In the first part of this article, I discussed the opportunity that joint ventures can be for emerging growth companies that have limited capital to fund priorities like new product development and geographical expansion.
What does a Joint Venture look like? The following is an example.
A Relationship-Based Joint Venture
Relationship-based contracts are a type of joint venture designed for the parties to coordinate more closely than is usually the case in a market contract that is based on a price determined at arm’s length for well specified products or services. Exclusive licensing, exclusive distribution or supply contracts and R&D partnerships are typical of JVs that are built around relationship-based contracts.
For example, imagine two manufacturing companies that form a joint venture. Stick to Our Core is a high tech manufacturing company that has decided to limit the scope of its activity to areas where its core competencies enable it to add the most value. They want to be involved only in product engineering, quality control and distribution. To do this they enter into a JV with Factory Operations, a company that specializes in running day-to-day operations in the factories owned by Stick to Our Core and other partners. Factory Operations manages the factory workers, inventory, supplier networks and logistics.
Contracts such as the one that establishes the JV between Stick to Our Core and Factory Operations will be complex. For example, they must define arrangements about shared investment and risk-reward incentives. Neither party should believe that the contract will address how to resolve the unforeseen issues that are sure to come up. There must be sufficient trust to enable the parties to work through challenges to the relationship. Resolving the challenges will require both sides to deal with ambiguity; make compromises and solve problems collaboratively.
Risks of a JV
Particularly in a small, closely held company, it is critical to assess risks around entering into a joint venture. Companies like Stick to Our Core and Factory Operations need to consider:
-
Do you share the same customer base? Will these customers view your company and the potential partner as equals? Can this partner “steal” your customers in the future as you transfer knowledge to them?
-
What do you bring to the venture that your potential partner cannot easily learn and replicate?
-
Do you share common values, goals, and a vision with the partner?
-
Have you vetted the potential partner with customers, suppliers, and industry colleagues?
-
Have you looked at other partnership options? Is this the best partner you can find?
-
Can both parties make money? Will the projected margins be acceptable to both parties over time?
JV’s: Driver of Success
A joint venture can enable a growing firm to expand, learn and pursue business opportunities. Finding partners that are truly complementary with you and are dedicated to working together is the first step. Being able to manage joint ventures successfully with a variety of partners can significantly increase an emerging growth company’s chances of success.
About the Author
Mark Rosenman has deep experience developing processes, systems and content to create value from intellectual capital. Serving as the Chief Knowledge Officer at Tatum, he successfully drove strategies to develop, capture, share and deploy the knowledge and experience of the firm's professionals. Contact or learn more about Mark here.
Connect with Mark on LinkedInPhoto Credit: Freedigitalphotos.net
