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Joint venture capital is the term for the assets shared between two businesses for a specific purpose, most commonly to fund a start-up company. The joint venture may also be created to obtain growth funding for a new business unit, product, or technology. A joint venture can be formed either within the same country or between businesses of different countries to combine strengths or bypass legal restrictions.
One company provides the joint venture capital to obtain an equity ownership of the other business. A business may decide to become a stakeholder to have access to the product or technology being developed or to share in future profits. Joint venture capital includes money, machinery, human resources, and proprietary technology. When most people refer to joint venture capital, they are referring to the money invested into the business.
Two entities wanting to obtain joint venture capital must form a joint venture. This can be done by buying an interest in the company and filing with the appropriate authority. In the U.S., a certificate of incorporation or the articles of incorporation will be needed along with a memorandum of association. These documents outlay the roles of each entity, objectives, expectations, and regulations. The joint venture will become an entity separate from both businesses with separate liabilities, except for the venture capital fund.
There are both advantages and disadvantages to forming a joint venture to obtain growth funding. The business that will be receiving the financial capital will be able to grow and expand its operations. It will also have a new source for obtaining ideas and strategies, expertise, and access to additional resources. The company providing the joint venture capital will profit by owning a stake in the business, product, or technology. It can also reach economies of scale, increase its product diversification faster, and have a continual source for research and development.
The downside of when a business enters a joint venture to obtain joint venture capital is that management will lose control of decision-making. The business providing the funding will have a say in its future plans and strategies, as well as how the joint venture capital will be used. Both companies may have different philosophies and expectations of how to use the joint venture capital, or what direction the joint venture should be heading. If the joint venture is between businesses in two different countries, then there can also be conflicting cultures and styles of management.
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