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Come Together

Two heads are better than one, so why not use a joint venture to get your invention off the ground?

For inventors, a joint venture is an agreement by two parties to work together to design, promote or manufacture a new product. The parties split the work and the profits. Inventors can form a wide variety of partnerships, including:

  • A partnership with a manufacturer who will help design the new product, build prototypes and eventually produce the product. The inventor is responsible for all sales and marketing activities and may also pay for the patent and other tooling expenses.
  • A contract with a sales and marketing group that agrees to market the product
  • An agreement with an expert in the field--such as a pro golfer or a well-known doctor--to present the product to consumers
  • An alliance with an engineer or industrial designer who will finalize the product design
  • A joint venture with another marketing company to exploit a market other than the one originally targeted
  • An agreement with an overseas manufacturer to make your product for a reduced price and extended terms in exchange for overseas marketing rights

Inventors form alliances because either they need a partner to help foot the bill, or they need to offer an extra incentive to get help from key people in the market. For instance, an inventor who wants to penetrate the hardware-store market may team up with a top manufacturers' sales representatives agency. Agencies might not be interested in taking on a product for a standard 10 percent commission. But they might be willing to take on the product--and pay for promotion--if they form an alliance and receive 50 percent of the profits.

When forming joint ventures and alliances, you might be hoping to do any of the following:

  • Introduce and penetrate the market as quickly as possible
  • Receive sufficient funding and support for a project that is beyond your resources and experience
  • Have more involvement in the ongoing success of the product than you would get in a licensing arrangement
  • Develop the product further before it can be licensed. An alliance can be a precursor to an eventual licensing agreement.
  • Generate additional market information and distribution-channel contacts that can be used for subsequent inventions
  • Obtain management, administrative and manufacturing support for a new product. A company with experienced personnel can do these tasks far better than most inventors.

What You Need to Succeed

Alliance or joint-venture partners look for a significant business benefit when they decide to team up with an inventor. Typically, they are only interested in your product if it can increase their sales 15 to 25 percent, or if it provides them with a market advantage over their competitors. The perfect product, from their perspectives, is one that has considerable market impact.

From the inventor's point of view, perfect products for a joint venture are ones that the inventor doesn't have the resources to produce, or the marketing network or credibility to launch. A joint venture allows inventors to move their products to market quickly with much less financial risk. The key to success is finding the right size companies to approach. If your product can sell $1 million to $2 million per year, a $100 million corporation won't be interested--but a $5 million corporation might be.

Here are some other factors to consider as you investigate joint ventures:

  • Money matters: Typically, the main advantage of a joint-venture strategy is that you get funding from your potential partner. For example, you may have identified a big market opportunity, but lack the money to create prototypes. You approach a potential partner company and discuss a possible alliance if the product is successfully developed. You can then ask for money or engineering support to finish the prototype. One strategy is to ask for support only for this first step; once the prototype is finished, the two parties can decide if they want to proceed. This step-by-step process is usually much easier to sell to a company than a licensing agreement.
  • Protection: You don't really need a patent to strike a joint-venture agreement, but it does improve your negotiating position and helps ensure that the product's intellectual property rights belong to you. You could apply for a provisional or design patent, but this can be dangerous. The provisional patent gives you only one year to apply for a utility patent. That year could easily run out before you finalize your agreement and finish the product design. You're better off applying for a very broad patent, knowing your initial application will be contested by the patent office. Then you can keep going back and forth with the patent office for several years. This tactic can keep your patent rights open for three to five years.
  • Prototypes: Many inventors choose a joint venture because they don't have the experience or the money to finalize a "looks like, works like" prototype. But a drawing often isn't enough to get a positive response from a potential partner. Having a prototype is important. Don't spend too much money creating a prototype; just take it far enough so the partner can see your product's sales potential.
  • Research: You won't have any trouble finding a partner if you uncover a product that satisfies the needs of a large market. But it's up to you to prove the market is there. Your research should show that customers need and want your product, and that they're willing to pay a reasonable price for it.
  • Manufacturing: Most inventors create a joint venture with a manufacturer that can make the product. Most sales and marketing partners won't form a joint venture with you unless you have a manufacturing source.

