How a Startup Studio Works
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Hello, David. Ben, how are you?

I am joining you from a new location today. Oh, snazzy new digs. I am trying out one of these new indoor phone booths that we just got here at the Pioneer Square Labs office. And it's got a nice cushy inside that looked good for absorbing sound. I believe on our last LP show where we were looking at our Twitter feeds, you were talking about indoor phone booths. It was clearly on your mind. Yeah. I mean, we constantly have the problem of...

too many needs for conference rooms and not enough of them. And this is the 2019 hyper-efficient solution to that problem. Yeah. How many people work at PSL now?

So we have 25 core team employees, but I think across our spinouts, it's over 250 or so. Wow. And in the office, listeners, this will become relevant in just a minute, as you already know from the title of the episode. Good question about in the office, 50 to 75, I think. We regrettably only have two floors right now. So at some point when the companies hit 10 or 12, they got to go find space, usually close by in Pioneer Square. Yeah.

Hence the need for phone booths.

Four years ago, we started Pioneer Square Labs and startup studios weren't really a thing. And we started right around the same time as High Alpha. And there had been some other previous things such as Betaworks and Science and the original Idea Lab that had started before. But, you know, now there's like over a hundred studios and all these different cities and, you know, a handful of unicorns that have come out of them and everything.

industry associations, and it's this whole thing that I think has sort of been begging for a little bit more explanation on what they actually are. Yeah, and I haven't really...

seen or heard any really good content out there from people like yourselves who are founders of this new wave of studios talking about them. So I'm excited to talk about it. And we should clarify, the we of doing all the great work of starting this is not me. It's you and you and your co-founders at PSL. I'm stuck in the old school, you know, traditional venture world. But

Tried and true, baby. But this is great. I get to learn a lot more about, well, I already know a bunch, but along with our audience, get to reiterate and learn a bunch about what you guys are doing. So where should we start, interviewer? Well...

Let's go back to 1890. No, obviously Ben and I both used to work at, at Madrona venture group in Seattle and you and your co-founder, Greg Gottesman had worked there, worked at Madrona labs at within Madrona. How did you guys start thinking about like bringing back the studio concept? You know, you mentioned how alpha was out there and obviously we, we know Scott, but it wasn't like it is now where there are a ton of these out there. Like how did, how did the idea kind of form? Yeah.

Yeah, well, all that credit goes to Greg. Greg had started Rover by pitching it at a startup weekend, as we've well covered on this show, and hired Phil to, you know, head up the technical side of the organization.

and served as interim CEO for a handful of months. And Aaron was an entrepreneur in residence at Madrona. And so Greg, over the period of time of trying to show some proof in the business and Phil really building product, convinced Aaron that Aaron should jump over the fence and be the CEO. It really occurred to Greg, well, gosh, if I can do this,

you know, with one company like Rover, maybe I can do it systematically. So that was sort of the birth of Madrona Labs. And we had started two companies there, Mighty AI, which just got acquired by Uber's advanced technology group for their self-driving car stuff and all the data labeling and Reply Yes, which was acquired a little bit earlier by Nordstrom, which was a SMS based e-commerce company. I didn't see that Nordstrom had acquired Reply Yes. That's awesome.

Good for you.

And so we started thinking about Pioneer Square Labs as, gosh, what if you could really blow it out with a startup studio kind of platform rather than being part of a single investment firm, which tons of great venture capital firms have incubated companies over the years. What if you actually could be a separate entity and be funded by a ton of venture capital firms? So that's what we did. We got 14 venture firms, foundry group kind of catalyzed the funding, but

tons of great firms here in Seattle and in the Bay Area to put money in, over 50 angel investors, basically all the active angels in Seattle to really build this sort of coalition of people who were, of course, bullish on the success of the studio model itself, that there could be a great return there, but more importantly to...

you know, really understand what companies were being started so that all of those angel investors and venture firms could potentially invest in the seed rounds of the companies that, uh, that spun out. You know, I talk about, uh, you know, as a VC, like the, the lifeblood of our business is, is entrepreneurs starting new companies. And, uh, um, you know,

This is a great app. How many spin-outs in total have you guys had over the last five years? We just spun out our 16th. That one hasn't been announced yet, but the other 15 have. That's awesome. I mean, including Glow, 15 companies, 16 companies that wouldn't exist otherwise.

As you mentioned, Idealab, like there have been a few of these studios way back in the previous generations of, you know, the startups and the internet. How much time did you spend studying those models? And what changed for you guys that was like, oh, we can do this scale in a different way now and for everyone else out there?

Well, it's interesting. So yes, definitely talk to folks. Talk to the leaders at both Betaworks and Science, who were sort of the two leading folks at the time. And actually, High Alpha has been started by Scott Dorsey, who's obviously a friend of the show and did a great episode with us on the exact target acquisition, was starting High Alpha at exactly the same time that we were starting PSL. And so we sort of bounced a lot of ideas off each other on how these things should be structured and formed. And we share some investors, too.

