Investing In Competing Companies
Bijan has a really good blog post up today about Spark's approach to investing in competing companies (they don't). He says:
I’m quite sure that we will miss a few important investments and i’m sure we could be more aggressive with and flirt with the gray line that we are trying figure out every day.
Our firm takes an almost identical approach to Spark on this topic. Back in early 2007, I wrote a blog post at USV.com on this topic. After reading Bijan's post, I went back and re-read my blog post. I wouldn't change a word four years later. Which feels really good to me.
I believe that VC is a service business and our customer is the entrepreneur. Our shareholders are the limited partners who allow us to invest their capital. And I believe that in order to service the entrepreneurs we work with to our fullest, we cannot and should not have competing investments.
I know that there are VC firms out there that don't share this view. And I am sure they have found a way to make it work for them and the companies they invest in. But we haven't and I am sure we never will.
That’s exactly the kind of ethic I’d want in a VC. One question is, how have you (or would you) manage a situation where two of your portfolio companies evolved into competitors over time?You look at the change in the Google-Apple relationship and realize that it happens…
both Bijan and I mentioned that in our posts. it can happen. look atTracked.com pivoting into Hashable. Hashable could pivot again and becompetitive with something in our portfolio. we can’t stop that fromhappening. but it makes us uncomfortable when it does.
Sure, I just wondered if there was a strategy to deal with it. At the least, maybe assign them to two different partners so they both have full-volume advocates?
that’s what we would do for sure. but USV is all for one, one for all. wedon’t have “chinese walls”. actually i don’t believe any firm has “chinesewalls”. some pretend they do though
Completely agree. Who knows, maybe a few of those firms will decide to be more transparent and call it the “velvet rope” instead of the chinese wall. 🙂
I still do not think so
@avc you mention that such a pivot makes USV “uncomfortable” — but in the end, not much can be done there, right? As a minority investor and board member, USV (and other VC’s) ultimately have to support the passion of the team they invested in, right? The other choices are to replace the team or divest, neither of which are any fun.
yup, totally agree
Fred,A thought experiment.What if early stage VCs tried the practice of proactively and deliberately encouraging competition within their portfolios by….- Choosing to do a first seed investment at the same time in 2 or even 3 companies who specifically are meant to be competitive with each other according to market specifics and targets you outline for a planned competition between these early stage startups?The race then will be to hit certain success milestones, defined by USV, and the first company to reach them gets a followup investment from you and/or partner firms.Sort of a “Techstars meets NASCAR meets March Madness”All above board. Everyone knows the game and then it’s a “stock car” race to achieve the milestones.You place a proxy board-member from USV on each board but the people you place will each be rewarded only if their company “wins the race”.Contracts with NDA’s (In the vein of JLM’s recommendations) are signed by every startup that applies to “race” that outline the rules of the race. USV chooses the 3 finalists who get a seed investment and then the race is on.The USV board then simply becomes the referee for the competitive race and the “winner” gets the followup investment from you while the “losers” are free then to go get investment from other firms.In my view everyone benefits from this arrangement. More startups get the chance to compete, more startup founders get more experience, VC’s maximize their chances of investing in a winner and minimize the “management team” risk. Plus you know exactly when your commitment to these 3 startups ends and if none of them “wins” by a set date you are free to move on to some 4th player or extend the race if the competing startups agree to extend.Competition makes the startups focus better and faster on delivering results on limited funds. The “losers” in these races are really winners as the founders of the “loser” companies now have a track record they can take to a different VC and get their version of the solution funded. That or they can pivot and move to an adjacent or vertical space with the credential of having been part of one of these competitions.Everyone wins somehow. USV clearly wins. All the startups in the race win even if they technically “lose” the race. The startups that applied but weren’t chosen for the “finals” would still receive the criteria for “winning the race” and so would also benefit as they would know what milestones represent winning to USV.Hmmm, perhaps those not chosen for the final and given a seed investment would technically still be “in the race” but without having the benefit of seed funding from USV. They would be unseeded racers at the back of the pack at the race start. But if they still hit the milestones first USV could then pivot to followup fund whoever signed the agreement to “race” and can prove they “won the race”Just a thought of course. I’m sure there must be major hurdles I’m not seeing to this being viable.The biggest of them being this would be radically different from the status quo.I love it because it let’s the VCU’s and Butler’s of the startup world to get to the “Final Four”.Everybody loves March Madness.;-)Roger
You raise an amazingly interesting discussion point and evidence some deep thinking. It would really take a unique VC and entrepreneurs and set of ground rules but it could likely be done.What might make it interesting to a VC would be the ability to not get poured out on the losers but the ability to redeploy the resulting talent and detritus to the emergent winner and thereby minimize the normal losses.There are several historic similar thoughts such as Sematech and MCC which were really publicly funded but simply aggregated huge talent to Tiger team big tech problems and were wildly successful in their day.Another parallel is something like Austin Venture’s entrepreneur in residence programs which gave rise to companies such as Home Away in which AV used their resident talent and slapped it with a $50MM checkbook and then initiated a rollup strategy with their hand picked entrepreneur CEO running the whole thing.The interesting about that approach is they were acquiring startups at fairly early stages of development but with a customer base which simply added to the the Home Away customer base and then eliminated existing management thereby creating a meaningful but traditional merger efficiency.In the process, they arguably created a category killer. They are just about ready for an IPO suggesting that this strategy is a fair way to rekindle the moribund IPO market.
