Entrepreneurs often have visions much larger than their bank account balances. One way to deal with this challenge is to align ourselves with joint venture partners that can increase our capactity without draining our cash flow. Bill Gibson has sent me another sales tip for my 24 hour blogathon and this one is on the power of joint ventures.
“Find a short or long-term strategic partner with the resources that offset the need for investment. A great idea for a concept, product, service or a business that requires specific expertise is often held back by the lack of it, or enough money to hire someone with such expertise. However, there are ways to get around these obstacles.
Scott, a young Johannesburg entrepreneur, investigated suppliers of a high-precision grinding machine, used for the highly specialised grinding down of high-tolerance material. During his search, he found an owner who was a partly retired engineer and who was not using his grinding machine. Scott and an associate entered into an agreement that gave them one year to generate revenue with the machine. If successful, they would buy the machine by paying an agreed monthly amount.
They launched their business this way. Without this deal, they could never have raised the money to buy the machine in their first year of operations. Another option would have been to give the owner of the grinder a share of the business. Then Scott could have avoided paying for the machine entirely. The advantage to this approach is that you may be able to go to market much faster than you would if you were waiting until you were able to raise the capital to build your product or open your business. In the case of the grinder, Scott gained valuable equipment, but you can also gain expertise that is needed – not just hired expertise, but expertise with a stake in the business. A strategic partner who has suitable expertise may be exactly what you need, provided you are able to work with this person.
At the onset, negotiate a reasonable buy-out option, so that eventually you can be the full owner of your business or concept. It does not mean that you are compelled to buy your partner out – it just gives you the option. Your investor may be more valuable to you as a long-term business partner. You could also negotiate a ceiling amount – the partner is automatically bought out once this amount is paid out. This figure would have to take into account a mutually determined base value of the investment in services, support, overheads and expertise. You may need a third party to help with this. Be sure not to give away too much in the beginning. Expertise is not the only resource you may need. Under certain circumstances, it could be in your interest to open a small business via a large company that allows you to use unused machines. In turn, they could either receive revenue, a percentage of the business or both. Resources cost money. You can trade either shared revenue or equity for the resources. However, remember that equity, once traded, may be gone forever.”