Why We Don’t Invest In Competitive Businesses
I was trading emails with one of our portfolio company CEOs last week. The subject was a company that was looking for venture capital that offered a service that was similar to one of the services our portfolio company offered. The CEO was encouraging me to take a close look. He said, “someone is going to invest, it might as well be someone close to our company”.
I told him that I completely disagreed with that philosophy. I said “When a VC invests in competitive companies it’s like an open marriage. It sounds all well and good, but it’s going to create problems down the road.”
He laughed and suggested I blog that. And so I have.
I have never understood “open marriages”. The idea is you are married but free to have relationships with others too. Maybe there are men and women who can deal with the complexities, conflicts, and uncertainties that such an arrangement would create, but I am certainly not one of them. I like to know where my loyalties lie and I like to know where the loyalties of others who are close to me lie as well.
And that’s why we don’t invest in competitive businesses. Let’s say we had two portfolio companies that both offered a video uploading/sharing service. And let’s say we had a relationship with a leading media company that was looking for a partnership in that area. Which of our two companies services would we suggest they adopt? Well we could introduce both companies and let the two slog it out for the business. But it would be hard for us to be an advocate for either one of them and as a result our relationship with the media company partner would be of less value to everyone.
What if one of our companies was approached by a potential buyer? Would we feel obliged to get both of our companies in the process? What if the founders of the company that was approached weren’t looking to sell, but the other company’s founders were?
Hopefully you see my point. Just like there are some people who can manage being in an “open marriage” there are some investors who can manage these conflicts and complexities. But we can’t.
We want to be the best partners we can be to our portfolio companies. That means clearly establishing where our loyalties lie and being consistent and vocal advocates for our companies. That works best for us and as a result we don’t invest in competing businesses.
Now occasionally we will have two companies, that by virtue of acquisitions or changes in strategy, will find themselves in competition with each other. We don't control our companies, so we cannot promise that won't happen. But it makes us uncomfortable when it does happen and we work to avoid these situations if at all possible.
January 15, 2007 12:02 PM, By Fred Wilson
Tags: competitveinvestments
Comments (16)
Fred, as an entreprenuer, I agree with 1,000,000,000,000,000,000,000%
If nothing else, what VC can say with a straight face that there is no breach of fiduciary responsibility when one sits on the Board of a company while also having insider info on a competitor and not continuously cross-disclosing any/all such competitive info (a requirement that would make it impossible to invest in competitors -- that is, if one is honest)?
Also, hell, last time I looked, as a founder or exec or CEO (or even staff member) I am required to sign NDAs and Non-Competes and the like. It would feel mighty bad to know that my Directors/investors don't feel honor-bound to not disclose and not compete. Or maybe they will let me off the hook of my pledges?
This subject rates a huge BLECCCH in my book. Talk about massive morale problems. Talk about massive dysfunctional Board relationships.
Posted by Steve , January 15, 2007 03:00 PM
Well I guess it is a fair way to invest ! I hope the case doesn't show up too often, because sometimes you might have invested in the wrong player !
Posted by ilan abehassera , January 15, 2007 04:40 PM
How do you deal with companies that revolve around the same space but have very different solutions? For instance both Feedburner and Tocoda are focused on the online ad space but have different approaches to the problem. It would seem that there may be potential conflicts. If you have the ear of an advertiser and they ask where to run their ads, where do you suggest? If nothing else it seems that as more and more of the web begins to revolve around advertising the line might get a little gray in this case.
Posted by Zach Coelius , January 15, 2007 06:23 PM
Glad to see a few recent posts from you fellas lately. I am curious if you feel an obligation not to disclose perhaps unique business methods of a company that you review and then decide is a competitor to the company you already are invested in.
For a very simple and obvious example: if you had invested in myspace and facebook's business plan came across your desk with information about the future roll-out of an important new twist, would you disclose the "twist" to your company -- in this example myspace.