That would be like pitting my kids against each other for most loved status.I hate this idea. Ughhhhh
Replying to my post in response to Fred as Disqus not letting me reply to Fred’s “Ugh/Hate”.As a 46 year old father of two with 24 years of marriage under my belt, advanced university degrees and 25 years professional experience and an entrepreneur now myself, I find your choice of word “kids”, to be quite insulting, condescending, arrogant, etc.Entrepreneurs are not your “kids” and the reality is we *are* pitted against each other whether you want to admit it or not.Perhaps in your old age, 3 years older than I, you have reached a level of comfort in how your world of VC investing works that you don’t like any real change in how that world works. The big “Five-Oh” coming in August right?VCs are in the business of innovation, with the exception I guess of how their own business model works.As Seth Meyers from SNL would say, “Kids pitted against each other”? Seriously? That’s the best you can do in critiquing this idea? Seriously?Hmmm.C’mon Fred. You can do better.Roger
One other thought on Fred’s reaction to my idea for “NASCAR meets Techstars meets March Madness”So it’s OK to “send a bunch of your kids to the orphanage” by not funding them at all after you “brought them into the world” and then choose one “only child” to “love” but it’s not OK to feed 3 kids but make them be at the dinner table on time so they can get food before it’s all gone?This reminds me of the scene in “Meaning of Life” where the dad says “I’m sorry kids. But I’m going to have to sell some of you off for scientific experiments”.:-)R
Full disclosure and recusing oneself from conflicts is the sweetest perfume to make such situations pass the smell test.As long as one does not go looking for an advantage from such situations, you can only do what you can do to avoid even the appearance of a conflict but when does occur, it should be fully and completely disclosed to all parties involved.The next step would be to recuse oneself from Board deliberations which are pointedly in conflict and then ultimately to resign from the Board.Taken to the extreme, a conflicted investor could sell his position to other investors or place it in a trust. Not a blind trust but one whose eyesight is just a bit blurry.Honest people face these type of things and deal with them in the fairest way possible.Remember there will be others involved — management, investors, LPs — who will provide a bit of a road map to ensure that the right path is taken.
One thing I leaned the first time through the VC grinder was to do a very very good job of finding out what companies they invested in – not only for style purposes, but because if they had invested in a competitor it probably meant that they were just pumping you for ideas.I also learned to look for complimentary or interlocking investments. Not just because it gets you access to tech, or smarts that you might need. But because M&A is easier inside an umbrella – both as buyer and seller.But I do have a question – it seemed like 10% of the time of so the VC would make a pass at all/part of our executive team to beef up one of their portfolio companies. What’s up with that?Lest anyone think that it was a dot-com boom thing, it happened to me again last week.I just don’t get it.-XC
That is called tortious interference — interference with contractual relationships — even in “at will” employment states wherein the uninterrupted employment relationship is sufficient to create the necessary contractual environment to support this specific common law tort.The elements of proof are as simple as pie —A contract exists — even an at will employment relationshipThe tortfeasor (that is legal for “shithead”) knows of the existence of the contract or relationshipThe tortfeasor provides an inducement of any manner to the employee to induce his breaching or otherwise changing the employment relationshipThe absence of any particular privilege to breach the relationship held by the tortfeasorThe relationship is breached or otherwise damagedThe damages resulting therefromThe real issue is whether you want to fight to keep someone who apparently wants to go.The real dagger is to drag the LPs into the line of fire. That will sort things out real quick. Some LPs would be extremely sensitive about this type of thing as they are often employee pension funds. GPs are not likely to shit where they eat.Rest assured that such behavior is outrageous and the deserve exactly what they get.
I’d like to have you by my side to throw bullshit back in the faces of bullshitters and douchebags – I’d feel safe with your wisdom and knowledge. How can that be made possible?
You have to move to Texas. And there will be BBQ involved. And Coronitas. And Tex Mex.
