms for return allocation, acceleration provisions, and investor protections. This approach provides concrete tools for addressing investor concerns while avoiding the valuation trap that can stall fundraising.
Evidence Supporting Fund Frameworks
The empirical evidence strongly supports treating studio vehicles more like funds than operating companies. Analysis of studio performance across different vehicle structures shows no correlation between legal structure and operational outcomes. Studios using fund frameworks consistently close capital faster and maintain better alignment with institutional investors than those forcing traditional equity structures or more complex fund structures. The data also reveals consistent capital deployment efficiency across models, suggesting that operational effectiveness depends more on team execution than vehicle structure.
The Regulatory Reality
The regulatory landscape for venture studios remains relatively undefined, but the direction is clear. Regulatory bodies consistently look to the substance of activities rather than legal form when determining oversight requirements. Studios raising capital from investors, deploying that capital to build portfolios, marketing returns, and managing those investments are conducting regulated activities regardless of legal structure.
This reality creates both obligations and opportunities. Studios must implement appropriate governance and compliance frameworks, but can benefit from the established precedent of fund management regulation. Using proper GP/LP terminology and fund governance structures, even in holding company vehicles, provides a clear framework for managing regulatory requirements while supporting operational needs.
Critical Considerations Under Fund Frameworks
Viewing studio vehicles through a fund lens provides clear frameworks for evaluating and structuring these investments. However, these frameworks must be adapted to account for the unique aspects of studio operations. The investment strategy must detail not just capital deployment but the entire company creation methodology. Economics need to balance traditional fund returns with compensation for entrepreneurial and operational value creation. The execution framework must span both investment management and company building capabilities.
Each of these areas requires careful consideration of how fund principles apply to studio operations. Distribution waterfalls need to account for both investment returns and entrepreneurial value creation. Governance structures must support both portfolio oversight and operational decision-making. Portfolio management approaches need to balance traditional investment monitoring with active company building support.
Regardless of the fund structure used, clarity on the economics of the studio and costs of building companies and the use of investor capital within the studio is critical. The use of multiple operational entities and fund vehicles allows studios to present themselves as standard fund structures at first glance, but the costs for a venture studio to deliver as investors, operators, and entrepreneurs is embedded in the studio model. These costs are rarely covered by typical management fees that only cover the cost of being a good fiduciary investor of capital, leaving gaps in how a studio finances the entrepreneurial and operational value creation efforts which are often revealed in due diligence and audits.
The Path to Maturation
The venture studio model represents an emerging asset class with extraordinary potential. Early data shows promising results, but unlocking consistent, efficient funding will be critical to realizing the model's full impact on innovation and value creation. While venture studios are far more than just investment vehicles - they are complete company creation engines - treating them like funds from an investment perspective removes unnecessary friction from the funding process.
The Economic Evolution
While structures should mirror funds, studio economics warrant fresh thinking. Traditional venture funds offer 20% carry to general partners who primarily play an investor role. Venture studios play three distinct roles in every company they build:
Entrepreneur - identifying opportunities and shaping initial concepts
Operator - providing active company building and operational support
Investor - deploying capital and managing portfolio
This expanded scope of value creation demands different economics than traditional fund models. The specific mechanics of these splits - how to properly compensate for the entrepreneurial and operational value creation on top of the investor role - represents one of the most interesting developing aspects of studio model evolution. But that evolution starts with recognizing venture studios as fund vehicles first, enabling clearer frameworks for both temporary vehicles and permanent studio investment.