I predict that medium-size corporations will be the new watering hole for entrepreneurs in coming years. It makes good sense too. After companies finish pruning their payrolls, they will once again turn their attention to business growth.
Corporate executives know that their investment dollar can go a long way in smaller, more nimble companies. With their inspired cultures that keep employees working happily into the night, new products can be developed and rolled out quickly.
Here’s how a typical joint venture or “JV” company works. Two or more partners agree to form a new corporation to pursue a specific business opportunity. Sometimes partners in JV’s contribute equal amounts of cash to the new venture or one partner may contribute cash while another partner contributes technology, know-how or the personnel resources to operate the JV.
Because a JV company is a legal business entity, entrepreneurs keep their core operations separate from JV activities. If the JV doesn’t work out, entrepreneurs haven’t sacrificed unrelated patents, trademarks, customer relationships and other business operations to JV interests. I also like that JVs are frequently structured with one class of stock. This means that the partner who puts up the cash doesn’t receive a preferred class of stock with more dividend and voting rights that the partners who provide technology or operating know-how to the JV. This type of financial arrangement tends to be more equitable to entrepreneurs than standard venture capital deals.
Perhaps the best advantage of working with corporations in a JV structure is the expectation that the partners share a more patient, longer-term investment horizon. This way, JVs can be somewhat protected from the politics and changing priorities of big corporations. And if a corporate partner does have a change of heart, the JV structure makes it easy to involve new partners with the least amount of legal upset.
There are disadvantages to JVs too. Action-oriented entrepreneurs complain that it takes a long time to solicit corporations and negotiate the ownership and operating terms of a new business entity.
Here are my six best tips to help sell your JV proposal like a pro.
No. 1: Research target partners. JV proposals that are most likely to get serious consideration by corporations offer meaningful economic and strategic benefits to both parties. Think carefully about a list of partners that might benefit most from your technology or market idea. Also consider the size of the opportunity in relationship to the size of your potential corporate partner. Approaching a Fortune 500 company with an idea that may generate only $10 million in revenues won’t get any return phone calls.
No. 2: Representation. It's not necessary for entrepreneurs to hire investment bankers to help solicit corporations and negotiate deal terms. The most useful ally will be a skilled corporate attorney who specializes in business contracts, securities law or licensing. Interview two or three candidates before making a selection. Well-respected attorneys from larger firms tend to stand up well to big corporation scrutiny.
No. 3: Penetrate the fortress. Solicit all potential corporate targets at the same time to save time. Target senior managers at the vice president level or higher in the corporate hierarchy. If you don't have specific contact names, seek out senior officers in "new business development" or "corporate strategic planning." If your idea’s primary value to a corporate investor is cost savings, identify the names of general managers and senior finance officers. Provided you are friendly, executive administrative assistants can help guide you through a corporate maze.
No. 4: Pick up the phone. From my investment banking days, the best corporate investments I ever structured started out as friendly, high level talks to identify areas of mutual interest. They were collaborations, not transactions. After initial interest is established, deliver a factual summary of the proposed opportunity, with emphasis on the size of the market, potential profitability and the strategic value of your company’s operating or technical capabilities.
Fight the inclination to talk about deal structure until the corporation is “sold” on the concept. Entrepreneurs always negotiate better deal terms when bigger corporate partners just “have to have it.”
No. 5: Protect intellectual property. Entrepreneurs should hold off disclosing details of important technologies to potential JV partner candidates until at least a provisional patent application has been filed at the U.S. Patent and Trademark office.
No. 6: Negotiate long-term success. Sometimes the percentage ownership in a JV company becomes less important to entrepreneurs than other deal terms. Pay close attention to the timing of funding contributions from larger corporate partners, the make up of the JV’s board of directors, and the decision making authority of operating management.
The best solicitation advice I can give to entrepreneurs is to present themselves as smart, honorable and effective managers. First impressions matter. Entrepreneurs who demonstrate they are serious do have a serious chance of tapping corporate resources for business growth.
Susan Schreteris a 20-year veteran of the venture finance community and small business policy advocate. Her educational work is dedicated to improving startup longevity and operating performance in rural, urban and suburban America. She is the founder of www.takecommand.org, a community service organization that offers the largest centralized database of startup and small business funding sources in the U.S. Follow Susan on Twitter @TakeCommand.