RudeVC: Investing in competing firms

RudeVC: Investing in competing firms

competitorsThe other day my partner received a fundraising teaser from an intermediary which contained a section on the project’s competitive landscape. The competition mapping followed the common quadrant format, yet to my partner’s astonishment, included one of our existing portfolio companies smack in the sweet spot of this project’s competition.

To solicit us for fundraising in a direct competitor of one of our portfolio companies simply points to an intermediary that didn’t do his homework. While I submit this is a tremendous disservice to his client and I have a big beef with this, that’s a topic I’ll address another time.

This incident however also started me thinking about a concern I’ve encountered from time to time from entrepreneurs about whether we would ever invest in competing businesses. To be perfectly clear, my policy is to not invest in competing companies. Not only do I consider it dishonorable, but it wouldn’t make good business sense for me either.

I’m in the VC business for the long haul (and in my mind I’m still young!). I aspire to attain strong performance on multiple generations of investment funds. I can project that some of my best future deals will be second, third, or fourth ventures launched by entrepreneurs already in my network today. So garnering a reputation for espousing conflict of interest would eventually come back to bite me.

Furthermore, I really see my primary role as a VC to work in service to my portfolio companies. I estimate that I spend almost a day per week on average per portfolio company working directly or indirectly for them. Dividing my bandwidth between two direct competitors would undermine the very service I committed to provide as an investor.

Of course, the pace of change brought by technology results in the continual scrapping and re-drawing of market segments and product categories. Moreover, especially in early-stage technology companies, the best firms will likely pivot multiple times during their progression. This means that two unrelated companies today could become competitors in the future. So how do I handle that ?

Well, first I employ common sense and listen to my gut. Generally I’m pretty focused on investing around particular themes, so I should have a certain degree of context to anticipate some chance of convergence. This method is admittedly far from foolproof; my judgment can easily be wrong. So I also defer to the judgment of the management teams of the respective companies. If I’m interested in a new investment opportunity that may later drift into the space of one of my existing portfolio companies, I will consult my portfolio firm. If all lights are green and the new investment progresses, I’ll most likely even encourage a meeting between the firms to ensure everyone is comfortable before finalizing the deal. If there’s any lingering doubt, even if I’m convinced but my portfolio CEO is uncomfortable, I won’t proceed.