Unspoken Reasons for Joint Venture Failure

Joint ventures are often compared to marriages. Similar to marriages, successful JVs and partnerships are rare: 50%-70% of them fail. Often reasons for joint venture failure are found in misalignment of strategy or business objectives. However several other causes of failure are less obvious. Let’s take a closer look at those.

Several years ago, I took over managing European joint ventures for a multinational corporation. The majority of those JVs involved smaller companies or entrepreneurs as their counterparts. Unfortunately, many of those business partnerships were not performing well. So I decided to speak with the company managers and joint venture partners to understand what led to such a situation and how it could have been avoided. I asked them the same questions: how did the venture start, what were the issues, as well as when and how they appeared? The answers I received were surprising.

 

Reason No.1: Hidden agendas

During the “seduction” period, before a joint-venture agreement is signed, partners are blindly in love. A corporation may praise a start-up for its product and knowledge of the local consumers. The start-up owner would complement the corporation’s know-how. They say what the other party wants to hear. But those words shape the other party’s expectations. They believe that it is going to be their role in the future joint venture.

The reality, however, could be quite different. A corporation may mostly value the local connections of a start-up owner or its regulatory compliance, such as land permits or other authorizations. In turn, the entrepreneur may look for easy financing from the corporate partner while expecting to have a “carte blanche” for running the JVs day-to-day business.

As both partners want to proceed quickly with the JV establishment, they tend to avoid discussing their expectations during negotiations. What if the other party has a different view? They prefer to delay those discussions until the commitment is in place. Once the contract is signed and a real JV life begins, first misunderstandings appear but those are more or less resolved by goodwill gestures. Later on, the pressures for JV business results increases. Those mismatched expectations lead to multiple disagreements that drain time and resources from both partners and ultimately affect the JV’s performance.

 

Reason No.2: Perception bias

A corporation is different from a start-up in virtually any aspect of running a business. Decisions take much longer for a corporation due to the need for several approval steps, especially for listed companies. What takes a couple of hours for a business owner to make up his mind, may take weeks for a corporate partner to decide. Yet each party tends to believe that their way is the “best way” of doing business. As a result, a start-up could perceive the corporation as slow and inefficient and the corporation would see the entrepreneur as impatient and pushy.

Another example of perception bias relates to the JV objectives. Partners may assume that their goals are either similar or compatible, but this is not usually the case. Through JV activities, an entrepreneur may want to gain additional market share or introduce new products quickly. However, the corporate side may aim at synergies from integration or portfolio diversification. So when one partner wants to focus on go-to-market strategies, the other may be concerned about margin protection and risk management. Thus, disagreements at the Board meetings could become inevitable and difficult to manage.

Lastly, the perception of the importance of the joint venture could vary significantly. For an entrepreneur, it is often an essential part of their business. By contrast, for the corporate partner, a JV could be just one of many ongoing projects. So by default, the focus and energy investment in JV activities may differ. I’ve seen numerous examples of a corporate JV team being changed regularly: people move jobs, leadership focus changes, and budget being re-distributed. This would rarely happen on the start-up side. Hence, the frustration and disappointment of many entrepreneurs for what they perceive as a lack of involvement by the corporate partner.

All of the above could break the trust and make the business venture vulnerable.

 

Reason No.3: Partner relations issues

It is a wrong assumption that joint ventures are only about building the business together. Human relations are an essential component of the JV’s success.

“They never call to ask how things are going”.

“When he comes to the town, he does not invite us for lunch”.

“She is very aggressive in her e-mails”.

All the above are quotes from the interviews cited as reasons for JV problems.

If partners come from different cultural or ethnic backgrounds, the relation’s impact on the JV’s success is even more flagrant. For example, business issues are often discussed at diners. However, the timing of the discussion may differ depending on the cultural backgrounds of the participants. South Europeans like the French would prefer to spend the dinner having casual discussions. Once the trust is built, usually around dessert time, they will address the business issues. However, for many Eastern Europeans, holding back the issues until the end could be perceived as having a hidden agenda. They would prefer to deal with the problems immediately and to enjoy the rest of the dinner in a more relaxed atmosphere.

Needless to say, other cultural differences such as direct or indirect communication styles, could also affect partner relationships. And without trustful relations, virtually any business endeavor is doomed. It is even more evident for joint ventures, with their inherent complexity and the need for agreement on major business decisions.

 

“To Do” list at the beginning of a joint venture negotiation?

So if you are an entrepreneur considering entering a joint venture with a bigger corporate partner, be sure to remember those important takeaways:

    • Do your partner due diligence, and understand their culture and strategic objectives. Lots of information can be found via the company website and social media. But it also helps to ask those questions to every company representative you meet. Once you understand your partner’s goals, be honest with yourself when deciding whether you can work together.
    • Have open conversations about JV objectives, roles, and responsibilities of each partner as well as their decision-making process. That helps to clarify the expectations and to tackle any misalignment upfront. Do not be afraid that having that conversation can turn off the corporate partner. It is normal to discuss these topics. If a corporate gets uncomfortable, this is a red flag that you may not be getting the full picture here.
    • Get to know the decision-makers and top management of the corporate partner. It is not unusual that joint venture coordination is pushed down to more junior employees and it may rotate. So you could never be sure that potential JV issues are handled at the right level of organization or even known. Thus, it is in your interests that a C-level executive sits on the JV Board. Also, stay in contact with that person and other company leaders in between the Board meetings.

Joint ventures are a great way to create value for all parties, but they need to be approached consciously. When I concluded my European JV interviews, their results surprised the company’s leadership. So I was asked to enlarge the scope to include the company’s partnerships worldwide.  Later on, the interview conclusions, best practices, and recommendations for improvement have been presented and approved by the Board of Directors. Following that, I developed a JV management toolkit to ensure the lessons learned were incorporated into managing future partnerships and alliances.

Reach out if you are interested to learn more about joint venture creation and management.