One of the most important decisions you'll make as a business owner is how and when to raise funds to keep the business going. In this lesson, we're going to talk about raising capital through strategic alliances and joint ventures. We'll introduce a few of the common sources of funding for startups. We'll talk about the different types of strategic alliances and how you can set joint ventures. We'll go through some pros and cons of using strategic alliances and joint ventures as a way of raising capital. Then I'll give a few words about best practices for engaging in strategic alliances. Sources of capital, there are a myriad of ways for you to raise money for your company. You can use venture capital funding, federal financing through federal grants and loans. Self financing through your own money or through getting a credit from a bank. You can raise money through family and friends, through angel investors. But you also can work with other companies through strategic alliances and joint ventures as a way of raising funds for your company. There are a number of ways to engage in a strategic alliances. I've highlighted a few here just to give you a sense for how a strategic alliance or a joint venture could work. It can be a direct investment. A bigger company makes a direct investment in your company in order to achieve a specific goal. It could be the creation of a whole separate entity, a joint venture entity, whereby both you and your strategic partner are contributing to the joint venture for the purposes of achieving a very specific goal or very specific result. Another way of structuring a joint venture or a strategic alliance is for one company to allow the other company access to its technology in its facilities or its personnel in order to work on a project that has of joint interests to both companies. You can imagine there are other ways to structure a joint venture or a strategic alliance. The idea is that there's some mutual benefit to both parties coming together to achieve a very specific result. Let's give the example of a Hudson's Bay Company, it's a big Canadian retailer and True Fit which is an American technology company. True Fit is in the business of building a website customization software that allows a retailer to, on its website, show different customizations of the retail products to customers visiting the site. Hudson's Bay Company and True Fit enter into a strategic alliance, whereby a Hudson Bay or one of it's retail websites, the bay.com would use True Fit's technology to allow Hudson Bay's customers to customize and to see the different customizations of Hudson's Bay products on the website. Now this was a very useful strategic alliance. First of all, it positioned Hudson's Bay as an innovator in the Canadian markets. They're the first big retailer in Canada to use this innovative technology. Now for True Fit, it was beneficial one because they enjoyed the brand lift from partnering with such an iconic retailer. Hudson's Bay is one of the major retailers around the world and by using their technology and connection with Hudson's Bay business, it gave True Fits brand a major lift. But it also gave True Fit, an American technology company access to the Canadian market. As you can see this strategic alliance included benefits for both companies and it allowed both companies to partner in their own strengths, True Fit with the technology and Hudson's Bay with its retail customer base. Partnering, those two strengths together to achieve a result that had mutual benefits. Here are some of the pros of strategic alliances or joint ventures. Sometimes if you want to get a result or get funding, going this route maybe cheaper than the process of getting venture capital funding. Also by partnering with another company, you may gain expertise and resources, and other intangibles from partnering with another company either in your industry, in a complementary industry, in a supplementary industry. These intangibles are beneficial to you beyond just getting the result that you're looking for. Also, if you have a certain type of technology, like True Fit's technology that you want to use via a strategic alliance. Sometimes your return on an investment by engaging in a strategic alliance is higher than it would have been had you just licensed the technology to this partner. Strategic alliances in joint ventures also have their drawbacks though. By partnering with another company, you necessarily lose some autonomy. You're bringing two companies with their own board of directors with their own management teams, you're bringing them together to try to achieve a common goal and a common result. Whenever that process happens, you lose some autonomy. Both companies have to give up a little bit of autonomy in order to get the job done together. Also, by partner with another company, you increase some of your liability concerns because now actions being taken by individuals who are in your company, who aren't your employees, those actions now could be attributable to you as a participant in this joint venture. There's increased liability concerns that you have to be cognizant of and be aware of when engaging in strategic alliances. Also, getting a strategic alliance together could be very time-intensive. You're trying to bring two individual companies together around a common goal, sometimes that can take time. It's also oftentimes very difficult to negotiate the terms because both companies want to make sure that the strategic alliance is in their best interests, and you have hard bargainers on both sides, it can take a good while to come to terms on the agreement between the two companies. Also, and this is a point that you should always be aware of when engaging in conversations with competitors. Strategic alliances sometimes raises conflict of interests issues. If you are working with another company that's in the same space that you're in, it can raise issues. It can also raise competition issues, around any trust when you are both partnering with someone who may be in the same space. You may be coloring larger parts of the market together. Or you may be engaging in prohibitive acts such as price-fixing or market divisions under the any trust in competition laws in the US and around the world. Whenever you engaging in conversations or strategic alliances or any type of partnerships with competitors, these issues are heightened issues that you should be hyper-aware of, hypersensitive to. You should definitely talk to a lawyer before engaging in these types of conversations with companies that are in the same space that you're in. Best practices here. Whenever you are engaging in a conversation around strategic alliances, joint ventures with another company, you want to make sure that you establish clear goals. What exactly are we trying to accomplish with this partnership? Once you have those clear goals, you want to select the right partner for those stated goals. No mission creep. You don't want this to be some broad, multi-year, multi-faceted venture. It should be a very specific goal that the partnership or the strategic alliance is intending to accomplish, and you want to pick a partner that can help you accomplish that goal. You also want to negotiate a deal that has risks and benefits on both sides. Oftentimes if you're startup, your negotiating partner will be a more established company, and so it won't feel as if they have more bargaining power because they are bigger company, they've been around longer, but that's not the case. You're bringing something to the table. They are bringing something to the table. Keep that in mind when you're negotiating so that you are sure to negotiate a deal that allows both parties to have some risk, and both parties to benefit from the strategic alliance. Also keep the lines of communication open. Once you have started our strategic alliance you got to remember that you have two separate companies that have operations outside of that common goal that you're working on via the joint venture or the strategic alliance. You want to make sure that as the strategic alliance is continuing, that the lines of communication between the two companies is always open so that you have a favorable, amicable, and a very good working relationship between the two companies. Otherwise, the individual operations of the companies could somehow frustrate the goals of the strategic alliance. Keeping that line of communication open helps mitigate the instances that happening. Then finally do your homework. Make sure you investigate the companies that you're pursuing for a joint venture or a strategic alliance. Make sure you do the proper investigations around personnel, around results so that you enter into this alliance with the best information possible. In summary, raising money is a very important issue for your business and it requires attention to the legal requirements around it, and various ways to raise capital and each has its own pros and cons. Engaging in a strategic alliance or joint venture with another company can be a very useful alternative to some of the more security-intensive funding options such as venture capital funding or angel investing. But if you're going to engage in a strategic alliance or joint venture, you want to make sure you do your proper investigation, do your homework, so you can select the right partner.
