Everything You Need to Know about Joint Ventures for Inventors
Joint Ventures—The Inside Scoop
Technically, a joint venture for inventors is an agreement by two parties to work together in order to design, promote, or manufacture a new product. The parties split the work and split the profits. The split can be 50/50, or it can be a different split depending on the work and resources each party contributes. The partnership could be a formal joint venture, or it could be a more informal alliance or agreement. What distinguishes a joint venture is that both parties contribute financial resources, and both share in 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 would be responsible for all sales and marketing activities and might also pay for the patent and some tooling expenses.
* A contract with a sales and marketing group that agrees to market the product for an inventor.
* 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 be responsible for finalizing the design of the product.
* A joint venture with another marketing company to exploit a different market than the one you originally targeted.
* An agreement with an overseas manufacturer in which it makes your product for a reduced price and extended terms in exchange for overseas marketing rights.
Inventors make one consistent mistake when trying to strike an alliance—they try for too high a percentage of the profits. Companies are not going to work hard to make you rich. You won’t get any deal if you ask for more than 50 percent of the profits. Remember that without you the company will continue in business, while you might not get into business at all without the help of an alliance partner.
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Inventors form alliances for two reasons. One is that they don’t have enough money and need to get a partner to help foot the bill. The second is that they need to offer an extra enticement to get help from people they need help from in other ways. An inventor, for example, who wants to penetrate the hardware store market, may want to team up with a top manufacturers’ sales representatives agency. Agencies might not be all that interested in taking on a product for a standard commission from a small company that can’t afford advertising or promotion. But they might be willing to take the product on and pay for promotion if they were receiving 50 percent of the profits instead of a 10 percent commission. The agency would also help set up a complete distribution network across the country.
Can You Play that Song Again?
When Nathaniel Weiss was a musician in his early 20s growing up in Philadelphia, Pennsylvania, he noticed an interesting phenomenon: when guitar players practiced, they constantly came up with great-sounding riffs, but if they stopped to write the notes down, they seemed to lose the groove and the riff died. Weiss created a pickup device that attached to a guitar and connected to a computer. Weiss’ software program then transcribed the notes played into sheet music. The result: Guitar players could play away knowing that their creativity was being preserved.
Weiss named his hardware/software product the G-Vox, but he knew he wasn’t ready to go to market because he didn’t have a distribution network set up, and he didn’t have much credibility in the guitar community. Weiss’ first step was to form a partnership with Fender Guitar Company, a leading guitar manufacturer. Fender offered the G-Vox as an option on its guitars, and Weiss also sold the product to guitar stores.
The market for writing aids for guitar players was steady, but it didn’t have much growth potential. While Weiss wasn’t able to locate a large songwriting market, he did notice that there was a huge market for helping students learn to play an instrument. Weiss reconfigured his product for members of student bands and orchestras. The benefit now was that the G-Vox pickup allowed students to see exactly what they were playing while practicing at home or at school. The school market is big, has established sales channels, and typically only buys from a few well-known suppliers—it’s a difficult market for any inventor to crack. So what did Weiss do? He formed another partnership, signing an alliance agreement with one of those major suppliers, McGraw-Hill. Together, the two companies proceeded to introduce new products created by Weiss’ company, G-Vox Interactive Music.
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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 if your product can increase their sales 15 to 25 percent, or if the product provides them with a significant market advantage over their competitors. The perfect product from their perspective is one that has significant market impact.
From the inventor’s point of view, perfect products for an alliance partnership or joint venture are ones that the inventor doesn’t have the financial, engineering, or manufacturing resources to produce, or that the inventor doesn’t have the marketing network or credibility required to launch. The one feature of a perfect joint venture product is that the product provides customers a significant, important benefit.
Why should a manufacturer or distributor be interested in an alliance or joint venture? Sure, one reason is that they end up with an exciting product to sell, but that’s not the real reason. It costs companies lots of money to introduce a new product. That financial risk is minimized in an alliance because the inventor is the one who does most of the legwork to get the product market ready.
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I personally believe a joint-venture strategy should be used far more often than it is by inventors. It allows them to move their product to the market in a big hurry with much less financial risk. The trick to success is to find the right size companies to present your idea to. If your product can sell $1 to $2 million per year, there is no point in presenting it to a $100-million corporation. They won’t be interested, since the product doesn’t have enough potential for them. But a $5-million corporation might find that $1-million product perfect for their sales and manufacturing goals.
When forming joint ventures and alliances, you might be hoping to
* 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 of an eventual licensing agreement.
* Generate additional market information and distribution channel contacts that can be used for subsequent inventions.