“…we cannot and should not have competing investments.” – this explains why one investor is playing it safe as our business is an obvious competitor to one of his portfolio companies. Isn’t it even lucrative for vc’s to invest in competitors?
just read your 07 post. love the open marriage example.i’ve heard you use the startup as the customer and LP as the shareholder before. i’ve since cited that many times. it’s right on target in my book.
yet it is controversial. especially in the LP community
Of all the smart things you’ve said over the years, this for me is the least convincing (well… perhaps apart from the liquidation preference thing).Most companies don’t turn away 99% of their potential customers.
the best service providers do
I was about to ask this on Bijan’s blog.Would you discourage a company you have already invested in from pivoting towards a competitor that you had also invested in?Let’s say hypothetically tumblr wasn’t working and David Karp came to you and said “what we really need to do is change strategies towards shorter messages and in addition focus more on mobile”. Well clearly they would compete against twitter if they made this pivot.What would be your thoughts and responsibilities?
we’d have to recuse ourselves from that discussionwe can’t control what an entrepreneur is going to doand we’d obviously be conflicted in that situation anyway
I just wrote a reply on twitter, but want to use also this possibility.In a mail to you, Mr. Burnham and [email protected], I described an idea.It is about two weeks ago and I also send it yesterday again, but don’t get a reply.What am I doing wrong?It would be nice, to get your feedback.
you are sending us emails when we are on vacation. i hope you got an out ofoffice reply to that effect from meplease resend it on april 4th when i am back in the office
I got no out of office reply. That’s why I was confused.I will resend it then
I’d take it one step further…..Sometimes I wish VC’s would be kind enough to stop me as I’m pitching my startup and tell me that they have a competitor in the space…instead of asking 10 questions, finding out all the intricacies of my individual startup and then telling me they’re not interested because they’re already invested in a competitor….It’s not always possible to do your due diligence on a VC when you meet on the fly, and not once has one stopped me when they were invested in a competitor.
i’ll take it one step further. i wish VCs would be kind enough to figure thecompetitive thing before inviting you into pitch. we do that regularly.sometimes the entrepreneurs want to come in and talk anyway. we urge them tobe careful with what they tell us.
Hi Fred,There is a lot of help out there in the entrepreneurial community for 1st timers. But based on this thread I wondered if you think it’s necessary to take precautions when speaking with funded entrepreneurs about an idea? Even if they aren’t in your same space maybe another company in the same portfolio is?
A VC who trolls for info on a competitor of one of its portfolio companies is a low life MF. Period.You should have a little disclaimer at the beginning of your pitch — like the Private Securities Reform Act of 1995 Safe Harbor pronouncement which all public companies append to their conference calls — in which you state “…this pitch contains proprietary and confidential information as well as trade secrets and is not intended for consumption by individuals or companies who have investments in competitors…if you fall into that category or cannot respect these implications, speak now or forever hold your peace…”This is a step between signing a Non Disclosure Agreement — which does not provide the same legal implications.I would have the first slide and last slide say the same thing. Don’t dwell on it, but summon up the honor of the VC and make damn sure that you are not providing information which will inure to your detriment.If they ask for a copy of your presentation, initial and date the same page. Do the same with a copy you keep yourself.This is like a poor man’s copyright but it is something you are perfectly entitled to do — safeguard your information, trade secrets and business.
i agree with that opening statement
that is a great idea!
it happens though JLM.its also an unavoidable by product that the VC benefits from all the companies they dont invest in.
Yes, I know but this is why I have been such an advocate for the reinstatement of dueling as a dispute resolution technique.
Just so i am clear – when you refer to dueling are you referring to book ending a presentation with statements of confidentiality? I am not familiar with the term.
now i just re-read it!!! oh lord.we actually had one such dueling lawn at my school in the UK.it was used twice to resolve disputes during my time.
Haha, I am talking about pistols at 10 paces — in particular a matched pair of antique English dueling pistols preferably. I actually own several sets of which more than a few have supposedly been used in real duels.One shot each.Alternatively, I would agree to Beretta 84F .380 cal (baby 9mm) pistols — you don’t actually want to kill the guy just settle the argument.
Hah, this made my Sunday! First legal clarity with NDA’s and now dueling pistols for rapid settlements. Playing catchup on avc and other favored tech blogs these days.
On a more serious note, the seeking of information is perfectly fine as long as the information is not confidential, proprietary or trade secret information.Public companies deal with this a bit more directly having the SEC as their watchdog —- though is a dog which will take a long, long, long nap on you from time to time — for material non-public information.Again, dueling may be the answer for the next 20 years.
I learned the hard way on this one. Sometimes the competitors are not always obvious, and certain “Intricacies” can be easily implemented into their portfolio companies. You must be extremely careful what you share and who you share it with. Especially if it is just for validation.
On the same vein, would you limit one of your portfolio companies from crossing a line in to a competitive situation?
no. we do not control the companies we invest in. we are minority investors.
