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Joint Ventures Versus Venture Capital


It might be the first goal of many a budding entrepreneur: to find someone with more money than he knows what to do with, explain why your idea can make him richer than Beverly Hills and accept a seven-figure check from him in return for a tiny little stake in your company — one that’s now worth several million dollars. Whether the business ever makes a dime, you’ll always be able to say that you were worth a mint and that you ran a large corporation.

In practice of course, it’s never that easy. While venture capital may well provide the sort of launch pad that’s sent many a business into the stratosphere, finding the money can be as laborious as building the foundations of the business in the first place. Time that could have been spent talking to potential customers, perfecting the product and developing new service ranges will be spent creating business plans, contacting investors and creating Powerpoint presentations to land the capital.

The chances of success are fairly small too, although they depend on the industry. Entrepreneurs with an idea in the healthcare field, for example, are said have just a 3 percent chance of landing an investor. Those odds may well be higher for entrepreneurs with Web ideas and based in Silicon Valley, especially if they have a proven track record, but even they can expect a long wait, lots of meetings and plenty of responses that begin “We think it’s a very interesting idea but….”

The Price of Investment
And even if you’re successful, the money always comes at a price that goes beyond the time taken to find it. Accept money from an investor, and you give up full control over your company. You don’t get to decide on your own whether to sell up, go public or even close down. When Bryan Zmijewski, founder of microstock photography company Lucky Oliver, announced his company’s closure recently, he made clear that the move came from “the investment team” who had decided “that it was in the best interest of all stakeholders to shut the company down.” That’s a serious loss of control over a business that’s taken someone else’s money but all of your hopes, dreams and efforts — and a sizeable chunk of your life too.

So what’s the alternative?

There are quite a few. BusinessFund.com lists 25 Alternatives to Venture Capital and offers some interesting, if conventional ideas. (One suggestion, for example, is to use personal credit cards, a route that carries a high risk of punitive interest rates.) Mark van Osnabrugge and Robert J. Robinson point out in their book, “Angel Investing” that in the first round of investment, 74 percent of entrepreneurs use personal savings to fund their business. In the second round, just over a third use angels and by the third round, a quarter are established enough to use a public share offering.

How Joint Ventures Can Beat Venture Capital

But there is another option that’s less frequently taken, offers many of the benefits  provided by investors and lets you retain full control over your business too. You can create joint ventures with other entrepreneurs.

You would still be able to receive the professional support and advice that’s often as valuable as the numbers on a VC’s check. But instead of selling part of your company to someone else, you’d be partnering with someone on one particular aspect of your business.

While you wouldn’t be receiving a giant sum of money regardless of whether you succeeded, you would be able to receive income and grow at the same time.

Joint ventures though come in all sorts of forms. One option is to team up with a big company or even a group of big companies. MySpace’s deal with Universal, for example, may have helped to settle legal action but it provided clear benefits for both the social media site and the music companies. MySpace was already well-established but had it lost the court case, the site might have required a new injection of cash from owners News Corp.

Of course, joint ventures don’t have to be that complex. Joel Comm, an Internet guru with a popular following, invites entrepreneurs to submit their joint venture ideas to him… but charges $497 to review them. The fee is intended to put off all but the most confident of entrepreneurs from asking for help but it also suggests that the value of a partner with a large audience can be high.

Perhaps the best way for a new entrepreneur to form a joint venture though is with another company at the same stage of development. Two businesses that agree to recommend each other’s services or which uses each other’s products can cut their expenses while still growing and bringing in new customers. Conferences can be good places to meet these kinds of entrepreneurs, and in fact it’s the opportunity to create those partnerships that is main reason people attend them. The presentations are often just helpful extras.

Every joint venture though, whatever the business’s stage of development, has to provide real benefits to all parties, and like any deal that means selling the idea with an emphasis on what the other side will get out of it. Yes, that’s like pitching a business idea to a venture capitalist. This time though you’ll be talking to someone with as little money as you but with drive that’s just as big — and dreams that are the same size too.



2 Comments

  1. DanGTD Says:

    What do you think about VCs like Y Combinator?
    They invest small sums of money, around $5000, for 6% of stakes. They see it like investing in people rather in technology.

  2. kamal Says:

    woww... what a great article :)
    unfortunatley, here in my country, Indonesia, there aren't too much people who want to spend their fund on investing a new business

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