Definitely talked and got a lay of the land. I think the thing that has changed, we felt like there was this really odd mismatch where despite the fact that it's easier to start or I should say cheaper to start a company than ever, but just as expensive to scale it. So it's with the advent of Amazon Web Services to

very quickly start a, you know, an internet based application and acquire customers on a zero fixed cost basis. So you can just buy a handful of Facebook ads, and there's no sort of like, large asset you need to build to start acquiring customers, you know, so companies are cheaper than ever to start. But there was still this massive gap of you basically have

two options if you want to work in the technology industry. You can take no risk and work at a big company, or you can take all of the risk and go bootstrap something on your own until you can get it to a place where it can get funded. And it felt like there was this sort of like missing spectrum in between the two where, gosh, you're a great operator. You know, you've risen up through some company. Maybe you're a serial entrepreneur who started some things before, but just know how much it sucks to be in that phase of finding your way in the woods.

Wouldn't it be nice if there was some option where you could not only sort of like have a risk defrayed way of starting a company where you can spend some time to figure out should this even be a company before I sort of fully launch into it, but then also to basically, like I said earlier, build economies of scale around all the knowledge of what it takes to validate an early stage idea and to determine if it's worth your time or not, which for everybody that we're working with, time is

by far the most valuable asset. What we do with our careers and the way that we spend our days is highly considered. You know, I have to imagine a big part of that that's changed from the

first generation of startups in the internet and studios is, there's just exponentially more people working in technology now. I mean, we joke about on the main show about how like everybody knew each other back in the day on the internet. And that really was the case. Now there are, you know, millions of people in, you know, like San Francisco alone, but like forget like in Seattle too, and like maybe not millions at Seattle, but hundreds of thousands and, uh, you know, all across America and across the world that are working in tech. And,

And some percentage of those folks are going to fall into the two camps, like you said, of like, I want none of the risk. I want to just work at Google or Facebook or whatever at a stable big tech company. Or I want all of the risk. I want to start a startup on my own or, you know, as a team or solo. But then there's also going to be people in the middle, too. And there's just so many more people that I imagine there's more talent that can fit into that for you guys. Yeah.

Yeah, and it's funny. I mean, we so we looked at the data in 2018. We started 14.3% of all of the companies that received early stage funding in Seattle last year.

That number has shocked me because I continue to believe that most companies will be started the traditional way. Like, I don't think this model is sort of the right way to start a company or the way everyone should start a company by any means. And you guys also have a venture fund now that you invest in. Yeah, I should say, too. And I'm actually doing a lot of work on...

that as well. PSL Ventures, $80 million early stage fund, both to invest in the companies that we start, but then also to invest in the companies that we don't start that are great Pacific Northwest companies. To loop back to your question of why now, it is amazing to me with the tools that we have available with the, we actually do a bunch of the sort of no code movement stuff. I just can't believe how much there is

off-the-shelf tools that are available that you can stitch together to validate a concept where you really can, with the tool set available today, get good at this thing that's called concept validation that basically nobody got good at before because...

If you're lucky, you start a company once in your life. If you're one of the rare 10% of entrepreneurs that start multiple companies in your life, you have two, maybe three times you do it. But nobody's lather, rinse, repeating this early stage that most people look back on and say, gosh, if it worked, which is rare, they say, gosh, it was fun because we were such a close...

small, tight-knit team. But nobody really looks back on that and says like, oh, it was easy and we knew what we were doing and we had good tooling and good systems and good processes around that. And so I think like we sort of saw this opportunity as, is that actually a core competency that is possible to get good at? A little bit.

a little bit of a side, but made me think of it. Do you guys use retool? We don't. I've just started hearing about this. I haven't used it yet and I don't think any of our portfolio companies have yet, but basically it's a way, you know, without actually writing code that you can, it's a product and a company that you can stitch together a lot of essentially a back end, quote unquote, of,

a product and get it out there without actually writing any real code. It's like, uh, that's cool. It's like, you know, there's like bubble and web flow and like, you know, sort of front end versions of no code stuff. Like this is like the backend versus my understanding of it. But, um, listeners, if you, if you used it, give us a shout, let us know.

We've done Airtable for a lot of stuff. I think, frankly, like as old school as it sounds, like we do a lot of just use Instapage, make a landing page for something and drive a bunch of traffic to it and then benchmark all the conversion rates of the traffic that we've driven against all the conversion rates of the other probably 120 or so things that we've run Google or Facebook ads against over the course of starting, you know, starting PSL. Wow. Cool.

Yeah.

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Let's jump into how it works then. So there's two sides, basically, as I understand it, to your business and process, and one of which is the idea side and the other, which is the people side. And of course, they meet, you know, in the middle. We'll start with the idea side. How do you do that?