Here’s what if.What if you just invested in a group messaging service (you did!) and a year into it you realized that the business you invested in just wasn’t working.And in that time you became more and more convinced that you were right on the space (group messaging was killing it) but you had backed the wrong horse.What do you do then?Do you just accept the fact that you will make no money in group messaging till the company you invested in just goes kaput? Or do you essentially write off that investment and move aggressively into the next player in group messaging?When do you make the decision to cut bait? Is it only after you try and get the founder to make changes to the positive? or after you try 3 times to get the changes made?
yes. i’ve had it happen to me before. that’s what i would do. i thinkreputation matters more than maximizing financial return
Sounds about right. Long term greedy as opposed to short term is much better.Hope you are enjoying vacation.I’m writing from a beach in Bonaire. Awesome snorkeling.
just had an amazing day of skiing on ajax (aspen mountain)some shots at fredwilson.vc
I am at the ‘Boat myself. My favorite week of skiing — the Sweet Sixteen >>> Elite Eight >>> Final Four. Nobody here, great snow and unbelievable grooming. Ski all morning, watch BB all night.
that’s basically what we did yesterdaywe’ve been skiing in utah and colorado on the third week of march for 20years. the combination snow, sun, and NCAA basketball is unbeatable
would the limited partners whose capital you manage share that view?
if they don’t, i don’t want them as LPs
Do you possibly see Foursquare and Twitter competing more so in the future? How would USV manage that potential conflict?
i do not see that happening. i know a lot about what both companies aredoing. i can’t say more.
Aren’t there fiduciary issues both as board members and from the funds POV from not investing in competition?
funds will put different partners on different boards and claim there are”chinese walls”
well thats a load of bollox. run dont walk from those types of firms.
The issue of fiduciary obligations in investment partnerships is quite a dicey subject.The problem is that one could easily conclude that each and every opportunity presented to a partnership is the property of the partnership and it should therefore be acted upon in the best interests of the LPs.Similarly, one could conclude that a VC has propounded an investment thesis and program and that the LPs have invested in the sponsors, the thesis and the program and nothing else.A equally sincere person could conclude that the default answer in the event of a conflict should be “no” while another might conclude that it should be “maybe” or “depends”.The only real way to deal with this is to have a clear understanding with the LPs as to what the relationship is and whether it is as broad as a fiduciary or as narrow as the investment thesis and program.It is a very, very difficult issue because the obligations of a fiduciary are greater and more profound than that of a husband to a wife.
So before I pitch USV, can I have a list of all your investments to make sure I’m not barking up the wrong tree?Or do I have to have a preliminary meeting with USV for you to decide if I’m a potential competitor.And what if you happen to feel strongly that my company will out perform your “competing” investment?Wouldn’t your investor/clients want to get in on that investment – and would they be a little upset when they find out down the road you passed on the next Twitter to protect a marginal investment?Investing in competitors is what makes for a well balanced financial portfolio as far as I’m concerned.Full disclosure up-front regarding any competing investment would be all I need from USV before I make any decision to either invest or come on as a start-up.As an investor, I’m happy to have a piece of competing entities – let the competition begin!As a business man, I’m happy to compete with anyone – it will only make me better.Eliminating or avoiding competition leads to complacency; and I try not to invest in complacency.After all, what’s the fun of life if we can’t compete?I say embrace the competition and prove you’re a winner!Fred, I believe you are a fierce competitor – I see it in your writing and every time you speak.That’s why you love this business. That’s why you want NY/NY to WIN!
here is the list. at this time, there is only one “stealth” company not onthis listhttp://www.usv.com/investme…an email exchange between us will identify the competitor issue and we willmake sure to identify it up frontour investors are not our customers or our clients. they are ourshareholders. our customers/clients are entrepreneurs. that is why this isour policy.
Do you think there is a higher proportion of “stealth” teams out there at the moment Fred? given how quickly teams seem to be raising money and almost on an “idea” rather than a proven service.I’m wondering if Google may have launched Disco earlier than they wanted given the hype and number of competing group messaging companies.
i don’t know. but it is a good question
So this dynamic necessarily puts limits on your stockholder’s investments because you often become an integral part of your client’s company – thus limiting your ability to invest in what may be a far better company at any given time?I’m just saying, as a client/entrepreneur, I’m probably OK with it. But as a shareholder, I find it a little financially constrictive. I want the opportunity to invest in the next big thing – especially when I’m banking on the fact that the VC I’m investing with has the experience and ability to identify it.
neil – not speaking for fred, but i think the LP is investing not just in FRED but in how he and his partners choose to do things. Fred chooses this path – they see the IRR.
Also, nothing prevents LPs to invest in other funds by other VCs.
exactly. that is yet another reason why this is a good policy for everyone involved
Fred’s approach may make USV more attractive to entrepreneurs, and therefore, make USV more attractive to would-be limited partners.
Got to disagree with you there Neil. The potential for information to flow from one competing company to the other via the VC is enormous. There’s also a big possibility of conflict of interest that could lead to all sorts of problems inside and outside the boardroom.I wouldn’t be vaguely interested in having a VC on board that was invested in another direct competitor.As an entrepreneur you will always have to face the competition but I don’t want them in my boardroom.
I certainly don’t want competitors in my boardroom either.It seems to me that VC’s put themselves in a difficult position by having an integral part in most of their investments.As this thread indicates; VC’s have to walk a fine line in almost every aspect of their business.As an entrepreneur and founder of a fledgling start-up, I am getting a great education here on this blog.I have gone from wanting to pitch a top VC, to finding an angel to try to keep the cat-in-the-bag and better protect my start-up idea.
