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. But there is a number of other causes of failure that 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. 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 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 corporate may praise a start-up for its product and knowledge of the local consumers. The start-up owner would compliment corporate’s know-how. Basically, 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 corporate may mostly value local connections of a start-up owner or its regulatory compliance, such as land permits or other authorisations. In turn, the entrepreneur may look for easy financing from the corporate partner while expecting to have a “carte blanche” for running 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. And those mismatched expectations lead to multiple disagreements that drain time and resources from both partners and ultimately affect the JV 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 corporate as slow and inefficient and the corporate would see the entrepreneur as impatient and pushy.
Another example of the 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 on-going 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 on regular basis: people move jobs, leadership focus changes, budget being re-distributed. This would almost never 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 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 success.
“They never call to ask how the 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 the interviews cited as reasons for JV problems.
If partners come from different cultural or ethnic backgrounds, the relations impact on the JV 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 French would prefer to spend the diner having casual discussions. Once the trust is built, usually around desert 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 diner in a more relaxed atmosphere.
Needless to say that other cultural differences such as direct or indirect communication style, could also affect partner relationships. And without trustful relations, virtually any business endeavour 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 an entrepreneur considering to enter a joint venture with a bigger corporate partner, be sure to remember those important take-aways:
- Do your partner due diligence, understand their culture and strategic objectives. Lots of information could be found via company website and social media. But it also helps to ask those questions to every company representative you meet. Once you understood your partners 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 those 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 organisation 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 in a conscious way. When I concluded my European JVs interviews, their results surprised company’s leadership. So I was asked to enlarge the scope to include company’s partnerships worldwide. Later on, the interviews conclusions, best practices and recommendations for improvement have been presented and approved by the Board of Directors. Following that, I’ve developed a JV management toolkit to ensure the lessons learned were incorporated in managing future partnerships and alliances.
Reach out if you are interested to learn more about joint venture creation and management.