How are you guys coming up with ideas? And then what do you, what do you do when someone has internally on the team, something that they want to pursue? So I'd say 50% of our ideas come internally within the team. The other 50% come from, uh, an entrepreneur who's approaching us with an idea, who's someone that maybe we've worked with before, or we have a really positive reference on, or, um,

you know, for whatever reason we, we believe that that person would be a great founder that we want to work with. Our original model was, uh, we will come up with our own ideas and then when it's working, we'll come find you, which was silly. And we've, we've become much more flexible on where the idea comes from. And I think, um,

You know, we're far better off for it. But we still generate a bunch of ideas internally. We hold highly structured ideation sessions every couple weeks where it's sort of- Is that highly structured in air quotes or actually highly structured? No, it truly is. Like we actually, we've developed a two-minute pitch process voting. We've actually built software around voting and determining if we should continue after a two-minute pitch

pitch into a 10-minute moderated discussion or whether we should sort of kill the idea on the spot. There's two actually very important things to the numerical voting. One is five is not on the number pad, which means that you have to have an opinion. And two is, yes, we pay attention to the average. The average should be north of a five to continue on to a discussion. But the

If anybody votes 10, it automatically goes to a discussion because we believe that the best ideas can be polarizing. And so, you know, if the whole group is huddled around fours and sixes, but it trends at four and a half or something like that, but somebody's a 10, you know, it's very much like a pound the table style of investing where you say, look, that person really wants to go to bat for it. We owe it to the idea to figure out why that valuable member of our team is so obsessed.

And so that's sort of like the automatic go button. It's like the, I haven't watched American Idol in long enough, but there's like, what are these shows? There's like a button that the hosts push and then you're automatically through to the finals or whatever. Anyway. Okay. So that's step one is two minute pitch. There's those, you know, there's like that. How often are you guys doing these ideation sessions?

every other week. And sometimes they're no topic, which is like, come bring whatever you're personally excited about. Often they're around a vertical that we want to do work in. So we had one three and a half years ago in insurance and Jet Closing, which is a title and escrow title insurance company came out of that. So I think they're thematically driven in that, you know, we pay attention to trends much like any investor would, and then try and double down on

what areas should we start a company? And then I would say the other times when we will verticalize those is if there is an entrepreneur in residence that we're excited about working with, that we're trying to find something on together and they're passionate about a certain area or have a background in a certain area, we can do ideation sessions sort of specifically geared toward that where we'll send home research to read and everyone sort of comes in with how can I apply different business models to this industry? Got it. So I would assume,

that come up in this stage there, that's not your 120 that you've pursued. Like that's, you're probably in the like many thousands that you've thrown out. Yeah. I think I was trying to figure it out the other day. Cause I was working on our numbers. We've, we've killed nine out of 10, uh,

At that stage or 9 out of 10 period of being killed? Yeah, we've killed 9 out of 10 that we've actively done work on. So that means, I don't have the number in front of me, but it's something like 170 or 180 ideas that we've actively worked on, which yeah, to your point, I think it's something like 700 or 800 different concepts that we've gone through and are in this gigantic database that we've built of mostly bad ideas that are stored for if you ever want to visit the graveyard. Yeah.

Do you guys use what, like Airtable or Google Sheets for that? It's a Postgres database. That actually was not no code. That was initially an intern project. Somebody building our ideation software system. Okay, so two-minute pitch. Then if you get either a 10 or enough enthusiasm from the two-minute pitch, then what happens? Everything has these two paths. One is the path where there's...

We know who the founder or founders are from the very beginning and we're working around them where that's a much easier path because like we don't have to designate an internal project lead. Like there's not someone who's trying to, you know, from our team spend the majority of their time putting on like the pre-CEO hat, which is normally my job when I'm working on the studio stuff is go pretend that you're running this company and see if there's something there or not.

that's easy because then it's like, cool, the person who's going to be the founder of this sort of owns it from day zero. Perfect example, you did this for Glow before Amira came on board, right? And did an excellent job as a customer, I can say.

Yeah, as for folks who are sort of wondering how that went down, Amira had been thinking about something very similar. But at the time, actually, neither of us had the perfect incantation of how it ended up. David, you and I were very much talking about Glow, FKA, Kimberlite as an app. And Amira was thinking about it as this SMS service and sort of like only through going back and forth a bunch. Do we sort of land together on this should definitely be a web app? Yeah, yeah, totally. Yeah.

So model one is the founders are running with it sort of from day one. Model two is someone like me will basically own it and...

And every week be sort of faced with the decision of justifying why this thing should continue to exist. And so we try to put the right balance of the project lead is always going to be inherently optimistic. And then there should always be someone else, either within PSL or maybe their co-founder, it's probably someone within PSL, that is sort of the foil to that of figuring out, okay, what

Have you thought about this? Have you thought about what's the thing that's going to kill this business? And the order that we tend to work on ideas in is if you think about the 10 slide deck problem, solution, market size, all this stuff, you just basically try and go down that list and look at the ones that look highest risk to you. Like, ooh, is that actually a problem? Or can we actually build the technology to create the solution for that?