Not to be the skunk at the garden party, but it would be a huge error to project what Fred Wilson says to the entire VC industry.Fred is one of the most forthright and fair minded fellows you would ever stumble upon and in my view quite atypical of the industry.This is an industry which writes its first check fully contemplating replacing the guy who has brought them the deal in some huge percentage of the transactions they fund.Most VCs would not spend as much time as I have spent typing this silly missive worrying about what any entrepreneur thinks about anything.
this is oh so true.
Do you draw a line between competing consumer technologies and competing business models? (Over)simplified example: messaging app that is free but generates revenue through targeted ads vs. Messaging app that charges per download.
good question. i suspect we would not view them as competitive, but we would view them as potentially competitive when the download model pivots to a free model
for me the real question to a VC is:given that your asset class wont sign NDA’s, how do you feel about learning from the 9 start ups so that you invest in the 1? aren’t you a much smarter investor as a direct result of the start ups you DONT invest in? isn’t there an element of moral hazard in that? i have always been interested to hear how investors think about this.
The unwilllingness to sign NDAs, in my view, is a power play and a ego fop by VCs.It is also likely not really very much legal cover as once such an issue is brought up and a VC fails to sign a NDA and ultimately a proceeding of any type is brought the VC has been forewarned that confidential, proprietary and trade secret information has been revealed to them and they REFUSED to sign a NDA — the implications are obvious and they are all to the detriment of the VC.One of the things that I often think about confidentiality and non-disclosure agreements is that they can define the exact info and they have an expiration date — thereby creating a safe harbor for the recipients of the information.I would much rather have a 6 month restriction as to information contained in a PPT and retain a copy of the pitch than having refused to have signed a confidentiality agreement or a NDA and then have seemingly open ended liability for having misappropriated the information.The fact that a VC has refused to sign a NDA does not allow him to use confidential, proprietary or trade secret information.A couple of self help remedies would be to have a slide at the beginning and end of the presentation which clearly states “This presentation contains confidential, proprietary and trade secret information.”This erects a fairly high level of warning and notice.If it were a public company, you would do exactly that in the context of Safe Harbor Pronouncement (Securities Reform Litigation Act of 1995) and you would identify information as “material and non-public” thereby enlisting the SEC as your enforcement watchdog.
i think i may have posted about this JLM. but i refuse to sign NDAs. and i feel very strongly that it is the right position to take given the amount of confidential information we are given.
Fred, I reason to a different conclusion while agreeing to the underlying facts which motivate your rationale. I also apply a bit of practical experience having been in that situation many times.First, the failure to sign a NDA or confidentiality agreement does NOT mean that one can use, disseminate or disclose information that is known to be proprietary, confidential or trade secrets.To do so is a common law tort.This is the kissing cousin of possessing material non-public information about a public company — it matters not how you obtained the info. If you ACT or simply disseminate the information then you commit not just a tort but also a crime.I fear that when one is exposed to such proprietary, confidential and trade secret information and REFUSES to sign a NDA or confidentiality agreement, then that fact alone predjudices the observor and makes an impending allegation broader and more threatening as it suggests that there is something less than fair play at work.What I think one can obtain by signing such an agreement is the following —An objective standard or definition as to what constitutes proprietary, confidential and trade secret information in that pitch or in subsequent docs. You narrow the playing field. You compartmentalize the information. You carve out what is already available from other sources or in the public already.A time deadline whereafter all bets are off. This is very important and you can thereby create an absolute safe harbor. I would agree to 3-6 months on any piece of data or until it is otherwise known in the public realm.You can create a dispute resolution technique — binding arbitration — which will provide the ability to reduce litigation expenses, prohibit punitive or exemplary damages and limit discovery.You can create a liquidated damages standard that is an arbitrary and very reasonable amount thereby giving the blood sucking contingency lawyers a garlic necklace.Last is you can create YOUR document and simply impose that on any deal conversation. Make it both ways — they cannot disclose your meeting, what was discussed or what you decide to do. Helll, it just as likely that you will discuss proprietary, confidential and trade secret with them.I do all of this routinely by agreeing to sign OUR NDA or confidentiality agreement. Just a boilerplate document which I have used for many years.I think the protections are worth it. So as a mechanism to quantify, minimize and rebuff damages, I think a proactive approach may be better than a passive approach.
JLM,I find your points here both logical and sublime. A pleasure to read.Ignorance of the law is no excuse for breaking the law and in your essay I hear you saying that a VCs outright refusal to enter into quid pro quo relationships related to confidential information in evaluating startups (refusing to sign an NDA) actually represents a potentially bigger risk to the VC than if the VC proactively and in detailed fashion proscribes the Non-disclosure boundaries they are willing to operate in.You are saying VCs should require an NDA with every startup entity they review outlining the things they will agree to hold confidential.In doing so I hear you saying this not only represents a reduction in legal risk to the VC but also sets the right legal, ethical and moral tone as it communicates that the VC at the foundational level is proactively working to minimize legal conflicts of interest.Do I read you correctly?Thanks, Roger
Loud and clear. The only other subtlety I would add is that the VC should have the standard “ABC VC NDA” form. It should be drafted to protect the VC and it should be written in plain language and easily readable.Of course, one would hope that the real world solution would be that folks would all behave but no entrepreneur should be embarassed by protecting his life force.
