When A Company Is Too Close For Comfort

It seems like more and more, we are seeing interesting companies emerge that are operating in the same or directly adjacent market spaces to our portfolio companies. In this situation, we exercise great care to make sure we aren’t backing two companies who will eventually find themselves in direct competition. That process isn’t simple. Many entrepreneurs who have already secured venture capital view every company within a hundred miles of their business as competitive. Many entrepreneurs who haven’t secured funding don’t think anything is directly competitive. We often end up being the arbiter of what is safe and what is not safe. And we tend to err on the side of sitting out of deals rather than risk finding ourselves in a difficult and potentially reputation impacting situation.

So what do you do when a company is too close for comfort? If we like that company, we try to be supportive without directly advising or getting involved. We will identify other appropriate investors. We will provide product feedback. We will be encouraging and supportive in our words and our deeds.

But if the two companies are indeed competitive, there is a limit to how supportive we can be. An entrepreneur we have backed doesn’t want to see us aiding and abetting a competitor. And first and foremost, we must always be working for and supporting our existing portfolio companies.

This is one of the trickiest aspects of the early stage venture capital business. If you handle these situations well, you earn respect and reputation (but often experience material opportunity costs). If you take a long view of the venture capital business, then you will always choose respect and reputation over a specific transaction, as painful as it is to do that in the minute.