What if you could have your own business, a cushy salary, and a $1 million in capital? Sounds amazing, right?

So amazing that over a hundred founders started companies through the Fractal venture studio. Based in New York, Fractal incubated over 130 startups.

But the deal wasn’t as great as it sounds. Many have found it impossible to raise money.

From a recent Business Insider report:

Founders have been passing around a Google spreadsheet, seen by Insider, that tracks the venture firms that have “blacklisted” Fractal. Firms like Insight Partners and Andreessen Horowitz, the spreadsheet says, won’t invest in companies where the founders have so little equity. A partner at the VC firm Addition “passed as soon as they heard ‘Fractal,’” a founder said in the spreadsheet.

Fractal took a massive 47.5% stake for its capital and support. This left the founders with little equity in their own company.

Unfortunately, Fractal’s model is common. There are countless venture studios, and they routinely take 40% or more of the cap table.

This makes a startup radioactive in the venture market. VC’s want to see founders incentivized, not diluted down to nothing.

First-time founders are especially vulnerable to venture studios. They don’t know how the business works and don’t have the network to warn them.

Venture studios should become accelerators or shut down. Their business model is hurting startups and achieving nothing.

After all, if a company can’t raise money and grow, who cares if you own 50%? 50% of nothing is still nothing.

Top accelerators take around 6% of a company’s equity. If the legendary YC gets 7%, what entitles you to 45%?

And if a firm also wants to lead the seed round in every company that goes through its accelerator, so be it. But that $1 million check shouldn’t give them more than another 10-20% in equity.

If your cap table is poisoned by a venture studio, it can be fixed. If the studio agrees, a new deal can be worked out where the studio’s ownership drops and the founders’ increases.

But most VC’s won’t be interested in fixing your cap table. Why bother?

There are another 20 deals in their inbox. They put you in the “too hard bucket” and move on.

If you want to be an entrepreneur, there is no way around risk. If you want a fat salary and security, get a job.

It’s telling that Fractal was started by investment bankers. Their playbook just doesn’t work in startupland.

These inexperienced investors found similarly green would-be entrepreneurs to work with. The results are ugly — and predictable.

Silicon Valley builds companies a certain way for a reason. Founders, employees and investors all need the proper incentives.

Founders should not join any program that’s going to take more than a small sliver of their equity. And before you join, make sure the program has a track record of producing billion dollar companies.

No one will bleed for a company like the founders. So when you’re ringing the bell at the NASDAQ on IPO day, no one should benefit more.

What’s your experience with venture studios? Leave a comment and let us know!

Have a great weekend everyone!

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