1. What is a Joint Venture? – Definition
Joint Ventures are, in definition, a type of strategic partnership where two companies or people share resources and expertise to achieve a common business goal. It usually is in the form of a business entity, developed for profit, where the two entities involved share the risks as well as the management of the project.
A much more simple Joint Venture definition states that:
“ A Joint Venture involves two or more businesses pooling their resources and expertise to achieve a particular goal. They share risks as well as rewards.”
This type of partnership allows the two entities (mother companies) to create a separate company together (child company) while remaining separate or to operate it under an agreement, without forming the child company. Joint ventures are formed so the companies can access new or emerging markets, to combine expertise, skills and resources or to cut costs.
2. How does a Joint Venture work?
We are not going to deep in the legal aspects of Joint Ventures but there are a few things you must know about them. First, they can be structured as Corporations, Partnerships, or Limited Liability Companies (LLCs), based on how the control and management responsibilities are shared. The entities involved in Joint Ventures must be a combination of two entities or two natural persons.
They can be created for various purposes and they may function as continuous projects or they can end when the business goals are achieved. For a joint venture to exist, it must have the following elements, which can vary based on local laws:
- An agreement between the parties
- Mutual contribution
- Joint control or right of control over the project
- A mechanism to share profits or losses
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3. Why you should form a Joint Venture?
Because it can be one of the most powerful business tools with a few essential elements in place, such as a clear strategy, shared objectives, proper documentation and accountability from both entities.
A study by McKinsey showed that 30% of the joint ventures that were created had met or even exceeded the expectations of parent companies. What is more surprising is that 25% of Joint Ventures, in the same study, still benefited all parent companies without meeting or exceeding any expectations.
With more consistent management practices, standardized resources and processes that ensure the sharing of best practices, we can see even more successful Joint ventures in the future. Joint Ventures that will help the entities involved:
- Leverage resources – In a Joint venture, both companies combine resources to achieve the shared business goal, in a way that capabilities are being completed by each other – For example, if you have developed better distribution and promotion channels, we can provide the development process for the product.
- Save costs – Economies of scale come into play here and in most Joint Ventures production can be leveraged for smaller costs than the companies would be able to get separately.
- Combine Expertise – By bringing to the table bigger and broader expertise, from two or more parties, the chances of success are bigger due to more capabilities being covered – from development to marketing, recruiting and sales, for example.
- Enter foreign or emerging markets – One party may enter a new or an emerging market very quickly and efficiently because the other one can take care of regulations and logistics much more easier.
- Explore new revenue streams – This is especially applicable for smaller businesses with limited access to capital and resources in general. By partnering with a bigger company, you get access to their capital as well as distribution channels.
- Gain from intellectual property – Applied especially in the case of technology companies, Joint Ventures are a great way to share assets and to develop in house solutions to solve their own problems which can be later sold to other entities.
- Create synergy – Synergy is an effect that is often looked for in Mergers and Acquisitions but it can be a result of Joint Ventures too. Synergy is simply the idea that two companies combined are stronger than they are individually.
- Gain competitive advantage – If your business goal is to create competition barriers for other companies in your industry, Joint Venture is an effective way to do that, especially if your strategy is clear enough and the other entity is aligned with your goals.
4. What are the types of Joint Ventures?
- Project Joint Venture – this is one of the simplest, most common type of joint ventures that most companies enter. It is defined by a single specific goal set by both entities, and by the fact that the agreement ends when the project is completed and the initial goal is achieved.
- Functional Joint Venture – This is the type of Joint venture in which companies complete each other’s capabilities, resources or expertise to create the synergy that allows them to achieve their business goals. Simply put, they save resources by pooling in.
- Vertical Joint Venture – This is a type of Joint Venture where the entities usually see a big success rate. It is done by companies or people in the same supply chain, for the purpose of dominating a bigger part of the chain, to reduce costs or to better position the company on the market.
- Horizontal Joint Venture – This type of Joint Venture happens when two entities with the same offering are partnering up, to enter new markets or to share expenses for certain activities.
5. Famous Joint Ventures Examples
- Google Earth
In 2005, Google started building around one million square feet of real estate inside NASA’s Ames Research Park, in Sillicon Valley. Based on the fact that “ Google and NASA share a common desire, to bring a universe of information to people around the world” they created a Functional type of Joint Venture to work on multiple areas such as large scale data management, massively distributed computing, bio-info-nano convergences and to support the developing space industry.
One result of the partnership is Google Earth, a free to use web application that allows users to see things on Earth from a bird’s eye point of view. It uses data collected by NASA’s SRTM (Shuttle Radar Topography Mission) and has the capability to show 3D buildings and structures through Keyhole Markup Language (KML).
You’ve probably heard of Hulu, right? It’s an US-based streaming platform with about 40 million subscribers and a few famous original shows such as the Handmaid’s Tale or Wu Tang: An American Saga.
It was founded in 2007 as a Joint Venture between News Corporation and NBC Universal. Later, Providence Equity Partners and The Walt Disney Company joined. It was a pretty complicated venture in the beginning because none of the parent companies had any control. Disney became a majority stakeholder of Hulu in 2019 when it bought media assets from Fox and Warner Media and also promised to buy Comcast’s interest in the company in the near future.
- The Compact Disc (CD)
In 1979, Sony and Philips joined forces to design a new audio format, starting from the same technology that both companies have been working on for some time – the laser and optical disc technology.
Three years later, in 1982 they introduced the world to the first CD system which was composed of a 12 cm compact audio disc and the player for it. Needless to say, this new standard for recording and distributing music really had an impact on the music industry, becoming the norm for about 30 years.
The first ever CD was ABBA’s album The Visitors.
6. Are you ready for a Joint Venture?
We said it before and we still stand by it – Joint Ventures can be extremely powerful business tools that help any company grow faster, be more productive and make more money without necessarily spending more or requiring more resources. It is a way of optimizing business through collaboration that many can benefit from.
But no matter how beneficial it can be, you have to really make sure that a Joint Venture is what you or your company needs right now. Before setting up a joint venture, take a good look at your business strategy, short term as well as long term, and set realistic expectations for everyone involved. Start by analyzing yourself and your business by asking the right questions.
If you’re ready to partner up in an exciting and successful Joint Venture, then we should talk. We are always on the lookout for new partners that we can help with resources, expertise or development so together we can achieve our shared business goals.