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Venture Technology

Project Model

Venture Technology Example

How does the Venture Technology Partner model work in the real world? Let's go through a hypothetical scenario.

Suppose the owners of a company, XYZZY Inc., have an idea for a software application that would significantly reduce the operating costs and improve the efficiency of their business. They realize that others may already have the same idea, so to take full advantage of the opportunity they need to move quickly. They also realize that they can ultimately gain more by building a business around their application and selling it to other companies like themselves. They contact Vision7 Software to analyze the concept and submit a development proposal.

Vision7 carefully considers the opportunity and decides to propose a venture technology relationship to XYZZY. Vision7 will perform all of the tasks associated with developing the application, from requirements analysis through prototyping, coding, and deployment, at a significantly reduced cost. In this case, the total cost would be half of what a work-for-hire developer would charge.

Assuming the application would cost $150,000 to build, Vision7 would charge only $75,000. In exchange for discounted development and maintenance costs, XYZZY would pay a royalty of 10% of the sales revenue of the application once it begins selling and provide a 10% equity stake in its new software business to Vision7. In this way, Vision7 and XYZZY share in both the risks and rewards as they work together to make the joint effort a success.

Assuming a per unit sales price of $500, Vision7 has the opportunity to recover the amount it discounted when 1,500 units are sold, after which it sees a greater total return than the work-for-hire model. Vision7 also remains committed to improving the application at continued discount rates so more units will be sold. XYZZY saves money up front on development costs, allowing it to invest in sales and marketing of the product. It also gets a technology partner it can count on to share its interests in growing the new business. Ultimately, if the new venture is successful, an initial public offering or acquisition would provide further opportunity for return on investment to both XYZZY and Vision7.

The above example is just one way the Venture Technology Partner model might be utilized. In some cases only a royalty might be appropriate. In others, only an equity stake would work. There may be other arrangements made depending on the situation. Of course, the numbers depend on the estimated size of the opportunity. In every case, however, the relationship is the same. In today's quickly changing economy, a partnership with a technology provider who shares in the goals of the business is the smart way to stay ahead.

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