Beyond the Pitch
Joint Development or Joint Ventures: What’s Best for Your Business?
Here’s why joint development or joint ventures are two options to consider for your startup: Most startups need outside help to develop their products. The reasons for this are many and understandable.
Startups are lean. Founders are focused on validating the market and the business plan. They are strapped for cash, strapped for time, and may lack technical resources.
It’s a giant challenge to fund product development or manufacturing. While preselling products is the best solution, often this is not possible in initial product development of high tech products. In those cases, joint development and joint venture relationships are two options to consider for completion of product development.
Joint Development Projects (JDP) vs. Joint Ventures (JV) in “Startup Land”
With startups, there are two types of joint development relationships. JDPs are based on agreements and are more easily managed. However, access to capital is often limited. Usually, these agreements are not binding; one of the parties can quit at any time.
- Pre-product sale: the startup accepts non-dilutive capital to develop the product and sell the product to the JDP that provided the funds.
- Joint Development Project: the startup and another entity (it could be a customer or a supplier) have an agreement to work together to complete a product or product features. Typically, they share profits (via discounts), access, expenses, and losses. There is commonly a period of exclusivity.
Joint Ventures are contractual between two companies who undertake a specific task. JV relationships are more detailed and more difficult to manage. They have potential access to significant capital and assets, but are binding.
- Joint Venture Development contracts are aimed at a product or feature development.
- Joint Venture Supplier contracts are aimed at supplying a product or service.
With either JDP or JV, it is essential to get legal assistance from a knowledgeable attorney who has specific experience with startups, JDPs, and JVs. This not something an entrepreneur should attempt alone.
Finding the Right Joint Development Partnership (JDP)
For startups, JDP partnerships can be useful in sharing development costs, but first and foremost, these relationships provide market validation of a startup’s minimally viable product (MVP) by a strategic customer. The startup may also get access to production capabilities.
For strategic customers, every company has gaps in its internal development programs. Companies are continually looking for ways to fill in their product roadmap. There are markets that they want to enter or features they know their customers need. When a startup has a technology or product that looks like a potential fit, a company that becomes a strategic partner, benefits by influencing the startups’ development direction and gaining early access to the technology (particularly if they are granted a period of exclusivity). They also receive significant levels of support during beta test.
Research the market to identify potential partners. Who are the large companies in the space? These may be potential customers, or they may be companies already supplying solutions to the industry. Ask to discuss the partner’s product roadmap. Do you fit as an enhancement or as a differentiation? If so, there may be a good probability of getting the relationship going. If not, don’t waste your time.
Structuring Successful JDP Partnerships
There are many options for structuring a JDP partnership. Most common are JDPs for a feature or product development or beta test. Understand the benefits of your technology to the potential strategic development partner is just as important as convincing them of “coolness” of your technology. Investigating your partner needs is essential prep work, as is navigating the corporate structure of a strategic JD partner to find the money.
When Is a Joint Venture (JV) a Fit?
For startups, Joint Venture contracts are usually considered when the startup is a product company with significant multiple market segments and needs access to production to avoid building a manufacturing facility. An example would be a materials company facing large capital expenditures for a manufacturing implementation. Sometimes we see JVs with enterprise or SaaS-like products, but this is less common as these companies tend to be less capital intensive.
There are multiple options for structuring JV agreements, from contracts that are application-based to broad contracts directed at building for multiple markets. A JV can be useful to share development costs, especially if there is the opportunity to enter multiple markets.
A JV can be a good way to defer product costs, to gain access to customer knowledge, and to speed up time to market. It can also be a minefield when it comes to both intellectual property ownership and rights (not just existing patents, but new discoveries and future iterations, manufacturing processes, trade names, etc.) and an exit strategy for the relationship. Secure the counsel of an attorney who is experienced in JV contracts with startups before you start discussions with any partner about a JV relationship.
Speed Bumps in JDP/JV Relationships
I’ve not yet seen a JDP or JV agreement that didn’t have some issues and surprises once the partnership got going. But some things are predictable, and while it may not be possible to avoid all speed bumps entirely, awareness and up-front conversation about these five areas can reduce conflict later.
- Payment – From beta test to installation to training and production support, who is paying for what? The startup wants to get compensated; the strategic partner is likely to believe it’s free. When do defined discounts and/or periods of exclusivity start and end? What form will the payment take?
- Intellectual Property – Who owns the IP by type, especially who owns IP associated with a product improvement that the team makes? Who has access to the IP? How is the IP (technology, process, and/or trademarks) valued? Define the terms of confidentiality.
- Management Authorization Matrix – Who has authority? What is the day-to-day process? Define banking, records, and asset arrangements. What, if any board relationships exist?
- Reporting Timing and Responsibility – Define to the appropriate level of detail.
- Termination Clause – Ensure that it is well-defined and well-understood by all parties.
Conclusion: Define the Relationship You Want and Get Legal Assistance Up Front.
Be coachable. Before speaking with any potential JDP or JV partner, discuss your options with an attorney—either one of the 10-Plus legal firms who participate in the Rev1 expert network or an attorney of your choosing who is well versed in these JDP/JV partnerships.
An attorney can help you define your ideal joint development relationship.
- Choosing the appropriate form of partnership based on goals and expectations
- Joint Venture Entities (equity ownership; form of contribution)
- Joint Development Agreements (investment-killing provisions; exit clauses)
- Joint Marketing Agreements (investment-killing provisions; exit clauses)
- Intellectual Property Rights and Ownership
- Contributions, Responsibilities, and Milestones
- Governance, Control, and Direction
Invest time to find the right partner and relationships. Understand that there are feature, product, and investment considerations. Recognize that they don’t care as much as you care. If you bring something to the table that is important to them and if you take the time to understand which relationship might work for them, you stand a much better chance of opening a dialogue that could lead to customers and cash.
When you put yourself in the mindset of who your partner is and what they care about, you will find out efficiently whether there is a partnership opportunity with the two of you or not.
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