3 Pros & Cons For Startups Pursuing A Joint Venture

With 95% of startups hoping to establish long-term relationships with corporate partners, a joint venture can be a smart solution. Most startups seek funding, market access, expertise and resources from other companies to fuel their innovation to great success.

Is a joint venture the right choice for your startup? Here’s what you need to consider before starting a new relationship with another business.

What Is a Joint Venture?

A joint venture allows two or more parties to join forces without a permanent relationship. They work together on a specific business activity. A startup might partner with a big corporation to bring innovation to an existing market.

The startup develops a new product or technology, and the larger company offers capital, resources, and distribution. An excellent example of a mutually beneficial joint venture is IBM and app startup Spare5’s “Watson Golf Pro” project. Watson Golf Pro combines IBM’s AI technology with Spare5’s app development skills to build a product that analyses golfers’ swings and gives them advice.

What makes this joint venture successful? Each company offers a specific strength, and they have a clear aim: to create an app for golf tips. Tech startups don’t have to limit their joint ventures to projects with other technology companies, though. Startups can bring fresh products to existing markets, like Walgreens’ joint venture with Pager. Pager’s high-tech mobile app pairs up patients with doctors and specialists in their area, giving Walgreens a new service for their customers.

What Is the Difference Between A Joint Venture, A Partnership & A Merger?

In partnerships and mergers, the companies involved lose their unique identities and become one entity. In a partnership, the businesses agree to co-own a new venture, while in a merger, two entities of similar size become one and issue new stocks.

A joint venture avoids combining companies altogether. In a joint venture, two or more businesses come together for one defined purpose. The firms share profits and losses for this project and otherwise remain separate parties. A joint venture dissolves after mutual goals are met.

Pros Of A Joint Venture

#1 Combine Your Strengths

A joint venture allows companies to enjoy the unique talents of the others. Two small startups may join forces to create a niche market and stave off larger competitors. A startup supplying a top-notch product and creativity may team up with an experienced company with a loyal customer base. A larger foreign enterprise may finance a smaller local company that knows the area and the market. Whatever the reason, pursuing a joint venture lets a business benefit from the capabilities of another.

#2 More Resources

When companies go in on one project, they get to pool their resources. They share profits and losses, which lowers the risk of the undertaking. The extra capital also allows businesses to pursue a new opportunity without taking out a loan.

#3 No Restructuring

When two or more companies become one, as with a merger, they must make changes. Conflicting corporate cultures must accommodate one another, employee roles and jobs may shift, and supply chains and workflows get disrupted. Plus, when new stocks are issued, these companies must answer to their stockholders. One such instance is shown in the case of Bucks County v. CBS. With a joint venture, these companies remain their own entities and can rely on the structures that make them work.

Cons Of A Joint Venture

#1 Commitment To Relationship Building

When beginning a new relationship, prepare for some growing pains. Companies may have diverging cultures, approaches to problems or reasons for creating a joint venture. When different businesses work together, such as in a joint venture, trust is a driving force for success. This, and teamwork, have to be cultivated for a lasting partnership to flourish.

#2 Limited Outside Opportunities

When companies work together on a particular business goal, each has to focus on it. Prioritizing the venture can mean setting aside other aspects of your business and not being able to engage in outside activities for the duration of the joint venture.

#3 Differing Objectives

Joint ventures can fail when they don’t have clear goals. If each party has differing visions for the outcome of the relationship, it’s easy for the venture to fall apart. To avoid this, establish clear objectives and be open with each party from the start.

How To Pursue A Joint Venture

To pursue a joint venture, the first step is to find the right partner. The companies you work with should share similar values and goals. They shouldn’t be a competitor in your market. Look for a business that can use your strengths as well as you can use theirs, and pitch your venture.

Once you’ve found an organization to collaborate with, the next step is to bang out the details. Here, planning is vital to success. Each party must decide what they want in a relationship and understand their obligation. Making all these details as clear as possible in the legal contract is critical for the best results.

With the right goals, a joint partnership can be a fantastic way to grow your business and achieve amazing results.

 

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