Doomed to Fail? – Joint Ventures as a Business Development Tool

June 30, 2001

A joint venture can of course mean different things to different people. Such arrangements can range from a simple teaming agreement, or long-term distribution agreement, through corporate partnering and strategic alliances to full-blown joint ventures involving the formation of a new, jointly owned, corporate body governed by a lengthy and detailed shareholders’ agreement. In this article I use the term ‘joint venture’ to cover any of these, without limiting myself to the somewhat narrower definition usually understood bylawyers. Likewise the term ‘partner’ is used loosely, not in the legal sense.

Why go into a joint venture?

Getting involved in one or more joint ventures, particularly in the IT industry, is often touted as a way in which companies can get to ‘punch above their weight’ in the commercial arena.

The perceived benefits of a joint venture have at their root thenotion that, if successful, such arrangements should produce a ‘win, win’situation for all parties. A smaller joint venture partner with a technological capability (‘Techbiz’) may bathe in the glory reflected from association with an established brand or market leader (‘Bigbiz’), and can obtain access to greater or more sophisticated financial and management resources and infrastructure. The larger joint venture partner may get access to cutting-edge technology and the flexibility and focus inherent in a smaller organisation, with the potential to be first to market. Meantime it can manage its risk within a separate economic entity (so that the joint venture project, if unsuccessful, will not adversely affect its core business).

The best joint ventures allow the parties to reach their respective goals more quickly and cost effectively than they could hope to do on their own. In today’s climate, funding for expansion is harder to come by thanit was at the time of alleged ‘easy money’ in the earlier part of 2000. However, the aggressive time scales within which projects must come to fruition (as driven by a desire for rapid return on investment and the fear of being left behind in the race to market) have not eased. Surely joint ventures are an obvious solution, especially when you consider that for Techbiz what could be on offer from a joint venture is not only cash alone but the established expertise, infrastructure and brand recognition that Bigbiz can offer.

Why are most joint ventures a disappointment?

Example A

In some cases the wrong partner is chosen. In example A, Techbiz1 which was a medium-sized UK based business needed an additional component in order to develop its software into the next phase. Rather than develop a solution itself, Techbiz1 decided to go out and identify a partner company with a product capable of being embedded. Out of a number of candidates, Techbiz2 (equivalent size and US based) was chosen for further in-depth discussions. A RAD type workshop was held to establish the suitability ofTechbiz2’s product, but certain crucial questions were left either incompletely answered, or answered with verbal reassurances that all would be well. Negotiations on the detail of an appropriate legal agreement started, and, after a significant amount of management time and legal cost had already accrued, some of the basic issues (such as on which platforms the product operated, how solid some of the earlier verbal assurances had actually been, and the extent of technical support which could be provided by a small company inthe US mid-west) were revisited. That produced very disappointing results, which were sufficient to cause the demise of the venture.

Example B

Many potential partnerships founder on the rocks of incompatible aims and objectives. Alignment in this area is probably the single most important factor in achieving a successful joint venture. Example B consisted of a plan hatched by a US company, which owned one of the few e-commerce products in the construction field and wanted to sell the product in the UK. USbiz realised a high degree of localisation of the product would be necessary, plus the market credibility which would come with the involvement of significant UK players. USbiz’s ‘shopping list’ was not a great deal more sophisticated than to find a number of joint venture partners in the UK construction sector representative of substantial and well respected builders, surveyors, and consultants in the field. Partners were identified and a new company was formed as the joint venture vehicle. The negotiation of the shareholders’ agreement proved tortuous, not least because the motivation of the individual partners was quite diverse, ranging from a wish to dip a cautious toe in the water of e-commerce, through a wish to be perceived to be in the vanguard of developments in a notoriously slow moving industry (whether the project flew or not being a secondary consideration), up to a sincere commitment to put in considerable money, effort and resource to reach a successful conclusion. Usbiz’smotivation was primarily to obtain contributions to the funding of a UK localised version of the product and to achieve profile and a potential customer pool through its choice of partners.

Example C

Management is often a bugbear in joint ventures. There is a clear need for management input in terms of people, cash (or equivalent) and the ability to carry out tasks or to ensure that the joint venture partners carry out tasks. Example C involved a Techbiz which had developed an e-commerce delivery model for a conventional recruitment advertising business. It identified a joint venture partner in the form of a large Mediabiz with existing interests in conventional print forms of recruitment advertising. Input fromMediabiz took the form of cash and services. Mediabiz also required a high degree of control and involvement in management decisions (particularly decisions involving expenditure) taken by Techbiz, ostensibly to protect its investment. Once the venture was underway, Mediabiz lost interest in the venture and became focussed on other activities. As a result, the managers of Techbizfound it increasingly difficult to run the business day-to-day. They could not get the necessary approvals from Mediabiz (through inertia rather than active disagreement) for actions they wanted to take which required Mediabiz’s blessing. Delay bordering on paralysis set in (potentially catastrophic in the IT sector). Although Mediabiz had made an investment of millions, it was small in the context of Mediabiz’s turnover, making it difficult to attract their attention once the ink was dry on the shareholders’ agreement. The terms ofthe shareholders’ agreement insisted upon by Mediabiz’s lawyers as‘standard’, did not in fact reflect the rather hands off approach Mediabiz would take in practice, and so probably had a detrimental rather than protective effect on their investment.