* Obtain the management, administrative, and manufacturing support for a new product. A company with experienced personnel can do these tasks far better than most inventors.
Inventors have other choices depending on the skills they have. Inventors who are experienced in engineering and manufacturing might choose a private label strategy (chapters 14 and 15), or they may choose to try and license their idea (chapters 16 and 17). Inventors who skill is in marketing, recognizing market opportunities, or in sales may choose to sell on a commission basis (chapters 10 and 11), or they may also pursue a private label strategy. Inventors might also decide to build their own company, raising funds from investors and/or banks and introducing their product on their own (chapters 18 and 19).
You need to bring something to the table to strike a joint-venture deal. You need to offer either (1) engineering know-how to create the final product, (2) key contacts with end users to create a product that best meets the needs of the market, or (3) numerous contacts in the distribution network to expedite sales.
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Typically, the main advantage of a joint-venture or alliance strategy is that you get funding from the potential partner. For example, an inventor may have identified a big market opportunity, but doesn’t have the money to create the prototypes. He or she then approaches a potential partner company and discusses a possible alliance if the product is successfully developed. The inventor can then ask for a sum of money to create the prototype or ask for engineering support to finish the prototype. One strategy is to ask for support only for accomplishing this first step, and then once it is finished, the two parties can decided together if they want to proceed further. This step-by-step process is frequently much easier to sell to a company than a license, where the company has to take on the entire burden of introducing the product.
Inventors don’t really need a patent to strike a joint-venture or alliance agreement, but it does improve their negotiating position. It also helps ensure that the product’s intellectual property rights belong to the inventor. In some cases, the inventor might apply for a provisional or design patent so he or she can say that a patent is applied for. This can create a dangerous situation, however. The provisional patent gives only one year for the inventor to apply for a utility patent. Your one year could easily run out before you have finalized your agreement and finished the product design. You are better off applying for a very broad patent, knowing that your initial application will be contested by the patent office. Then you can keep going back and forth with the patent office for to establish your claims. This tactic can keep your patent rights open for three to five years
One reason that inventors choose the alliance strategy is that they don’t have the experience or money to finalize a “works like, looks like” prototype. But often a drawing just isn’t enough to generate a positive response from a potential partner. If you want to strike up a joint-venture agreement, you’ll find that having a prototype is an important tool. However, you don’t want to spend too much money creating a prototype. Just take the prototype far enough so the partner can see your product’s sales potential. More than likely your potential partner will want to make changes to better meet customer needs, to improve product quality, or to lower product costs.
Always approach a potential partner with several pieces of market research from target customers. You position becomes much more favorable if you have survey results from at least 15 to 20 potential users. Your position is even stronger if you have survey results from 15 to 20 people in your potential distribution channel. You’ll find that potential partners will feel you’re a professional if you have survey results.
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This tactic requires you to know exactly what your target customer wants and the sales potential of your target market. You won’t have any trouble finding a partner if you uncover a product that satisfies the needs of a large market. But it is up to you to prove the market is there. Your research should show that customers need and want your product and that they are willing to pay a reasonable price for it.
Research Report Basics: Replacing the Rolodex
* Start by clearly defining your target customer group. For example, the initial target group for the Palm Pilot, one of the hottest new products of the last 10 years, was businesspeople who spend a considerable amount of time out of the office. This included salespeople, executives, insurance people, and marketing managers.[AUTHOR: Okay to put this in past tense, or is that still the main target customer? It seems to me they’ve expanded to include just about any businessperson, yes?–ce]
* Define the size of the market. I like to do this in two ways, first by stating how many people are in the market, and second by listing the size of other products sold to that market. In the case of the Palm Pilot, the number of initial sales could be estimated by the early number of cellular phone sales.
* Explain why you feel the market needs the product. For the Palm Pilot, the reason would be that people are away from their computers for long stretches, and they want a truly mobile computer to take with them.
* Verify your premise. Have actual interviews with both end users and dealers that show that they would indeed like the product you are proposing. For the Palm Pilot, you could interview 20 to 25 potential end users to clarify their need for a smaller mobile computer.
* List the customers’ product requirements. You want to have survey information about what features potential users require. Inventors accomplish this task with six to eight in-depth interviews with potential users discussing what users would like to see and what they’d like to accomplish with the product.
* Establish how important this product would be to users. People typically buy functional products that solve their major priorities first. If you were pitching the Palm Pilot, you’d want to show that users would buy your product first before other time-saving, out-of-the-office products.
