Contemplating a joint venture with someone bigger than you? There’s a strong temptation to cast caution to the wind. So long as you aren’t hooking up with a direct competitor, your secrets will be safe, right?
Not necessarily. In fact, the experiences of Clean Fuels Technology Inc. (formerly known as A-55 Inc.), an emulsified-fuels-technology company based in Reno, Nevada, and Interactive Network, a now- defunct Silicon Valley software maker, suggest that ventures with noncompetitors may be just as risky as partnerships with companies in the same business, at least when the alliance involves a much more powerful partner. And the risk may be especially acute when you’re counting on such an ally to finance and distribute new technology.
Both Clean Fuels and Interactive were looking for such help from larger noncompetitors–Caterpillar Inc. in the case of Clean Fuels, Tele- Communications Inc. (TCI) in Interactive’s case. But instead of getting help with new technology, Clean Fuels and Interactive lost it, and they have spent much time and effort to win it back through the legal system. Yet neither company went into their ventures with their eyes closed. Indeed, both relied on the kind of formal agreement that experts contend is an absolute necessity in such undertakings. (Caterpillar and TCI’s parent, AT&T Corp., failed to respond to requests for interviews.)
So what did they do wrong? In Clean Fuels’s case, experts suggest that management committed the cardinal, if sometimes inevitable, sin of betting on only one partner–Caterpillar, the Peoria, Illinois, heavy-equipment manufacturer–instead of spreading the risk among more. Interactive, on the other hand, allied with several partners, but evidently dropped its guard and fell prey to one. Taken together, their stories offer some valuable lessons on the pitfalls of teaming up with a larger partner and shed some light on how to structure such deals. Ultimately, says one former Interactive board member who asked not to be identified, “It’s not always possible to know as much as you want to about a possible partner.” And as a junior partner in these relationships, he says, it is wise to remember that “a strategic investor clearly has his own agenda. If you don’t understand that up front, you may be in for some surprises.”
She’s the One
For Clean Fuels, the eventual surprises in its venture with Caterpillar were not apparent at the outset. Clean Fuels had developed and patented a form of fuel that uses emulsions of water and petroleum as replacements for traditional fuels, lowering emissions of oxides of nitrogen and other gases from diesel engines. As the single largest manufacturer of diesel engines that would use the fuel, Caterpillar seemed like the single best choice of partners. It agreed to commercialize the technology in 1994, not long before demand for it was likely to rise, propelled by stricter federal emissions standards. These were, in fact, boosted in 1998, and are slated for another increase in 2002.
When the venture was dissolved in October 1996, Clean Fuels acquired all rights to the technology. Under the terms of the joint venture agreement, Caterpillar was to remain a licensee of the technology for use in its own engines. However, testimony provided during a 16-day hearing in Denver late last year showed that just before the partnership ended, Caterpillar filed patents and patent applications with the government for the same technology. In August 1999, Caterpillar announced it was joining with Lubrizol Corp., a $1.8 billion Cleveland-based fuel-additives company, to develop and market a low-emission diesel fuel called PuriNOx.