“So as a mechanism to quantify, minimize and rebuff damages, I think a proactive approach may be better than a passive approach.”This I do have to agree with….
More than one seed investor has instructed me that early stage fundraising is like dating. I was told, ‘coffee’ is like a peck on the cheek, a date is a first meeting, etc. I found their comparisons rather anemic. But, hey, this discussion gives us the opportunity to take on this comparison full throttle. This means taking it from the gal’s perspective. Hold on tight!As a reminder, we’re all told not to ‘go there’ with NDAs because we’ll come off as hopelessly naive and therefore never worth talking to or investing in, yadda yadda. So we don’t. (God forbid we should appear naive. Horrors! And yet sounds strikingly like when teenage girls are pressured by their boyfriends to not wear condoms. We all know who gets stuck holding the bag there.)We, the early web startup, truly only need ‘one guy’ (or syndicate). Investors want to spread their seed. And they definitely don’t want to get stuck with the wrong one, ‘cuz he can’t get out of it. That would totally suck.This conflict that has played out through the ages!I want to keep my kimono closed. He wants it open. He wants everybody’s open! Woo-hoo! The more he can fiddle with the better.Problem is, when I allow him, the things that are truly special about me gets lost.Now let’s talk about the importance of social proof. If you’re in a community where everyone knows each other, when you act like a jerk everyone finds out in about 5 minutes. Like when your friend was dating your little sister and then cheated on her. So you tracked him down and broke his nose.In a world without NDAs, entrepreneurs require a tight personal introduction to provide any semblance of protection, if at all. And successful serial entrepreneurs probably have an advantage over first-timers in this department as well, because who’d want to screw them? There’s automatic competition for their deals. But first-timers? Like Freshmen girls, real easy to screw.We also have to not fool ourselves with the lure of totallly unrealistic relationships. By that I mean, long-distance. The kind where you’re from opposite coasts but you met on a cruise, or….in Vegas. Well, we all know what happens there. He thinks she’s cute, she tells him things, they do things. Then they go home. He kinda sorta didn’t mention that due dili thing — I mean marriage proposal — he’s got goin’ on with someone at home. This cute gal here is a stranger to his life — no one he knows knows her. No risk of anyone learning he was untoward, that he let her give a bit more of herself than she should have, and he might be taking it and using it for other things.The ‘what happens in Vegas stays in Vegas’ clause has been invoked. None of it counts when you’re on vacation!But poor girl, she gets home, calls him 12 times, does some stalking…er…research, and realizes, he’s not quite who he said he was. And he didn’t quite mean things he said. He was just being nice because it felt good in the moment.So the lesson on that one is — if he’s not geographically desirable, available, and clearly interested, don’t waste your time. He’s not a candidate. And you gain nothing (while may lose much) by disclosing your sumpin’ sumpin’.If he truly thinks you’re all that special, let him travel far + wide to woo you. Meanwhile, limit flashing of your family jewels to wooers who are nearby and trustworthy.Does the comparison work, JLM?
Yes, except yours has just a splash of porno. Haha.
Glad you enjoyed the porn diversion JLM. I aim to serve! (j/k)In my mind it’s fundamentally a reflection of the ancient conflict between nurturers and seed-spreaders. We need different things.When the intersection works well it can be explosive or at least a great pleasure. When it fails it can be a total train wreck.So our (entrepreneurs’) meager power can come only from who and how we choose NOT to disclose to.My daughter has recently evolved into a mythology addict. So I’ve been reading all the great stories to her, over and over and over — Greek/Roman, Norse, Old Testament, etc. And it blows me away how it’s all the exact same patterns we see here. Nothing EVER changes….LOL!!!So is it worth trying to change this? Not likely. Plus selfishly, at this juncture, like a lioness protecting her cubs, i just want to get what I need out of the system to do my business and grow my critters into lions and lionesses themselves.There do exist good people. They reveal themselves over time. Like in the great stories, characters weave there way in and out in crazy unexpected ways. Some betrayals, some surprises.It wouldn’t be a great story if it were easy. 🙂
OMG. I’m super glad I came back and found this comment. You’re my favourite Tereza! <3I wish I could tag this as a favourite, instead of just a like.P.S. You’re a brilliant woman. 🙂
As an entrepreneur, I agree with you on this one Fred.Funny on Friday, I had somebody ask me for advice. We went to lunch and I was ready to give a couple of hours of free advice and pickup the bill.They asked me to sign a confidentiality agreement and it was a quick lunch where we split the bill.
It would come down to proving that they were given or seen that confidential information and that they didn’t see it somewhere else. A VC firm will have much deeper pockets too than an entrepreneur looking for funding.This really is a moot point. There’s no protection at all except for maybe patents.
