When Portfolio Companies Work Together

The post from 10gen about the Foursquare outage this week prompts me to write about the pros and cons of portfolio companies working together.

Back in the mid 90s, it was fashionable for VC firms to talk about the synergies between their companies and actively encourage the companies to work together.

At Flatiron Partners, the firm I co-founded in 1996, we did that early on. We had a portfolio company called eShare that had a web chat system they sold to websites that wanted to offer live chat.

Two of our portfolio companies, Geocities and StarMedia, became big customers of eShare. Whenever eShare let our portfolio companies down, we would get caught in the middle like a parent with two fighting children.

It was no fun and it soured me on the whole idea of encouraging our portfolio companies to work together.

Since that experience, I have taken a different posture. When one of our portfolio companies can solve a problem for another, I make the introduction. But I also make it clear to both companies that I am not going to encourage any unnatural acts and they should not factor USV's interests into their decision.

Then, when something goes awry, and it often does, we are not caught in the middle.
Even with this approach, it can be very painful to watch two of our portfolio companies struggle with a business partnership. I know my partner Albert had a bad day earlier this week when 10gen and Foursquare were scrambling to get Foursquare back up.

There are plenty of times when it makes sense for portfolio companies to work together. Most of our portfolio uses Return Path's email deliverability service. Many use MongoDB. A growing number use Twilio. I think all use Twitter and many use Tumblr. But hopefully they've all made those decisions themselves without any pressure (real or perceived) from USV.

We do encourage our portfolio companies to share space. And many do that. I think a lot of good comes from idea sharing, networking, and relationship building. If that leads to business partnerships then great, but it doesn't need to in order to be valuable to both parties.

So in summary, I strongly believe that VCs need to go easy on portfolio synergy. When it happens naturally it is usually a good thing. But it should not be forced in any way.