Or, ooh, is the market going to be big enough? And you basically try and kill it with the most obvious one. And then only when you get through what seemed like they should be the biggest risks, all the way down to being able to kind of actually make the whole 10-slide deck and be like, there's a real case for every one of these things. That's when it's on the path to being spun out, is when you determine that you tried to call it a bad idea in all these different ways, but it turned out to actually be a good one. What have you guys found...

over the years since it was 2017

15 when you started or 2016? October 2015. October 2015. Wow. Like that was almost the same time we started Acquired. It was exactly the same time or maybe like a month. I think we started Acquired a month before. That's awesome. I never put two and two together that you started two things right at the same time. Because we both had Madrona in our title when we started the podcast. When we first started the show. That's right. Yeah. So you mentioned, you know, there are

earliest instantiation of PSL was don't find us, we'll find you. Well, it was also, I mean, it was basically, it was eight of us. So there's four co-founders and then four super fast sort of early hires. It was also like,

We were trying to do stuff in parallel, but we basically were all working on the same stuff. Maybe you had maybe two things going on at once. We didn't really have the bandwidth to be able to do that or know what resources you should put on a project at what time. Yep. How has that evolved? I mean, now I would assume certainly there are still cases where like somebody internally at PSL is running with an idea pre-CEO phase, but it sounds like it's much...

smoother when you have the founder like there at the beginning, right? Yeah, it's a gigantic maze of funnels. Basically, there's one macro funnel that is sort of the five stages. And only because we've brought in my wonderful partner, TA, who's more systematic and organized than I could ever hope to be, do we have these phases sort of codified.

So you think of it as a funnel. There's ideation, which we talked about, validation, which we've got a whole bunch of kind of, I guess, machinery around that and a team that specifically works on validation, then creation. So it's basically like design and development of the product and then spin out, which is when we formally create the entity, transfer the intellectual property, all that stuff, and then scale up, which is after it has been seed funded to actually hiring and scaling up the company.

And so there's that mega funnel that defines our business. But then we've got a handful of other funnels. So there's sort of the idea funnel, which is going into ideation. There's the founder funnel, which is, you know, all of us doing the work very similar to what you do. I think getting to know really smart people who have domain expertise in areas that you think you might want to start companies in or fund companies in that, you know, you want to be a part of their next venture.

And then there's another funnel, which is sort of this third part of our business. You mentioned ideas and you mentioned people, but it's really investors. Part of our validation process is do other very smart venture capitalists think that this is something that they'd want to invest in? Because, you know, our business model is to create venture scale companies. So we would like some venture capitalists among the hundreds and hundreds and hundreds that we know to say like,

yeah, I don't know, you should do more work there, but it seems like there's a there there. And so there's sort of this...

funnel of who's going to invest in this thing, which actually is both nice because it speeds up the fundraising process for investors or for entrepreneurs when they spin out of PSL, but it also helps entrepreneurs figure out, okay, is this worth my time? Is this worth pursuing or are we going to have a really rough time capitalizing it later? I feel like at almost every stage of the business, entrepreneurs need to be thinking about not just like

Where's my next funding round coming from and what does it look like? But also, what does the capitalization and financing lifecycle of this business look like? Because it's very, very different for different sectors. And I think entrepreneurs and also early investors have the most heartburn is when your expectations are this business looks like one path and it ends up looking like another. Totally. So funny, I have a half-written blog post right now that

is uh why you shouldn't raise venture capital and i think like you and i talked about a lot on this show like most businesses shouldn't raise venture capital and in fact most venture-backed businesses shouldn't have raised venture capital and so how do you how do you sort of spot that early and figure out what actually should go into that asset class of huge market rapid growth you know the all the all the things that make a great venture investment yep yep

Validation. Let's talk more about that. You guys do a ton of work and are very scientific around this. Yeah, so Peter Denton leads our validation efforts. It was funny, when I was trying to hire for the profile of Peter, I thought initially it should be a marketer. So I interviewed like

20 director of marketing at different companies. Ultimately, really grateful that when we found Peter, his title on LinkedIn was VP of Marketing, which Peter is like a... I hesitate to use the word growth hacker, but putting VP of Marketing was a hack so that he could...

Nobody at his company was doing marketing. And so when the press contacted them and said, we need to speak to someone to give a quote, he updated his LinkedIn to say VP of Marketing so that they could get a quote from the VP of Marketing. So it's one of those sorts. But background as a product manager and technical enough to write a bunch of JavaScript and figure out how to go really deep into Facebook's tools and use their API. So what Peter has basically built is a bunch of machinery around questions

quickly spinning up landing pages for concepts and testing a gigantic matrix of value propositions and audiences to figure out...

sort of not only with this sort of early burner brand, does someone want this, but why do they want it? And who is that segment that this has strong resonance with? And so we're looking for is, you know, double digit click through rates off of a Facebook ad, or we're looking for double digit conversion rates on leaving your email address once you're on a landing page. And we're, you know, these are all different for different business models. These are all different for different audiences. And so

Part of the stuff that he's built is basically benchmarking all those conversion rates against all the other ideas we've tested and figuring out, you know, does this look like what boundless looks like? Where, my gosh, there's this perfect group of people who want marriage-based green cards that really resonate with this particular value proposition. And when you launch the product, you just...

sort of know that it's going to work. And of course, other folks at PSL and Lindsay on his team do a bunch of work of actually talking with customers and verifying that what shows up in the numbers is actually qualitatively true. But you can sort of have confidence that, you know, that concept is resonant with that particular audience. At that phase when you're

Doing that kind of testing, you mentioned, you know, burner brands, like how often does what you're testing, you know, whether it's the brand or some, you know, if you have you in a small form of the product or whatever, like, does that survive versus like, you're really, it's, you're just trying to see like, is there, is there a demand signal? And like, you get to the next step when you get to the next step.

