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.
Yes, this is true for your portfolio companies, as there are some good synergies.I can see Meetup and Foursquare possibly working together. I also see Twitter and Foursquare as very similar. There are plenty more examples where your portfolio companies can work together.
It’s all about timing and necessity. Who knows you might be able to find a better partnership with a company outside of a portfolio: Not better for the portfolio but what’s best for that business – which is something that Fred always preaches (in a good way). It’ll always come down to case by case.
As usual- well written and thoughtful
I saw this once regarding the choice of lawyers. The investor pushed that hard as a part of his value-add, and the company reluctantly went along. The first two or three bills seemed wildly inflated, but the investor said it was a “good deal.”It was only after the lawyer sent a $600 bill for a “hey, how’s it going” drop-by chat that the investor finally agreed it might be a good idea to find a different lawyer.PS: That lawyer is still driving his Bentley around and pretending he’s useful.
Maybe the reason for the bill is that he had to fill up the tank in the Bentley to go to that drop-by chat! lolAs a rule of thumb I try not to pay for other people’s Bentleys until I can pay mine first.
“That lawyer is still driving his Bentley around and pretending he’s useful.”So does that make him a Taker or a Faker? 😛
I’ll bet he’s still patting himself on the back thinking he’s a maker 🙂
I inform lawyers in advance – at the beginning of the relationship – that I won’t be paying for any social chat, discussions of his/her golf swing, or where a great dinner was had last night. I’m happy to chat “as friends” but not on my dime. If I find such in the bill, I deduct it (as a line-item on a copy returned with remittance). Doing that once usually stops future abuse.People should remember that clients don’t have to be “at the mercy” of a lawyers’ billing practices. But by the same token, don’t hang around the attorney’s office chatting and using up their time either. They typically have pressures from partners regarding billable hours. Check your watch at the start and end of the meeting and make a note of it. Then reconcile it with the bill. And it’s fair to ask for explanation and justification of billed hours for work done on your behalf in your absence.
I should add that there is a diplomatic and polite way to have that discussion at the outset. It can be done in fun and cheerful manner. I didn’t want to suggest that one should start the relationship sounding like an ass, but that it’s fair to say that as a conservative business person you must watch all expenses, etc.
Any lawyer who is going to bill you for social chatting should be immediately replaced. As a lawyer, I would NEVER do that. It’s called marketing and should be billed as that. Not to the client.I find that the client is sometimes to blame for rocketing up the bill unnecessarily. They pass work off to the lawyer that they should be doing themselves – like building or updating their cap table. Or they disregard clear instructions on how many copies of x,y,z need to be signed and then the lawyer has to go back over everything with him/her again to get it done correctly. So, as an entrepreneur, in addition to having frank discussions like @dale allyn mentioned, you should also be cognizant of how to control your own legal bill.
I wholeheartedly agree. It’s a two-way street. The client has the responsibility of respecting the lawyer’s time, and being prepared, and/or doing the work which is not necessary for the lawyer to handle. Not unlike giving one’s accountant useful expense reports instead of a shoe-box full of receipts to wade through. Ethical lawyers will work to control clients’ costs as well, especially if the relationship begins on the right footing.
I once accepted a lunch invitation from a consultant who previously worked for me. He wanted to stay connected, fish for company info he could use to pitch….the usual. I was generous with my time and he made a big show of paying the bill. Two weeks later he invoiced me for the whole thing- his cabs, time, and the meal. The very definition of chutzpah.I did not pay that invoice.
Absolutely true. Just to be clear, the company didn’t pay the bill. The lawyer was a bit indignant about the matter but didn’t pursue it.
Businesses can’t survive selling only to family & friends & portfolio colleagues, but it doesn’t harm to sell them something. The problem is that you are around them a lot, and you can try harder with them than with other clients because that will make you feel great. On the positive side, if you encourage them properly you may have the most detailed and sincere feedback you’ll ever have.
