The corporate-studio model continues to excite emerging studio GPs, yet remains a black-box of all that goes on behind-the-scenes in the deal room.
Our last episode with Elliott Parker received enormous praise as we began to reveal how studios can work with corporates most successfully, so we decided to continue the topic and sit down with Ben Yoskovitz, Founding Partner at Highline Beta.
We asked Ben if he’d be willing to “go there” and talk about the inner dynamics of working with corporates from his perspective. Let’s just say he definitely went there.
In today’s Q+A, we asked Ben:
Before we dive into the Q+A, we encourage you to listen to the full episode here and follow/subscribe for more episodes.
Ben Yoskovitz: My co-founder Marcus Daniels and I wanted to combine early-stage investing with hands-on building. We also saw an opportunity to accelerate ventures by partnering with corporations. Specifically, we had seen in our portfolios how young companies thrive when they secure a first major customer or distribution partner early on.
So we launched Highline Beta as a startup studio to meet founders on day zero, invest at the earliest stages, participate actively in company-building, and connect ventures with corporate partners. Over the last seven years, we’ve built and launched nine companies this way. We’ve also made nine standalone seed investments.
Ben Yoskovitz: We take a portfolio approach - incubating some ideas internally and spinning out others with corporate partners. Launching new companies with enterprises does add complexity. It’s essential to negotiate terms upfront before project work begins.
We don’t assume every engagement will or should result in a spinout. Sometimes the best outcome is an in-house venture wholly owned by our corporate client, an acquisition of an outside startup, or no new company at all. We remain agnostic and open to various pathways aligned to the client’s innovation strategy.
Ben Yoskovitz: Pre-incorporation work is more of a service engagement or consulting project for the corporate client. They often own resulting IP developed, and there’s no new legal entity created yet.
Post-incorporation after deciding to spin out a venture, the relationship changes substantially. Now new shareholders constitute an independent company with external investors involved. The corporate relinquishes control. A founder approved by all parties takes the reins to scale the business.
Ben Yoskovitz: We aim to negotiate equity splits upfront before discovery and validation activities commence. The corporation tends to take 10-30% initial ownership. Highline Beta targets ~20% for the sweat equity and extra value we provide. The founding team receives ~40%. And ~10% goes into a stock option pool for future hires.
The specifics depend on the corporate partner and context, but this framework aligns incentives and allows for venture profile creation. It becomes more complex if the spinout is closer to the core corporate business or in a highly regulated industry. So while we work towards some standardization, each new spinout involves some unique negotiation.
Ben Yoskovitz: Pre-incorporation during project-based work, we engage closely with corporate innovation teams and frequently report back to c-level executives leading the initiatives. But post-spinout with a new founder-led company, corporate stakeholders move to a board observer or advisor role. They have a voice but no vote in daily decisions or strategy.
The founder retains voting control with support from studio partners in governance positions. Too many legacy corporate interests and personalities persistently involved post-spinout can impair the ventures momentum and chance of success.
Ben Yoskovitz: At inception, the board often consists of the founder, a Highline Beta representative, and a corporate delegate if governance oversight is compelling enough to warrant a formal seat. By Series A, investors joining often mandate board changes.
Studios may exit governance roles as lead directors, maintaining only observer capacity or trusted advisor status for the founder. Corporates also tend to exit or move to observer roles at this juncture due to increasing liabilities and the demands of priority business units. But an ongoing alliance is still mutually beneficial between enterprises and their spinouts.
Ben Yoskovitz: Exiting Highline Beta’s board seat does not necessarily mean selling our full ownership position. Departing daily operations enables founders to take full control and makes room for new lead investors coming aboard. But as co-founders embedded from day zero, we remain close trusted advisors to support ongoing growth where we can.
We do evaluate opportunistic liquidity options case by case when significant step-ups in valuation occur early on. As studios, we’re not wedded to the belief that shooting for an IPO or unicorn outcome is always the right ambition level. There is no shame in base hits, so long as some home runs also emerge from the broader portfolio.
Smart capital deployment means assessing each spinouts priorities and momentum individually to determine if partial or full exits make strategic sense. We will continue investing in some ventures for the long play while others result in shorter holds. This combination helps studios generate appealing returns profiles for LPs across funds, especially during uncertain macroeconomic conditions.
Ben Yoskovitz: The studio began in large part with significant co-founder capital contributions and some initial funding from angel investor friends who believed in Marcus and my vision. Emerging manager studios can fund early operations more creatively through deferred compensation arrangements before establishing viable revenue streams. But it always helps in selling the blueprint to have your own meaningful skin in the game alongside outside partners rather than solely relying on others’ money to de-risk your concept.
Ben Yoskovitz: Over the next few years, we aim to scale studio operations prudently 2-3x by perfecting our model and expanding leadership. Adding vertical expertise through new specialized partner teams allows us to intensify focus on our priority sectors and adjacencies. We also continue developing co-investment pipeline relationships to sustain portfolio company funding access at seed and beyond.
Broader industry advancement depends on increasing specialization. As the universe of studios proliferates horizontally, investors have trouble differentiating capabilities. Targeting specific verticals and business model stages as a studio provides more value to founders and corporates while also improving outward positioning. I expect we’ll see consolidation of generalist studios and leadership emergence of vertical specialists with demonstrated expertise over the next decade.
