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Starting a Build-To-Buy Company

Recently, I came across an interesting new type of company formation - a 'build-to-buy' joint venture.

Essentially, this means an entrepreneur puts together a team to build a product or a service in collaboration with another (usually well-established) business entity. This is structured in the form of a joint venture.

According to Investopedia, "A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. This venture is its own entity and separate from the participants' other business interests.

For example, let's say I want to develop new eye-tracking technology that allows users to control their Macbook with their eyes. I would pitch this concept as a 'build-to-buy' joint venture to Apple. Apple would own some percentage of the joint venture (usually >=50%), and make a cash + in-kind + brand investment into this venture. (In-kind investment might include access to backend technology and devices, and brand investment means allowing the joint venture to use Apple co-branding on the product). Through its investment, Apple is also buying an option to purchase the company for a certain amount (usually a fixed multiple of revenue and/or a perpetual royalty) given a set of predefined OKRs.

I would start the company and build the tech (and maybe even start selling) for the first few years and provided we are on track with our KPIs, Apple can swoop in after year two and exercise its option to buy the company and absorb the technology and the team.

Reasons such a structure is attractive to Apple (or another established business entity):

  • Strategic proximity to an exciting new technological development
  • Access to an extremely talented team
  • Minimal capital-at-risk
  • No impact on human capital and management bandwidth
  • Low stress on the company balance sheet
  • The right of first refusal (to acquire the company)
Done right, a build-to-buy joint venture is a great way for entrepreneurs to build relationships with established companies, develop products they are passionate about in the medium-term without needing to commit resources and time over the long term, and get an opportunity for a (relatively quick) exit (helps your resume and your bank account!).

I don't want to make it seem like it's easy. It's not. Just because Apple de-risks the venture through the option to buy the company, it does not guarantee that it will exercise that option quickly (or ever). Similarly, in most cases, it might be impossible to even enter into a joint venture with large companies. If you are an entrepreneur interested in entering into a built-to-buy joint venture, here is what you need for your proposal:
  • Why should your joint venture (potential) partner care about this product? How is it relevant to their business?
  • How can the product help develop the company's brand?
  • Why should they enter into a JV with you? Why can't they develop the product in-house?
  • What resources do you want from them? Cash? Brand? In-kind?
  • What are the key OKRs for this JV? What is the timeline?
  • What is the break-even time horizon?
  • What does an acquisition look like? What is the structure of the JV and the resulting (potential) acquisition?

This type of build-to-buy structure is extremely common in the biotech industry where medium-to-large biotech companies frequently enter into JVs and subsequently acquire small drug, and single-asset biotech companies. A big reason is that developing drugs and biotech assets is extremely expensive. In comparison, building technology platforms is (relatively) cheap, fast, and scalable. However, I am confident that starting build-to-buy companies is extremely underrated in the tech startup world and more entrepreneurs should explore this space.

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