It could help evolve or direct plans of one or both companies as well. I’d truly hope this kind of discussion is going on anyway with a group of companies..
Great post. I have often wondered why building synergies was not a big part of a VC’s job. Your example really explains why. Thanks.
I think you’re doing the right thing Fred.As long as a partnership is made to last longer than the time both the companies will remain in your portfolio, the decision should not be made with you in mind.A database technology is the kind of choices that can have a major impact on a service for many years.
Definitely like the “natural acts” and reasonable expectation part if I may add the latter. And a most desirable situation would be that the portfolio companies are complimentary to one another, such a VC would be very valuable imho.
I would play on an arms lengh basis but bearing in mind my duties as a go(o)d father
Investment decisions are made on a one off basis I am sure – but with the knowledge received and processed from your relationship with other companies.I figure collaboration should be the same.If a company needs a service – sure they should look at a fellow portfolio company – but should ultimately go with the best service provider out there for them, period.What could be interesting is using existing portfolio companies to vet potential partners before an investment. If a seasoned tech pro can’t make it work with a partner – one wonders whether or not that should color your investment decision a priori.
How does the general manager possition you created some months ago fit in here? I know his role wasn’t to make your portfolio companies work more for each other, but when you create a network you may be pussing for it without intending it. I guess equilibrium is difficult…
Also, you need to treat each relationship as if it was a hard earned one, even if it was facilitated. And you need to give each other client satisfaction as you would otherwise.I think there are 2 cases to this scenario.1) One that doesn’t work well. When company A needs company B, but company B doesn’t need company A, but does it as a ‘favor’ to the VC. If things don’t work out, everybody loses.2) One that can work better. When both companies need each other for a variety of reasons. That has more sustainability, because it’s more of a win-win. But even that is not guaranteed, because one company may evolve faster than the other one, and won’t “need” that other company as much as before, and then it’s like case #1 above.Regardless, I think one should not ignore portfolio synergies, but also don’t count on them to evolve the same way they got started.
Well, I think if you get investment into a company with a good portfolio then you’ve probably already done a lot to earn it. :)I was going to say more but saw you summed it up nicely in your last sentence. 😛
Isn’t it just like setting up two single friends?Make the intro…but then get the hell out of the way.I would even say….don’t tell your friends you’re setting them up. Just seat them next to each other at dinner and see if anything happens. Higher probability that way.I wonder this works for portfolio companies too. If they think it’s their idea, they own the decision more.Anyway, it’s always best to stay friends with everybody if you can. Taking sides almost never ends well.
I think there can be a bit more involvement than that, like letting them meet, and asking if there’s interest or to brainstorm. I imagine Fred would want to invest in the kind of thinkers who look for synergy anyway?
If they’re not feeling the love, you can’t make it. There is a risk that it’s perceived as annoying.I can’t overemphasize the long-term value of them thinking they came up with the idea themselves.
people like choices. showing options is good, giving only one choice is not so good.The perception of choice is what is important.
It’s a tough one. I think that would completely depend on the person involved. There are target markets for a reason. 🙂
ah yes of course. don’t want a UI overloaded with widgets and dials.
“Make the intro…but then get the hell out of the way…” – and pay for the dinner. and tip.
I wasn’t thinking that, but that would be nice. 😛
I like this post – it reminds me that even the most respectable VCs have a tough streak.
I used to feel pressured to take those co-portfolio meetings every other year or so. The one time I did it was a total waste of time and now I politely refuse. Taking a meeting that you know is going to be a waste of time just to please a vc was a junior mistake. If its something I really need I’ll probably find it anyway.The flip side is I would never expect an independent VC to help with sales other than by lending their brand name and credibility. Of course all my startups’ VCs have been independent.Has anyone had positive experiences with big company in house VC firms providing “synergies”?
I used to get asked to meet with people to explore synergies even though I could see there was nothing there. Both sides feel like they’ve been forced on a date with someone they know they don’t want to go out with – all to please a 3rd party who thinks they’re doing everyone a favour in the first place – ironic!