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Most of the time, inventors create an alliance or joint venture with a manufacturer that is capable of making the product. Then they don’t have to worry about manufacturing the product. Most sales and marketing partners won’t be willing to make an alliance with an inventor unless he or she has a manufacturing source. They won’t trust the inventor to make a quality product or deliver in quantities once orders develop. Remember that your partners are putting in a lot of effort on the product, and they don’t want to see those efforts wasted because of lack of effort on your part.
You must have a professional in charge of every phase of your operation if you want to get a joint-venture agreement. If you are going to handle sales and marketing and don’t have marketing experience, be sure to have some advisors and helpers who do have experience. The same holds true for manufacturing. The partner won’t count on you unless you’re an expert yourself or have experts to call upon.
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You have the best chance of striking an agreement when you can show you have unique insights into what your target customers really want—insights that allow you to develop the perfect product to meet those desires. Your key contacts then are people who have a very strong understanding of what your customers want. If you are introducing a home-decorating product, your key contacts are interior designers or architects who are recognized as having an uncanny ability to understand what customers want. If you were introducing the Palm Pilot, you would want contacts who have introduced other products to the same target customer group, or you would want people from that target group who have always been early adapters of new technology. For a medical product, your key contacts would be doctors or hospitals that are influential in your product’s field.
PRO AND CONS
* Allows the inventor to introduce new products that are beyond his or her reach in terms of either resources or experience.
* Helps the inventor gain tremendous production experience that he or she can use later.
* Speeds up the introduction and market penetration of a new product.
* Typically fills in the experience gaps that the inventor has for introducing a new product.
* Offers the inventor much more control of the product and its subsequent development.[ * Is a much easier sell than a licensing agreement.
* Allows the inventor to introduce new products when he or she can’t afford to produce a “looks like, works like” prototype.
* Doesn’t provide the inventor with total control of the product.
* Depends on another party to do their job effectively for the product to succeed.
* Doesn’t allow the inventor to withdraw the product to start a company on his or her own.
* May not establish the inventor as a force in the market in order to launch his or her own company.
* May create stress for an inventor who’s input is overridden by the joint-venture partner.
UP, UP, AND AWAY
A successful first invention is often the launching point for a successful company. But a joint venture or alliance may actually leave the inventor joint venture partner in a stronger position than the inventor, especially if the alliance uses the partner’s name to build credibility. On the other hand, the inventor learns about the product introduction process and develops contacts that should be helpful in his or her next product. The best part about a joint venture is that often it places the inventor in big powerful markets where there is a lot of interest from investors. A success in a joint venture or alliance should help the inventor launch a full-fledge company on his or her own if the next idea is in the same market. Realistically, most inventors who use a joint-venture strategy would not have been able to launch their products otherwise. Also, if your eventual goal is to start your own company, the joint venture is a much better first step than selling on commission or selling through a private label because you maintain some ownership of the product (which doesn’t happen when an inventor sells on commission), and you are also making contacts with distributors, end users, and key industry people (which doesn’t happen when the inventor sells on a private label basis).
Inventors succeed because of their ability to produce and market a product, skills that count more than the particular merits of any one invention. I believe inventors in joint ventures have a 10 to 20 times better chance of success than an inventor going alone. Inventors need the joint-venture partner’s money and expertise. Inventors will be in a better position to succeed on their own once they’ve survived a partnership.
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The key to success is knowing what your target customer wants, so your key resources are knowledgeable people in the market you are targeting. Here are some tips for finding those key resources:
* Meet people in the target market, as many as you can, and start identifying “early adapters,” people who buy products before anyone else.
* Meet as many people as you can in the distribution channel and get their input.
* Read trade magazines and find out who are the key players in the market. Become familiar with your market’s most influential people.
* Go to any local association meetings of your target customer to find new contacts and to get a better understanding of what people want.
* Learn from your contacts which manufacturers in the industry are strong in marketing and are strong in manufacturing. Your best bet for a good joint-venture partner is a company that has strong manufacturing but weak marketing capabilities.
* Develop a relationship with a regional manager or marketing person at a company you have targeted as a potential partner. You need someone on the inside of the potential partner pushing for an agreement in order to succeed.
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 convince 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 to be sure they can count on you as a partner.
* You will be responsible for keeping the momentum going on the agreement.
* You will have to take charge of finalizing the product design, even if the partner does most of the work.
* Sales for most partners take three to four months to ramp up throughout the distribution network. Don’t be alarmed if it takes six months for the product to show true sales potential.
I’ve found that companies won’t proceed with a joint venture, no matter how great the opportunity, if the inventor or entrepreneur appears difficult to work with. Don’t call the potential partner constantly with questions, revisions, or suggestions. Limit your contacts to just one or two per week where you mention major concerns or suggested actions.
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