Dos and Don'ts

  • Don't ask for too much of the profits. Other companies are not going to work hard to make you rich. You won't get a deal if you ask for more than 50 percent.
  • Do bring something to the table--either engineering know-how to create the final product or numerous contacts in the distribution network to expedite sales.
  • Don't approach a potential partner without several pieces of market research from target customers. Your position is more favorable if you have survey results from at least 15 to 20 potential users, and even stronger if you have results from 15 to 20 people in your potential distribution channel.
  • Do have a professional in charge of every phase of your operation. If you plan to handle sales and marketing and don't have marketing experience, you need advisors who do. Ditto for manufacturing.
  • Don't be a pain. Companies won't proceed with a joint venture, no matter how profitable, if you appear difficult to work with. Don't call constantly with questions, revisions or suggestions. Limit your contacts to one or two per week where you mention major concerns.

Steps to Success

You are trying to convince a potential partner that together you can dominate the market. What will really get your potential partner excited are your relationships with key people in the market. Having an advisory board of key end users and distributors is a common tactic to show that you're connected to the market. Here are steps for finding those key people:

  • Meet as many people in the target market as you can, and start identifying "early adopters"--people who buy products before anyone else.
  • Meet as many people in the distribution channel as you can, and get their input.
  • Read trade magazines, and identify the key players in the market.
  • Go to your target customer's local association meetings to find new contacts and to get a better understanding of what people want.

Use your key contacts to help you find the right potential partners to approach. Your best bet for a good joint-venture partner is a company that has strong manufacturing skills but weak marketing capabilities.

Next, develop a relationship with a regional manager or marketing person at a company you have targeted as a potential partner. To succeed, you need someone on the inside of the potential partner company pushing for an agreement.

As you search for a joint-venture partner, here's what to expect:

  • Potential partners will not be easily convinced that you have a unique, profitable opportunity.
  • You will have trouble getting an appointment if you don't find a company contact who will recommend that the company look at your offer.
  • You will have to push for a formal agreement to establish your rights in the relationship. (The partner will try to keep the agreement on a more informal basis.)
  • You will have to persuade the partner that you can do your part in the promotion.
  • The company will want to proceed slowly to ensure your idea has potential and they can count on you.
  • You will be responsible for keeping the momentum going.
  • You will have to take charge of finalizing the product design, even if the partner does most of the work.
  • Sales for most joint-venture partners take three to four months to ramp up. Don't be alarmed if it takes six months for the product to show true sales potential.

Realistically, most inventors who use a joint-venture strategy would not have been able to launch their products otherwise. A joint venture can place you in big, powerful markets where there is a lot of interest from investors. It also lets you maintain some ownership of the product and make contacts with distributors, end users and key industry people. If you manage it well, a joint venture or alliance can be a steppingstone on the road to launching a full-fledged company of your own someday.

Is a Joint Venture Right for You?

Pros:

  • Allows you to introduce new products that are beyond your reach in terms of either resources or experience
  • Helps you gain production experience that you can use in the future
  • Speeds up the introduction and market penetration of a new product
  • Offers you greater control of the product and its subsequent development than a licensing agreement
  • Is a much easier sell than a licensing agreement
  • Allows you to introduce new products when you can't afford to produce a "looks like, works like" prototype

Cons:

  • Doesn't give you total control of the product
  • Depends on another party to do their jobs effectively for the product to succeed
  • You can't withdraw the product to start a company on your own.
  • May not establish you as a market force capable of launching your own company
  • Your input may be overridden by the joint-venture partner.

Adapted from Entrepreneur magazine's Start-Up Guide #1813, Bringing Your Product to Market, by Don Debelak.

Like this article? Get this issue right now on iPad, Nook or Kindle Fire.

This article was originally published in the February 2005 print edition of Entrepreneur's StartUps with the headline: Come Together.

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