It did earlier on, but now that we're more sort of like we draw a brighter line between what work we're doing for validation and what work we're doing for actually building a product, they typically don't survive. Like our design team tends to not get active or at least put a full, you know, more than a couple of hours into the landing page that we're putting together for validation.

for one of these burner brands. And I think that like we don't kid ourselves into saying we need to iteratively evolve that crap landing page that we built to be this, you know, real full experience that's fully thought through that takes all of our voice of customer learnings like a

Yeah, they tend not to survive. I will say a funny thing that I learned from Peter the other day that we need to do a write-up on because this is just great is on these sort of burner brand sites where we're trying to make it look as real as possible so that we get really crisp data on that's not confounded by people going, I don't know. Not only have I never heard of this, but it doesn't look legit, is like all the links on the site,

on the site are there, just none of them work. So they're like hrefs with nothing in them, like little just anchor tags. And then we put all the analytics on everything to see like where are people clicking for everything other than the like mail capture or the checkout here or whatever the thing is. And the number one thing by far and away that gets clicked on is reviews.

So like if we were selling, we were testing a CPG product and basically everyone was clicking reviews. No one cared about, no one cared all these other things. I thought that was fascinating of like, what do people want? Social proof. And if they don't see it on the homepage, they're going to go look for the social proof. Interesting. Huh. Amazing.

I should keep going on that well, too. There's lots of stuff you can do other than just drive Facebook ad traffic. That's interesting, but there's more free stuff you can do, too, like determining market size based on number of searches for your set of keywords per month.

Like you can get a sense of like relative traffic that basically are a large enough number of people concerned with a problem that your company solves where without spending any money on Google ads and knowing conversion rates, you can see who else is bidding. You can see what the volume of searches is using Google keyword planner. You can look at, and this was actually kind of interesting in a business I was looking at last week, looking at Google Trends.

to get more real-time information than you could get in research reports because i think the first thing that like i always do and i'm sure everyone does when someone says hmm is this a big idea or not as you go look for some third-party research firm that's you know drawn some conclusion about what the market size is and that's a trailing indicator like if you're in a growth market that's going to be backward looking and you know gardener isn't writing any reports about uh you know

I don't know. X, Y, Z. Whatever the next great entrepreneurs are working on because they're the next great entrepreneurs working on them. Yeah, that's exactly right. The true believers aren't waiting for the research reports to come out to start working on their products. They're excited about it because they're excited about it and they sort of

know their secret, they know they're right. And so if you're trying to do some of this a little bit more methodically, then you need to not just be looking at research reports for is this going to be a thing or not, you need to use alternate methods of determining that. What does good look like? Like what's a, you know, obviously changes by sector and whatnot, but like, what's a good conversion rate that you're like, yep, this passes the test?

I would say for click-through rates, looking for north of 5%, and for on-page conversion to email addresses, looking for north of 10%.

The real answer to this question and the thing I get yelled at every time by my colleague Ben Rush and my colleague Peter Denton is it's not the click-through rates dummy. It's the cost to acquire a customer. And who cares how – there's so many levers you can play with. And I'll give you an example here. What if you pay a ton of money per impression to get the most highly qualified –

customer to see the ad and then you're going to get like 30% click-through rate or something crazy and then if you match the copy on the site and the messaging on the site perfectly to the ad and perfectly to what that really high value person on Facebook said they were interested in then you're very likely to get an email address but oh my god you just paid $600 for you know this wealthy millennial in investment banking who's looking to buy $400 sweatpants and it's like

Okay, but like, is there a way that you can get a sort of broader top of funnel and accept some lower conversion rates, but end up with your cost of customer acquisition being dramatically lower? And I think like that, my temptation is always to say, how'd the conversion rates look, but ultimately, that is only a proxy and you can spoof it with the way that you are doing your targeting.

So really what you're more trying to find is like, is there a deep enough pool of potential customers out there that we can acquire for, you know, a reasonable amount of money that we can make the economics work given whatever the economics of this product or service are? And frankly, like most ideas don't even get there. Like most things, we are wrong that there is anybody who has a desire for that thing. I think the tendency of founders is either,

And especially with people looking for a problem to solve, which is often what we're doing in a studio where we're relying on our own ideas and probably even better the ideas that come from other people. But like the ideas that you tend to come up with when you're looking for a startup to work on are either your own problem. So you're going to way overfit to your own needs or two, you make decisions.

false assumptions about the people who experience the problem. Like if you're building something for the enterprise IT buyer, but you've never been one, you're probably wrong. And like, if you can find a way to do some validation,

Like, you're not even going to get to the how deep is the well question because you're going to get cut off at the knees at like, nope, people don't have that problem. Or if they do, your thing doesn't actually fix it for them. Yeah. Yep. Okay. So that's a perfect tee up to my second question before we move on to your next stage is maybe this is why you have the venture firm now in addition to the studio. Do you find...

or do you not find at all that the types of ideas that make it through this maze in the studio are generally like,

not the type of ideas that like are just like nobody would have because you have to like prove somebody would want them like that are like uh i don't know like airbnb in the early days everybody would be like that's crazy nobody's gonna do but you need like a missionary entrepreneur that's gonna just like change everybody's perception of something i do think there are a set of companies that will be very successful that uh we have probably already killed and just had a false negative on and i also think there's a set of things we haven't even considered that