Fully agree with you, Fred – I think the by far biggest potential for synergies between portfolio companies is sharing knowledge and best practices among each other as most companies try to solve the same problems at the same time. This process has to be carefully managed though and requires therefore some relatively deep involvement by the VC.
Wrote a post recently about the similarly powerful joy I feel watching my team work together and kids play together – harmoniously. http://bit.ly/cAfD4vYou've created both of them from scratch and put much of yourself into them. It makes sense that seeing the respective fruits of your labour exist together in harmony both elicit the same profound joy.I would presume the same is true, in theory at least, on an intra-portfolio level.I appreciate though that it’s not always possible or optimal – practically or politically.
I agree LIAD. When my girls get along and laugh or protect each other, I am profoundly delighted.It’s interesting, though — pretty much all parenting books tell you there’s not much a parent can do to make the children like or love each other. You can model respectful and loving behavior; you can manage around the edges to make sure they play fair and don’t kill each other; you can try very hard to be ‘even handed’ while trying to give each child what he or she specifically needs…because of course every child is a unique being….and not making the other jealous. And sometimes, one child just needs a lot more.I assume portfolio companies are similar.But then again, what do I know?
I was going to ask this, and I just saw a tweet on it, so I’ll ask anyways. What’s your view on portfolio summits? yes/no and if yes- what’s the best approach, frequency, etc…
yeswe did ours a couple weeks agoit’s a great thing
Fred,I’ve always wondered how you’d go about this, if you’d put pressure on companies or not – and now I know. :)Also, I imagine you already try to find synergistic partnerships between portfolio companies, and suggest the ideas to one or both? Or am I overreaching in what you consider your role? At least in my mind your portfolio picks allow for quite a lot of synergy, but that could simply be a positive side-effect of not investing in similar companies in a few different layers?
You can end up in a similar situation if you take a strategic investment. The pressure to use the products or services of the strategic investor can be pretty high, even if they are not the best fit, particularly if they have a board seat or if think you might be looking for further investment from them at some point.
Totally agree. It’s sort of like working with friends or family. Don’t do it unless you were gonna do it otherwise, and the more you can treat it like a normal business transaction and do it on its own merits the better. When it goes well it goes amazingly well, but when it goes south, it gets messier than it ever would otherwise. It just adds a huge burden of “undue politeness” to the relationship that prevents people from really cutting through to the root of the issue so as not to upset a web of relationships. Both sides need to explicitly grant the other permission to be frank, upfront, and to treat it like a normal relationship and be straightforward. If either side expects special treatment because of the relationship, or expects the other to be nice because of the mutual relationship, then you cripple the potential from the very beginning.
It seems that the working together question is “relatively” straighforward. At least there is not a wide disagreement on your approach. What I would love to know is what to do when 2 of your companies begin competing – at least in some overlapping features, if not their entire product line.What is the VCs role then? It is much more of a zero-sum game – but with money at stake for any of the outcomes. I understand you do not invest money in companies that are competitors, but as we all know startups take surprising turns in their business models as they develop and react/lead the market.Has this ever happened to you? Your audience demands to know… 🙂
we try very hard to stay away from that situation
Outside of pushing for a particular partnership, would you consider encouraging a preferential pricing system for fellow portfolio companies (depending on the service or product)? This could be an easy way to create the opportunity for collaboration without the explicit request for it.The problem seems to be rooted in an investor being the driving force of the beneficial partnership rather than the catalyst. By providing a discounted pricing structure to fellow portfolio companies there would be an added benefit to some sort of mutual relationship without an actual explicit request from the investors.