Since VCs don't sign NDAs where is the ethical line drawn? how i it actually practiced in the real-world?
Keep us the great work.
Posted by Perry , January 15, 2007 06:34 PM
Zach - that is great question. though TACODA and FeedBurner are both ad networks, they really don't compete much because their unique value add is different. In fact, they are working together. But it does require some judgement on our part in cases like that.
Perry - we will not sign NDAs, but if we went around disclosing confidential information, we wouldn't see any more business plans. confidentiality is a critical aspect of the VC business.
Posted by fred wilson , January 16, 2007 06:16 AM
Daryn, it's a hedge on management and maybe the business model, but not on the space. So it could be overweighting.
Posted by ventureblogalist , January 16, 2007 09:08 AM
Fred,
Any thoughts on bringing something like the TechStars and YComb type idea tanks to NYC?
Posted by kevin , January 16, 2007 11:06 AM
Fred,
Turning this around, how do you feel about your Limited Partners backing other VCs in general and specifically those that you compete with on a regular basis?
Posted by Nick , January 16, 2007 04:26 PM
Tend to agree Fred, an investment means you found the best management team/product/business model in its niche. Investing again in the same niche means that your current investment is failing so are you are trying to edge. Is that the right choice? Answer might be a case by case.
Posted by andre taliercio , January 16, 2007 06:59 PM
'open marriage' is what kids put on their myspace pages as a joke - and a funny one at that. i am pretty sure that myspace/facebook is the primary venue for this term.
Posted by mathew , January 17, 2007 01:11 AM
Nice thought
I adapted and translated that article in a french blo
Posted by Jean-carl , January 17, 2007 10:32 AM
I work for the Advanced Technology Development Center (ATDC) down at Georgia Tech. One of the policies at the ATDC is that we do not let competitive companies into the incubator. Since I joined last October I have questioned the wisdom of this from time to time.
Just because a particular entrepreneur comes to us first should not necessarily preclude another with a good concept and plan from joining I have said on more than one occasion. After all our job is to help entrepreneurs launch and build great companies. The more the merrier. Right?
You have me rethinking my stance.
Posted by Lance Weatherby , January 17, 2007 01:47 PM
Kevin - we wouldn't choose to adopt a Ycombinator type model. i am glad that Paul is doing it, but it's not in our future.
Nick - i have no problem with our LPs backing VCs that we compete with. The fact is our LPs are just not as involved in our business as we are with our portfolio companies.
Lance - you make a good point about first come/first serve. I've often thought about that problem. but i still come away with the conviction not to invest in competing companies.
Posted by fred wilson , January 18, 2007 06:39 AM
This is a good reason why startups need to research the VC's they are interested in, rather than blindly throwing around business plans. First of all, check the focus - make sure you're in the right sector... Then check the team and the portfolio - I wouldn't really want a VC investing in my startup if they are currently on the board of a competitor.
Due diligence is a two way street.
Posted by Robert Dewey , January 20, 2007 11:10 AM
invest in a competing business? no way. take investment from a VC with a silimar portfolio company? no way.
at my startup, our investors had a loosely competitive company in their portfolio. it was a disaster. i never knew who's interest my board members were looking out for. we actually ended up OEM'ing our product to the portfolio company. i didn't want to do the deal, but the VCs "as investors" wouldn't consent to a new round of VC until i did the deal.
in my experience, VCs and management need to be 100% aligned. otherwise, distrust perculates and bad things happen.
oh, and by the way, the portfolio company sold for $300M+ to a competitor. sigh.
Posted by matt lucas , January 31, 2007 04:29 PM
Competing companies are often taking different approaches to filling the same need. If you believe that the need has to be filled, and that one of two competitors is going to be the one to do it, why not hedge your bet?
This is strictly money-speaking though. I understand the complexities and conflicts of actually managing the relationships, and I could make some really bad analogy to an open marriage I'm sure, but I won't!
Posted by Daryn , January 15, 2007 02:19 PM