And I'll give an example of like absent the founder coming to us and having already done something in this space. If someone pitched me on creating the next Webflow or Sketch or Killing Email or one of these things that's like a superhuman, you know, something that's like a three-year build. If they're like, we should do that as a studio. It's sort of like, I don't know. Maybe...

but we're not going to be able to validate it. So like what we do have to be willing to do is such a heavy lift that, right. It's like, well, let's use, we believe we should do this in the studio for all these other reasons that are not validation. And those are so compelling that let's start the company that way instead of, you know, that founder going off and starting at the traditional way and sort of pitching for, for investment, I think. Um, but like, I would say, um,

We will only do one of those, I don't know, once a year, once every other year. It's going to be, it's got to be a small part of the portfolio because they're big beta bets. Yeah. And you guys must actively think about that as you're resourcing stuff, right? Like, yeah, this is a heavy lift. Like we're so convinced we're going to like take the risk on this, but you know, you could do three less heavy lifts, you know, with the same amount of resources and time. Yeah.

Yep. And then there's always that question too of like, do we actually believe that we are oracles enough? The answer is already no. To know that like this one that we're going to put so many eggs in is as it goes on its startup rollercoaster journey, is it actually three times more likely to succeed than these other three bets we could have made? It's like, ah, startups are so hard, man. I don't know. It's funny. I feel that, I mean, this is making me think like the

the longer my career gets in VC and it sounds like you're feeling the same thing on the studio side, the more I'm sure of the less I know. I'm more certain that I know not much. Yeah. And we've had long kills that really hurt. Like,

We learned the hard way a couple of times not to do hardware in the studio. We had a six-month project and a nine-month project that I think one thing I've been thinking about is a kill blog. Like anytime we kill something, like writing up why and writing up what the idea was and sort of saying like anybody else who wants to work on this, you should take a shot. But here's why we didn't continue it. But we had two, one in IoT and one in –

radiation detection for lack of a better, it's a long story. Um, that is, there's a story there. Yeah. That, uh, um, it's, it's just really hard to do. I think if we were going to, if you were going to do hardware in a studio, you'd want to have a dedicated model to that, where you were going to have a hardware lab, where you were going to take on a bunch of big CapEx costs and you were going to build intentional muscle around how do you validate hardware concepts? Cause I think it's a whole different, whole different game. Yeah. That makes sense.

Okay, so after validation, you've got an idea, it passes the appropriate benchmarks with flying colors. What next? So we've got a team of eight engineers who are, their backgrounds are mostly sort of like founder CTOs who sort of know how to make the, well, there's two important things. One, they know how to build an application as a one-person team on the engineering side. And

do a lot of their own product management, which I think is tricky, but is really like, it's that technical co-founder role. Like you're not going to probably have a product manager. And so you're sort of either the design, you have a designer on your team that's acting as product manager, or the CEO is both doing sales and product, which is hard, or the CTO is sort of doing their own product management. So category one is kind of functioning sort of independently in that role. And then category two is understanding how to make the appropriate trade-offs for

what is overbuilding in a startup and what leaves the founder and CTO who will come in after you high and dry and how do you not do that. And as our former CTO who actually spun out and is now the CTO of one of our portfolio companies, Attunely, Ryan Kosai told me, code is temporary but architecture is forever. And I always love

I like that way of describing really this job of the sort of technical project lead within PSL that is basically making these decisions that somebody else will inherit, but making them with many years of informed sort of co-founder CTO experience.

to know what trade-offs to make there. And so they start working with a designer on our team and at this point, typically the person who will be the founder and CEO on building that product that we now have conviction that some significant number of people want and want badly enough that they've convinced us that we should pour resources into building it. Let's flip over to the other track and then come back to the combined idea and people track of people. Like

You're working on an idea. So now you are living exactly in my world, by the way, is constantly flipping between people, ideas, and making progress on those ideas, investors, having conversations, setting expectations. And it's sort of this triangle that you're trying to get all over the finish line at the same time. I would say I'm walking a mile in your shoes, but we both wear fly nets. So, you know, you walk miles in my shoes every day. So,

So when you have an idea that is in this stage, you're looking for the right founder. If you did the full win in cases where the founder is not already part of it, where do you look? How do you, how do you find the right person?

Important in that is if we're talking to industry insiders, making sure to not over-index on their signal of this will never work because often that's actually a reason you should do a startup. I think we look a lot in obviously our own networks of people who...

have been at high growth companies in the past that understand the pace of scaling, that know how to manage teams, that are people that are going to be able to successfully raise money down the line, that are charismatic, that are great storytellers, that are magnets for talent, that either really understand this industry as an insider or have something about their background that makes you believe they'll be successful in this industry. And so this is where the job is sort of like,

like part venture capitalists because you're really making a people bet that they're going to be the right person to take the raw material that we've created so far and sort of like turn that wet clay into a real company with direction. And I think that even when we build the crap out of something and we have like a product and we know the value prop and it's generating revenue and it has customers, like if we recruit someone really late in the game,

they still end up reforming it. They're still the founder of the company. It's still raw material for them. It was a while ago I watched Alfred Lin give a talk that's on YouTube somewhere. I'll see if I can find it and link to it in the show notes. His interviewer was asking him, Alfred Lin, of course, friend of the show we had for our Zappos episode and is now head of the U.S. venture practice at Sequoia, and asked him what he looks for in a founder. And he said, you know,

