By Andrew Amann, CEO of NineTwoThree Venture Studio, a two-time Inc. 5000 Fastest Growing Company. Andrew & his team have created 50+ products & 14 startups.
Entrepreneurs looking to create a repeatable process to forge new businesses, generate new startup ideas and build successful development teams are increasingly turning to the startup studio model. Instead of simply creating one startup, this approach ultimately reduces the risk involved in business creation and increases the odds of a successful startup.
Launching a startup studio works especially well when following the agency builder model. By forming a digital agency to perform project work for third-party businesses in a variety of business sectors, you gain vital market knowledge and an alternate source of capital.
However, measuring the success of this form of studio requires meaningful metrics analyzing various aspects of the studio’s operational efficiency. In a similar manner as other technology businesses, tracking the utilization and productivity of developers becomes critical. At the same time, the allocation of investments and the realization rate also help to track success. In short, without the right data, any venture studio simply flies blind.
So let’s take a deeper dive into some of the critical metrics used to measure the efficiency, productivity and subsequent success of any startup studio. We also look at why the agency builder approach makes sense for many studios. Leverage these insights to truly keep a finger on the pulse of your studio’s operations. In the end, it’s the right approach to building a startup studio focused on achieving that Holy Grail of continuous improvement.
Advantages Of The Agency Builder Startup Studio Model
Any startup studio deciding to operate as an agency builder enjoys a variety of benefits as a result. Arguably the most important of these involves the extra revenue earned by the studio by working on projects for other businesses in tandem with startup incubation efforts. This crucial capital reduces the need to attract outside investors whose investments potentially limit the stakes the studio owns in the businesses it forms.
Additionally, working on projects in potentially multiple business sectors broadens the level of expertise at the studio. Understanding the pain points in different industries informs the ideation process, enabling the studio to form startups in new markets. Networking opportunities also provide a source of crucial technology and leadership talent.
Finally, having third-party project work keeps the utilization rate of the studio’s technical and project management talent as high as possible. Optimizing the utilization rates of your teams is the true hack of the agency builder model as it allows you to develop and launch new digital products with much lower sunk costs compared to traditional startup studios.
Utilization Rate Provides A Helpful Window Into Studio Operations
A simple formula, utilization rate is a percentage determined by dividing the number of billable hours by the number of available hours. These calculations typically get performed for an individual employee but could be used for a department, or even the entire studio. Agency builders benefit from knowing these rates, as it helps track work performed for both internal startups and external projects.
You can track utilization across the entire studio by dividing the cost of billable work by the cost of non-billable work like internal functions or unpaid startup work. The result should inform you very quickly how much of the company is assigned to generating revenue for the rest of the team and provides a benchmark to ensure your rates are high enough to cover the operations.
Productivity Rate Works In Tandem With Utilization Rate
As an agency builder, productivity rate gets analyzed in tandem with utilization rate to provide a more accurate view of studio operations. This formula calculates the percentage of client work compared to the combination of startup work + SG&A expenses (a.k.a. overhead). The important difference between utilization and productivity rates is that someone could be working on a project that no longer has a budget, which means they are utilized, but not very productive.
If productivity is lower than utilization, then your agency is working on free client work. Try to keep your productivity around 70% and shoot for the remaining 30% to be overhead rather than overages.
Useful Metrics For Tracking Startup Studio Investments
In addition to understanding the overall utilization and productivity of your employees and contractors, startup studios also benefit from tracking their investments in emerging startups as well as the studio itself. Investment allocation is one metric used for this critical purpose. At a glance, it provides data on where the nonutilized money is being spent. Think of the investment allocation as the pot of money that is either being used for management of the agency or investment into a startup.
While work for startups provides hope for future growth, it ultimately contributes less in currently realized revenue compared to client projects. Any startup studio operating as an agency builder needs to effectively balance the two. Compare the potential future revenue of a successful startup against current project earnings for a true reading on studio profitability, both current and future.
Finally, the realization rate compares the total billable hours spent on client projects to the total possible hours that could’ve been billed if the agency had 100% paid work. This ratio takes overhead out of the analysis, focusing on the “cost of goods” ratio between client work, startup efforts and overages. This metric allows studio leadership to gain a window into how the agency is converting available work to short-term profitability.
Understanding these KPIs ultimately ensures the success of the studio as well as its emerging startups. Additionally, don’t forget to consider the agency builder approach for your venture studio. The additional capital and market insights provide significant benefits to any studio.