You are betraying your sweet and innocent youth. Never lose it and become jaded and cynical. Like me.It is exactly because of those deep VC pockets that suing a VC is so attractive.I could produce big time 10 law firms who would undertake such a lawsuit on a contingency — 30-50% of the damages or settlement received — just for the settlement value of the allegations.The kind of bloodsuckers who handle asbestos and trip and fall claims.Damn good courtroom lawyers by the way all.If a VC, in fact, misappropropriated proprietary, confidential or trade secret information on behalf of a specific company, they — the company — are also in the grease.If anybody — the VC or the company — had a general liability or D & O policy, the fruit might be hanging particularly low. Insurance companies do not try cases, they settle them.Do you think that any insurance company in their right mind would allow a VC to testify in front of a freakin’ JURY?Do you think a VC in his right mind would want to be deposed in such a case? The harm to their reputation would be immeasurable.Know that I am not an advocate of such legal antics but that nonetheless is the system. I think it is an unfair system.
You’re asking me to ignore reality as an adult and stay in childhood lala land of blissful ignorance.The problem is to stay in blissful ignorance you can’t actively protect yourself and bring up points and methodology of how to protect oneself without the underlying bitterness – unless you have the resources to pay bloodsucking lawyers or an equally effective and intelligent wing-person.So if you’d like to be my bouncer and protector of innocence – please let me know how we can lead to a handshake.Saw your comment below about moving to Texas. I’m traveling soon, to get away, to kill some time … perhaps a visit to Texas now; Not sure how to get directly in touch with you..
Just joshing you a bit. Feel free to text me at 512-656-1383 w/ your e-mail. Visitors always welcome.
Are you sure this is right JLM????If I tell you, I won’t sign a confidentiality agreement, don’t tell me anything confidential. I’m on the hook?Just because you tell me you have this super secret plan to run bingo halls more efficiently, if I come in with my loyalty software than runs some huge casino’s, some of the biggest retailers am I on the hook?Don’t know….I’ve always been an execution guy.
Let’s start out with the premise that anybody with $25 can sue you, a pragmatic view of things not a law school theoretical view of things.Getting sued and winning is sometimes as expensive as getting sued and losing. It costs money to prove you are innocent or right.In many instances real damage is done just by the filing of a complaint and it only gets more expensive and time consuming from there.There is a huge difference between confidential, proprietary and trade secret information. They are not the same thing.Let’s start w/ the most extreme example wherein a public company is involved and such action falls under the SEC’s “tipping” exclusion. The problem is never POSSESSING the confidential,, proprietary or trade secret information, it is ACTING upon it.In this instance there can be both civil and criminal implications — but it is the action that gives rise to the jeopardy not the possession.In the case of an entrepreneur identifying “some” information as confidential, proprietary or trade secret information, there is a huge benefit to the recipient of that info to have the body of info identified, limited and compartmentalized.From the entrepreneur’s perspective there is something to be gained by first identifying exactly what you think falls into each of those categories BEFORE putting together your pitch.If an entrepreneur does think they are getting ready to share such info they should watermark those slides with that specific identifier.From the VC’s perspective I would gladly concede that specific info is confidential, proprietary or trade secret but attempt to get into a safe harbor posture by limiting the time period in which I would hold it in confidence and not act upon it while also agreeing to immediately return or destroy the info if I decide to pass on the deal.The big gain is the absolute limitation of time — usually 3-6 months — as well as the “no copy” and return of the info.Now let’s take the instance in which the VC “acts” upon the information and worse to the detriment of the entrepreneur. First, it is morally wrong and legally it is a general tort — not a statutory or contractual beef, a garden variety tort — and this implies it will be decided by a jury.Let’s say the information is used by a company upon which the VC is a Boardmember — now you have another defendant.The entrepreneur gets to testify in front of a jury that the big bad VC listened to information — there are always two parties to any conversation — which he was warned was confidential, proprietary or trade secret information and then misappropriated it to the benefit of a company in which he had an investment and used it to the detriment of the entrepreneur.The equities of this situation are fairly obvious but drawing these equities in front of the typical jury while the VC is living large and shows up in a $2K suit?So, the short answer is that it is not the possession of the confidential, proprietary or trade secret information which is problematic but rather what one does with it.
I did not want to commingle two different points — I think that there is damn little real confidential, proprietary or trade secret information.Once you wander from the formula for Coke or my personal mojito recipe (trust me on this one), I think it is pretty damn slim stuff for “normal” businesses.I also think there is damn little real effort made by companies to classify such information correctly and to operate appropriately after they do.As an example, I think companies think that something is “confidential, proprietary or trade secret” and then do absolutely nothing to safeguard this information walking out the doors with employees or have selectively and arbitrarily classified info as such.You cannot allow your employees to talk about your safeguarded info over drinks in a local bar and then claim it is the secret to Coke.I think this is particularly problematic when you are in the realm of software in which the code may in fact be “special” but any competent programmer could arguably have gotten to the same place.
yes, and this happened recently with the mobile messaging space. we met with groupme, beluga, kik, and talked to pingchat. we were clear upfront that we were talking to a bunch of them and the minute we made a decision, we alerted the others of that decision.i would hope the entrepreneurs/founders of the companies we did not invest in would say we behaved well in this situation. we try hard to do this right. it is a tough thing to do.
but the super tricky question is that you still have a lens in to the entire sector as a result. And that has elements of moral hazard.its a tricky subject actually.