I've come to think over the years that like really the most important thing is founder market fit. You know, are you the right person to attack this market? Because if it's a good market, there are going to be a lot of people that are attacking it. And so you have to believe that there's something special about this in the early days, this team. And then, and then once the product is built, like the,

product, but the product is a reflection of, you know, the founders that is going to win. Yeah, there has to be something special about that. Yeah. And Amira is a great example of this. I mean, if you think about like, what were we looking for? I interviewed, and it's funny, it's not interviewed. It's more like got coffee with or had a casual conversation with

probably 20 old media people where it was like, ooh, this person's, you know, they were a big wig at a radio station or they were at an agency that made massive ad buys in the audio space and understands how monetization works in the $18 billion terrestrial radio industry. And I just kept getting this vibe. It's like, oh, these are not the people that's going to figure this out. And it was through your introduction and through meeting Amira at Podcast Movement where she had like

been running a sort of boutique ad agency in the podcast space not because she thought that was going to be a big business because that was how she thought she was going to learn about what the big business was where it was sort of that light bulb moment of like oh this is exactly the type of persona who is like already betting her career on hey i should go figure out where the opportunity is in this market i'm willing to think about it in a different way i

Totally. Yeah. Totally. I'll also say, I just want to tack on, uh, this is where having all the venture firms and angel investors is a huge asset because when we're working on something, we just like once a month, we email all of our investors and say, here's all the projects we're working on. Uh, here's the ones that don't have people yet. If there's somebody that you've been wanting to invest in that, uh, it doesn't have a thing and you think they'd be great for this, let us know. And that's totally happened. And that's, that's been a huge asset. Yeah.

That sounds like you've got built-in multi-sided sourcing for your own investors and your company, like deal flow and LP flow. Okay, so product building phase is...

build the product. What does it then look like to spin out? Like, you know, at this point, you've got, you've got a product demand is validated. You've got a team, you've got a product bill, or at least a early product bill. Why would you kill anything at this point? Yeah.

So we basically, I mean, we're really making a, at this point in the maturity of PSL, we're making a go decision when we start doing engineering work, unless we are explicitly doing engineering work because we believe that a key risk is the technical feasibility. And we're pretty clear about when we are deviating from our process and doing engineering

tech before we feel something is fully validated. We have something right now, actually, that just made it through validation and that is working on... There's a designer attached to it now. It's already... It's becoming a real product, but we spent...

an engineer's time for two or three months, like determining if this thing that was written about in this research paper was possible or not. We just try and be really judicious about are we kicking the can down the road and not making a validation decision unintentionally? Or, you know, why are we doing the work that we're doing right now? But I would say technical feasibility is a barrier maybe 20% of the time and the rest of the time, whatever

we're able to say, we feel reasonably confident we can do that. So let's evaluate every other component of this business. Are we going to spin it out? That's basically when the person who is going to be the founder and CEO of this business makes the pitch to us of, I'm ready. I'm excited. Here's everything we've learned so far. We call these deep dives, which is really, it's sort of an escalating set of meetings that starts just as like, hey, let's all

talk about what the interesting direction for this business can be. And it's a series of updates that sort of culminates in really someone saying, yeah, I'm ready to go spend my life on this and I have conviction, so you should have conviction. It kind of makes sense to launch right into fundraising after that because you've basically, you know, you've got the narrative for yourself of why you're doing it down. So you're sort of ready to go and talk to the world about it.

Have you guys evolved your thinking and approach to fundraising for spin outs at all over the last few years? I mean, I'm sure you have. Well, I'm curious, A, in general, how, but also specifically, like one thing we've seen at Wave is that the definition of a seed round is changing and expanding. Like there are seed rounds that happen pre-product and there are seed rounds that happen post-product.

And very often these days, companies are raising a seed round, both pre-product and another seed round post-product. So how do you guys think about this? I think that it's becoming increasingly common for companies to raise two seed rounds. It's not just increasing, it's like the norm. It's the rare company that doesn't these days. I will say one thing that we did was when we raised the venture fund, we structured it in such a way such that

every company that spins out of the studio raises a convertible note from PSL Ventures like immediately that's part of our spin-out decision is we're also making an investment decision of that super founder friendly note that is going to be a part ultimately of the of the seed or first seed round that is a the same decision as okay we're gonna we're gonna spin this thing out a

A thing that's important to note in here is PSL Ventures will never lead a round or price a round in a PSL studio company. But... Because that would be a conflict with your...

Totally. Like we're not going to price our own. Exactly. Well, I mean, you could, but you need a pool of investors that are excited about things you're spinning out. And if they start thinking that like, oh, well, PSL is just going to, they're going to invest in the ones they really believe in and then the ones they don't believe in, they're going to give to us. Yeah. Yeah. Yeah.

