Does joint venturing make sense?

The short answer is: not often. They work well in specific circumstances but most JVs are a waste of time and money, seldom delivering on their promises or surviving beyond a ‘honeymoon’ period.

Particularly for smaller companies we almost always advise against JVs and have seen a few basic patterns in how problem JVs come together:

  • An active strategy to ‘dip a toe in the water’ before committing to a new direction, technology, or market by engaging a partner with specialist capability in that area.
  • Prospective M&A partners that can’t quite consummate a deal organise to work together and revisit the transaction later.
  • Partners with complimentary technologies, strategies or markets work together to attack a new opportunity to which neither is willing to fully commit.

Business operators contemplating major strategic directions or partnerships can be drawn to the JV as an easy way to move in a new direction without having to ‘break the eggs’ of changing their existing business model.

A couple of examples:

  • A major multinational producer of a common industrial material formed a JV with a specialist division of a conglomerate in a developing country to produce a specialist product for that market. The former wanted to get experience working in the developing country, while the local conglomerate wanted to build their technology capability. Staff of the multinational did not see the JV as a path to promotion and few were interested in working with the business, which was seen as a ‘hardship posting.’ The local partner was left to run the business and ultimately learned the technology, copied it, and used their experience to compete globally with the multinational.
  • Two technology players in the Australian market spent months negotiating an acquisition, but neither was confident enough to consummate the deal on mutually acceptable terms. They agreed to operate as a JV for 6-12 months to assess cultural fit and build comfort in working together. Without full commitment, the JV did not get the resources (primarily sales staff) needed to thrive, and did not achieve the results either partner had hoped for. The JV was ultimately shut down and the deal did not proceed.

Both cases highlight how a lack of commitment from JV partners can kill a business before it’s really started. This is often the core of the problem. If either partner is not confident enough to commit to the new venture, their core business will take precedence over the JV, which will struggle with a lack of resources and/or attention.

JVs are sometimes seen as a temporary measure, with the expectation of a more committed approach later. With any strategy, it’s problematic to do one thing now, in the hope of achieving something completely different later on. The many small businesses started to fund other ventures later, for example, seldom ever evolve into those ventures.

It’s easy to see why. In 6 or 12 or 24 months, if the ‘interim’ business is doing well, operators are unlikely to change it and risk ‘killing the goose that laid the golden egg.’ And if it’s doing poorly, they are unlikely to be able or interested to move to the planned second stage.

Forming a JV as a ‘consolation prize,’ interim measure or test exercise indicates that full commitment is not available. Prospective partners in such ventures should carefully consider if the project is worth doing at all. After all, if you’re not committed as a business, how motivated can the staff be to make it a success?

When do JVs succeed? Here are a few of the lessons we’ve learned:

  • Don’t set up a JV as a second-best solution. If the best solution isn’t attractive, the opportunity might not right for you now.
  • Avoid overlap or conflict with parent businesses. Where the JV threatens to cannibalise revenue from a parent, it is unlikely to receive support.
  • Commit the right resources to make the business succeed. If you are not willing to do so, the JV is unlikely to succeed without them.
  • Define a clear timeline, expectations and evaluation criteria. Be clear on what success means and how and when you will measure it.
  • Agree the end game. What exactly will happen if the JV succeeds? If it fails? How will he partners extricate themselves from it?

Joint ventures tend to work better for larger businesses where resource commitments are not challenging to the core business. JVs that are much smaller than their parent businesses may struggle to get management attention, however.

Joint ventures also have better results when using the capabilities of both parents to attack a challenge that is new to both. For example, a software provider and a complimentary services provider may combine to set up a business in an entirely new market. Being additive to both JV partners reduces the potential for the JV to challenge either partner.

In the right circumstances, JVs can be a useful tool. But those circumstances are relatively rare and if the business case is not compelling to both JV partners in its own right, it may be better to ‘keep your powder dry’ and move on to other opportunities.

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