In example B, management was complicated by the sheer number ofparties. A revised version of the joint venture agreement in example B sensibly ‘gave management their head’ to a greater extent, which actually improved the chances of success of the project. Another factor well illustrated in example B was the lack of traditional lines of management and control within a joint venture. The executives in a joint venture company are often not in a position to insist on the co-operation of the participating partners, and sanctions for failing to co-operate can be weak. Indeed a whole breed of consultants have sprung up ready to train companies in the art of successful collaboration in joint ventures, through techniques of persuasion, motivation, understanding and negotiation, rather than command.

An obvious area of failing can be insufficient resource; be that cash, people or other contributions in kind, such as IPRs. Where resource isinjected in kind, the relative value of respective contributions need to be debated and agreed.

The deal structure is an important element of the overall picture. Whilst it would be true to say that I have not known the success or failure of a joint venture turn on the choice of deal structure, the right choice for the deal in question can undoubtedly oil the wheels of a project and thereby improve its chances of success. This article does not go into detail on the legal and other characteristics of different deal structures, however it is important that Techbiz is made aware that even an undocumented ‘understanding’ between companies could of course amount to a partnership in legal terms. A highly effective tool for flushing out the basic terms of a deal and to enable the parties and their advisers to reach a realistic assessment of prospects of success (before too much time and effort goes into a finely honed corporate joint venture documentary edifice) is to draw up succinct heads of terms. These should focus not only on the areas which traditionally spring to the lawyer’s mind, but also on communal/individual aims and objectives, and dependencies.

Maximise your prospects of success

Firstly Techbiz needs to be satisfied that a joint venture isthe most appropriate way forward, in preference, say, to raising venture capital finance (although many companies do both). Broadly speaking a joint venture is more appropriate to a ‘slow burning’ long-term expansion programme for Techbiz if it already has proven technological capability, whereas venture capital may be more appropriate if what is needed is a cash injection in the short term.

Where, as is common, the joint venture proposal includes the provision of rights by Techbiz to Bigbiz (by way of exclusivity arrangements for example), Techbiz needs to be sure that sufficient rights to satisfy Bigbiz can be granted, without significantly devaluing Techbiz.

The joint venture partners also need to beware of what is known as ‘channel conflict’. This is a term used most often in the sales context, where a business can find that it has created a conflict, say, between directly employed salesmen and independent resellers, with both groups competing for some of the same customers and the commissions to be gained through them. In the joint venture context, Techbiz needs to be mindful that it may face competitionfrom the joint venture; hopefully this will not be the case where the primary purpose of the joint venture is to grow new markets. Alternatively Techbiz may find a venture capital investment preferable, where the whole of the benefit to be gleaned by the venture capitalist is inherent in the success of Techbiz, so what is good for Techbiz is good for the venture capitalist and vice versa – therefore no conflict arises.

Only a small number of potential joint venture partners should be approached, as the amount of management time that can be absorbed is huge and also there is an obvious danger of making it seem as if Techbiz is being touted around. Another obvious point is that dealing with a foreign potential partner will absorb even more management time and effort, due to the added cultural/language/legal and geographic barriers.

Bear in mind the likely constraints that may be encountered within Bigbiz. It may be a relatively quick and simple matter to agree a teaming agreement (even one with a big budget) with the operational staff of a particular department of Bigbiz, but a modest deal involving Bigbiz in acquiring shares in Techbiz (or in a new corporate vehicle) is bound to need to be escalated to corporate level. Once this has happened, the corporate personnel negotiating the joint venture are unlikely to be the people operating it on a day-to-day basis, so extra efforts will need to be made to ensure that the structure created is workable (see examples C, and to a lesser degree B).

Be prepared for a lengthy process from inception to close, particularly at the stage of discussions of objectives, strategy, technology and markets, which should not be skimped.

The major headline items on any checklist for Techbiz should be:

  • Articulate your needs (in terms of strategic, resource and operating objectives) and also what you bring to the table which will be of value to potential partners (skills/product, people, distribution capabilities, other tangible or less tangible qualities or resources).

  • Identify the possible partners by reference to: size, market sector, skills/product, brand/profile. Refine the list by applying further criteria (so far as it is possible to ascertain the relevant information). Can Bigbiz meet your objectives without overshadowing you? Does Bigbiz have a compatible corporate culture? Can possible conflicts of interest be minimised or eliminated? Does Bigbiz know your products? Can you ascertain whether Bigbiz will find what you bring to the table of value?

  • Prepare your deal structuring proposal, having considered alternatives and the implications of each. Decide on negotiating limits for your favoured and alternative structures.

  • Prepare an information pack (and confidentiality agreement) to share with potential joint venture partners. Indeed there should be an initial pack and a further, more detailed information pack once progress has been made.

  • Put significant effort into preparing and agreeing heads of terms which give prominence to collective and individual aims and objectives, set out, in detail, contributions in cash, people, IPR and so forth and tackle how the joint venture is to be managed and how management can both make things happen and ensure that the parties perform their agreed functions.

  • Jointly choose the preferred vehicle, by reference to the pros and cons of each, eg high-level collaboration, teaming, partnership for a particular project, joint venture company (advisers must ensure absolute clarity in what is meant by each of these options, as the terms are often treated casually or interchangeably).

In summary, Techbiz should do its homework thoroughly, in order to identify the best partner and to flush out potential problems early in theprocess. Draw up heads of terms with particular emphasis on aims and objectives (the legal boilerplate is secondary). Keep the legal framework as simple as you can, and be particularly aware that following the hallowed legal wisdom for ‘necessary’ protection of joint venture partners may, in practice, itself imperil the running of the joint venture in the fast-moving IT sector.

Rosemary Downs, Directorand Solicitor with v-lex limited.