Yeah. I think it's ultimately value destructive to do that. So that said, one way that we've definitely mitigated this is, hey, everybody who spends out, you can go raise money on your terms. You can do it sort of when you're ready. Yeah, totally. Once your children have all grown up and left the nest, we were talking about your office space earlier. A lot of them keep working in the office for a while, right? Yeah, really for like a year. It's really until they're 10 or 12 people because...

So we have these two floors. And it's interesting, in my head, it's bifurcated by floor. So the floor where the studio employees are, it's chaotic, right?

it's a great place to be when you're just kind of a founding team, but it's totally chaotic and people are getting pulled into stuff all the time. You know, it's, there's a ton of energy because there's all these other people around you. By the time you hit four or five, six people, you kind of want to be creating your own culture. You kind of want to be setting the hours for the company. You kind of want to be setting the rhythm for the company. And so we, that's when people sort of move up to this second floor. That's like,

Really designed to empower the founders to sort of build their own culture that's a little bit more separate. And I think that that's important because once you're five people, you don't really need to draft off the energy of others anymore. You can kind of create your own your own sort of system and energy there. Yeah. And then once you're bigger than that, you know.

you should probably go get your own office regardless that's probably the best best for everyone but we like to you know ideally close and I think if we could we'll try and continue to sort of expand because I think it's it's helpful to be to stay really close because the the studio is effectively a co-founder in every case yeah you remain a board member of the company right

Yep, exactly. So it tends to be the CEO and someone from PSL as the initial board until a seed fundraise. But like really a co-founder of the company. We think of it, we're a gigantic 25 headed co-founder. And so the idea that like, you want to be as close as possible because...

Every single one of us in the studio have equity in every single company that is spun out. And we really encourage founders, hey, keep using these people, not like put an engineer on your schedule way and say they're responsible for this feature by Friday, but in a sort of more consultative way, in a way of sharing learnings, in a way of...

You know, hey, we need you for four hours to parachute in and help us solve this difficult problem. And having a board member do that is one thing, but having this sort of team of 20 operators who are actively building day to day, I'm sounding like I'm sort of speaking the party line here, but I found it to be pretty powerful. Mm-hmm.

Yeah, well, I mean, at the very least, it's a built-in community, right? I mean, one of the challenges of being a founder, I mean, like us starting Waves, starting a venture firm is very different than starting a company, but no different in this respect. Like, it's lonely, you know? You're working, building your thing every day. And, you know, having a community is important. Maybe to bring it on home then.

What's the future hold? I mean, like, you guys started this four years ago and there were, you know, like, you could probably count on certainly two hands, if not one hand, the number of studios out there. Now, as you were saying, there are industry associations of studios. There's probably a hundred of them. Like, what a, you know, PSL is obviously the elite. And I say that not just as your, you know, co-host and friend, but you guys really are. How do you keep moving forward and innovating? Yeah, I think...

Right now, we sort of have this spectrum with two points on it. It's like if an entrepreneur wants to work with us, they either can raise money from our venture fund or they can do the studio. I'd like to see more things along that spectrum. So it really is sort of a spectrum other than a buffet of two options. We only have so much time in the world, so it's tough to hold me to this. But I'd like to start open sourcing a lot of the stuff that I've talked about because I think...

creating sort of playbooks or at least like how-to guides on a lot of this stuff to be able to sort of inspire entrepreneurs or for entrepreneurs to use even if they're not working with us. Like I think that creates a lot of value. And so I'm trying to figure out the right way to do that where I don't sort of lose focus, but also still get to put that stuff into the world. And also, you know, other people from our organization are sort of thinking about the same thing.

And as David Cohen or Brad Feld said in the title of their book, you know, I think the name of the game is really do more faster. It's how do we get more efficient at creating more companies per year? We're Pacific Northwest focused. So I think really the inspiring thing for me is Seattle is already sort of one of the best tech ecosystems in the world and has the most

two most valuable tech companies and how do we sort of massively increase the amount of net new entrepreneurship and startups that are happening in this ecosystem. And so... Well, man, you guys are 14% of, you said, of new company creation? Yeah, and I don't, to be clear, I don't want to grow that. I want, I want, like, I want us to keep that number and for the pie to get way bigger. Yeah.

you know, keep that, keep that percentage or, or, you know, or have that shrink. But like, to me, everything in service of continuing to increase the amount of startup activity is a great thing. And I'm, I'm just like, it, it seems like a no brainer that, uh, you know, we would be able to, to capture some amount of value in that. Yeah. Yeah. Well, especially with the venture fund now too. Yeah.

Hey, we got options for everyone. Yeah, yeah. Awesome. Let's bring it home. LPs, hopefully you enjoyed this special turning the tables. Yeah, I should also say, I think we're going to title this How a Startup Studio Works. I have no idea if this is how a startup studio works. This is how Pioneer Square Labs works. For folks involved in other studios, either companies that have spun out or if you're running one, you know, it'd be interesting at some point to compare models. Yeah.

Awesome. LPs, we will talk to you very soon. We'll be back with a main show episode very soon. We were supposed to do this week. I apologize. I got very sick traveling last week. David is a human and gets sick when he's traveling in back-to-back meetings like everyone. But we will be back very soon with more exciting stories on the main feed as always. Sweet. All right, LPs, talk to you. Later.