Agree with the concept whole heartedly. Curious if this only applies to VCs who are taking board seats and active roles? Given the sheer number of companies some of the micro-VCs invest in and the very early stage of some of their seed investments–which often change a model along the way–it would seem like maybe the line is different for those sorts of funds.Also agree with your overall theme that not only is VC reputation right ethically, it is also good for business. The first time, struggling entrepreneur may need to pitch everyone regardless of reputation. But those with a successful track record or a great idea that gets traction can pick their investors, and reputation/ethics/business practices are a key differentiator.
Fred, BusinessInsider.com/Silicon Alley Insider has sensationalized your article on their homepage as : “FRED WILSON: VCs should never invest in competitors of their portfolio companies. Here’s why…”This is USV’s philosophy and your article does not give advice to all VC’s. It’s a shame that BI has became TMZ of Tech News for the sake of pageviews. They did this crap a few months ago when they jumped the gun with your twitter article.
ugh. i hate it when they do that. i’ll let them know i don’t appreciate it.
you should – they are taking it out of context – and bannering the hell out of it.
but does fred not post to the site himself?http://www.businessinsider….
No. They just pick up the posts they like and run them
Fred, this totally makes sense. but there is a tricky question: what is or would be your position when 2 companies you have invested are indeed not competing, but during the evolution of their life (either because of market forces or because they pivot or because they acquire something or because….) they become competing? What would you as a VC do? Would you keep your position? follow up on the investment in next rounds?
VC positions are illiquid. we would keep them, but figure out some way to keep the information flows separate. it is really hard. i hate it when this happens.
Totally agree, and would take it further – avoid reviewing prospective companies if they are competitive to existing companies in the portfolio. Tempting to do, but ultimately one of the worst things to do.
bad, bad, abd
I posed this exact question to Bijan (and it’s similar to Harry DeMott’s right space, wrong horse comment) but:The other scenario I wonder about is when you firmly believe in an idea, and an existing investment just isn’t executing well on its plan/vision or an amazing team comes to you with a similar concept and seems more likely to succeed.Purely hypothetical, since both of these companies rock, but what if Andy Rubin and Jony Ive walk in pitching the world’s sexiest open-source, modular, home control and entertainment platform, but it is directly competing with Boxee. Do you say no, or perhaps try to figure if there is an opportunities for the companies/teams to work together?
the answer is no. we would not even meet with them under most circumstances
cool. good for you – that’d be a tough one for me I think.
I do wonder about VCs who appear to wrap up an emerging market with as many startups as possible vs those who don’t invest in competing companies.Both have merit, but the former seems a lot more darwinian / hands-off to me.
I’m agreed with the last point
Andrreessen (sp?) invested in Instagram before the pivot, and then in Picplz and then Instagram pivoted.
In this case, would you as a VC explicitly sign a non-compete, as part of the financing?
Fred: just noticed something weird on the site: the “Previous Post” and “Next Post” buttons do the opposite of what they say they do.??!
Been that way since the redesign. First time I’ve read someone else mention it.
as designed, given how many old ideas are new again
Why invest into a VC fund if he just buys the sector and market. Fees are for alpha please!As FW says, it’s important to view the underlying start-up as a client. How would you feel if the day after you met with your VC you knew he was going up the street to meet your rival?Anyway, VC is about picking winners not a hedge portfolio.
i had read this the last point of your article is very interesting
Companies I’ve worked for have forced me to work on competing brands. I don’t like it much. While I actually don’t have an issue keeping things straight in my head and respecting competitive boundaries, ultimately both clients will believe that you are favouring the other guy. In the end, they both end up feeling they aren’t getting the best value and move on to another partner.Short term monetary gain at the expense of long term relationships for all parties. Can’t imagine the start-up situation would differ that much as it’s a matter of human nature.
Your last point is interesting.Early on everyone is competing for early users…as you say, it’s almost non categorical. As the product gets honed, the user base gets more defined and the concept of competition from a functionality perspective takes shape.This issue becomes more exasperated daily as the solutions increase and the world gets really noisy.I can’t answer from a VC perspective but from a marketing perspective it pushes (as it should) marketing closer to product from the outset. The earlier you can build the beginnings of a community the less cold and less daunting it becomes when you actually have something ready to sell to find your market.
true, and they also compete for ad dollars.that’s not something we can do much about
Yup, interesting times.With the monster platforms—Google, FB, even Twitter it reminds me when Microsoft ruled the world. You could build companies and create value and win, without them having to loose.