we don’t have a “discounted pricing” systembut i do think most portfolio companies will give each other “most favored nation” pricing
One of the things I think about — from a distance — is the idea of larger VCs and PEs offering shared services to their portfolio companies, achieving economies of scale and where applicable perpetuating some of the unique attributes/culture of that firm in the services being offered — attributes that attracted the founders to that particular investor to begin with. I can’t say that I have enough insight to know how well this would work, but I particularly think about this when I see the value that firms like USV offer to their portfolio companies — well beyond capital. A couple of VCs have pointed out to me that the portfolio CEOs want some degree of autonomy in running their companies and might see this as an intrusion past a certain point — particularly in my arena which is recruitment and executive search (but these have been smaller firms that may not have attracted founders based on their ability to provide more comprehensive support). I’ve seen this work to some extent, but don’t have a lot of data. A friend who heads a private equity firm says that their SVP, HR functions in a sort of shared services model ~ but they have a strong operational aspect to what they do as a firm. I guess your GM functions in this capacity to an extent.Do you think that shared services are a viable alternative for a VC firm’s portfolio?(I’ve edited out some anecdotal detail for sake of brevity.)
The term of course is “keiretsu”, and the concept has been used successfully for ages in Japanese (non-tech) business. It’s of note that Kleiner Perkins used to heavily promote and use this term in describing its portfolio, up until just a few years ago. But now that term can’t be found prominently (or at all?) on their website. Despite some of the points in this post, I was very intrigued to hear of the creation of the General Manager of the USV Network position– it made a ton of sense to me and I was thinking of that idea for a while. I’m eager to hear how that’s going (Gary Chou: are you here?)
i don’t like the word keiretsu Keni purposely did not use it in my post
I think this is the link (there may be another, sorry if it is not the one being discussed) http://groups.google.com/group/mongodb-user/browse_thread/thread/528a94f287e9d77e?pli=1From my interpretation after reading the posts from both sides it sounds whoever managed Foursquare’s implementation didn’t proactively manage and prevent a shard outgrowing RAM. Neither side seems to be debating this, or that once this happened the shard underperformed and took forever to sort the problem out. For this type of issue I am sure who was at “fault” could continue to be debated all day. Publically at least they have kept things pretty amicable. Foursquare did fingerpoint MongoDB a little by naming them in their post mortem which wasn’t great for MongoDB at the time (I saw scoffs from RDBMS vendor staff and others on NoSQL’s reliability in response to this). Especially occurring a few weeks after some media publications attributing Diggs issues partly to their use of Cassandra. So I am glad 10gen had the right of reply. More broadly speaking I think your approach is right, but I also think that any form of common collective (no matter how loose) creates a bit of a family mentality. My experience, meetings with your “sister” companies tend to be more frank, open and less formal. But it hurts you more when your family chooses your biggest competitor over you.
We are working at Soho Haven and there is definitely a benefit from sharing experiences (recruiting, stress, fundraising, etc.) with other startups
Love that concept. Looks very cool.Do you have any formal shared services among you or is it all informal/ad hoc sharing?
People at Microsoft should read this 🙂
I’d love the community to weigh in on a related issue of portfolio companies who are in a similar space. The vendor/client relationship (ala 10Gen and 4SQ) is one thing. But what about deeper business partnerships between portfolio companies? I would love my VC to have domain expertise but the flow of strategic and financial information is a worry. What if we want to sign a new deal that disadvantages the other portfolio company? Companies that cooperate one day often compete the next. Seems that such partnership operating under a shared VC present a potential Sophie’s Choice. Anyone have thoughts on this? Fred, have you dealt with this issue either pre-investment or post?
we have a member of our team, Gary Chou, who is entirely focused on creating a community among our portfolio company team memberswe think this is a big opportunity
“I think all use Twitter and many use Tumblr.” I bet none of your portfolio soldiers ever complained to you about the fail whale, as in, Fred, please go fix this.
I imagine Fred would want to invest in the kind of thinkers who look for synergy anyway?
You’re going to have hiccups when learning how to scale something.When it’s something like MongoDB and the portfolio companies using them — they’re taking the punches while testing and scaling, so when future users/clients use it will be “true and tested” — to the capacity that the portfolio companies have reached anyway.