WHY JOINT VENTURES FAIL
Many small business consultants counsel clients to approach joint ventures cautiously. They acknowledge that such partnerships can be most valuable in nourishing a company's growth and stability, but also point out that smaller businesses usually have far less margin for error than do multinational corporations, or even mid-sized companies. Some experts recommend that business owners considering a joint venture with another establishment (or establishments) launch a small joint venture first. Such small projects allow companies to test the relationship without committing large amounts of money. This is especially true when companies with different structures, corporate cultures, and strategic plans work together. These sorts of differences often make it difficult to work together smoothly. So, going through a period of "courtship" before committing to the marriage is usually a wise move.
In addition to a period of courtship, a small business should investigate the prospective partner thoroughly including interviews with prior joint venture partners, suppliers, and customers. This is especially true for a small company considering a joint venture agreement with a larger firm. Joint ventures can benefit all parties to the agreement greatly, and often do. But when they go wrong, the pattern is often a familiar one, explains Gabriel Berg, a partner in the New York City Law firm of Berg & Androphy, a firm that handles many claims of idea theft. Ms. Berg is quoted in an Entrepreneur article that highlights difficulties that often arise when a small firm wishing to market or advance a new product idea enters or attempts to enter a joint venture agreement with a large corporation.
Berg outlines the pattern she has seen in countless lawsuits arising from failed joint ventures this way. Early on, the small company will try to protect itself through the use of nondisclosure agreements and by withholding key information. Over time it may feel pressure to share proprietary information too early in the process because it needs the larger company's resources—capital or market distribution network. By divulging this information too early and before contracts exist to strictly define the terms under which the parties will develop the joint venture project, the small firm puts itself in a vulnerable position. "It's easy to think nondisclosure agreements are enough, but most leave room for either party to claim that nothing new has been invented '¦ [and] both sides have room to come back later and say, 'Oh, we always knew how to do that."
People sitting down to discuss a joint venture partnership are usually in an optimistic mood and want to trust their potential partners. So far so good. However, if the optimism causes the partners to proceed before their relationship is thoroughly documented in the form of contracts, then trouble may follow. It is crucial that contracts exist that clearly define how the costs and benefits of the joint venture will be shared by each partner. Otherwise, a small business owner may wake up to the nightmare scenario described by Berg this way. "A large company calls, promising the moon, and you end up out of business, watching your ideas go to market without you." Lawsuits are very costly and they take time. Although many small firms may win lawsuits resulting from failed joint ventures they are often described as hollow victories because they cost so much to litigate and often cause the company to fail in the process. It is, of course, far better to avoid such litigation if at all possible.
Managing a joint venture partnership is another area that often causes friction in the partnership. The managers of one company may be more adept and/or decisive with their decision making than their counterparts at the other company. This can lead to tension and a lack of cooperation. Projects are made more difficult if they lack a well-defined decision making process that is predicated on mutually recognized goals and strategies.