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.

#VC & Technology

Comments (Archived):

  1. leigh

    Ever regretted that decision in retrospect (not from reputation standpoint but from business success one…)?

    1. fredwilson

      Sure. The opportunity cost of this approach can be high

  2. Guest

    Can you give us an example of two competitive companies? 

    1. fredwilson

      foursquare and gowalla

  3. awaldstein

    yup…in early markets, the concept of a competitive landscape is basically everyone.Especially true when the behavior is not yet clear and lots of people are vying for that connection to that impulse. Think video and community like Shelby.tv (just playing with the new one this morning). This is a behavioral drive that is still searching around for the right platform to play on.

    1. JamesHRH

      If you cannot explain why people should do business with you, you have bigger problems than competition.

      1. Rohan

        haha. Big problem, that one.

  4. LIAD

    Alternatively firms can absolve themselves entirely much like SV Angel seem to do:Their assurances re competitive companies are purely that:1. portfolio company confidential information is always ensured2. they do not get involved with any portfolio company at an operational level – SV Angel partner, David Lee talks about their policy in full on Quora here – http://b.qr.ae/u8dZQ9For me it’s all about transparency. As long as you know where you stand from day one – you can make an informed decision.

    1. kidmercury

      yes, for an angel fund seeking to make a lot of investments, i think this is the best approach. 

      1. JamesHRH

        I agree.

    2. Sean Schofield

      I don’t think disclosure addresses the potential for conflict of interest.  Suppose both companies raise an angel round and are now ready to raise the next round.  The investor is obviously going to be involved in helping with the next raise.  If they help one company pitch a particular VC that’s kind of a dig against the other company isn’t it? I mean you can’t exactly say “Hey I have two great companies in this space and I’m going to pitch you Company A and another VC will get pitched Company B.  Don’t worry they’re both awesome!” 

    3. fredwilson

      what is “operational level”?does helping to recruit talent count?does making connections to potential partners count?i just don’t know how anyone can really live up to that promise

  5. Jonathan Berkowitz

    I’ve (we’ve) been thinking about this on and off this year.  Our investments are seed stage.  It’s very difficult for a seed stage company to identify what “it” is going to be and therefore who they might be competitive with. We’ve found this to be even more challenging in enterprise situations (as opposed to consumer plays). 

    1. leigh

      too true 

    2. Tom Labus

      Why is the enterprise side more challenging?

      1. Jonathan Berkowitz

        I think it comes down to supply and demand.  I’ve noticed two things: 1.  There are fewer customers (in terms of total quantity) so there’s an immediate, heightened awareness of each one.2.  Early stage companies building software for larger enterprises are pretty focused on the business development aspects of what “C-level problem” they are solving and how much value that’s going to deliver. There are only a handful of C-level problems.  Because of these two things – we’ve found our early stage enterprise customers to be extremely defensive / protective and it definitely influences our investment behaviors.Just so I’m sure I’m being clear – there are “business solutions” companies that are not necessarily focused on larger enterprise markets, but rather, for example, the SMB market.  These companies tend to fall somewhere in between consumer plays and enterprise plays.

        1. Tom Labus

          Thanks for your insight.It would seem that the enterprise market is less fickle though.  If you can gain a beachhead there you could have a larger/longer ride since it takes the enterprise awhile to adapt change.

          1. Jonathan Berkowitz

            That’s frequently true. In the context of this conversation, we were looking at how to evaluate the potential competitive nature of two businesses and whether or not it’s appropriate to invest in one given an investment in the other. I can tell you – if a portfolio company of ours has been around long enough to have the beachhead you describe, then an emerging company would need to be executing a disruptive play against ours – and we wouldn’t invest in disrupting our own portfolio, despite it’s potential appeal.

        2. PhilipSugar

          The enterprise market is not at all like the consumer market.If you a decision maker at an enterprise decide to make a bet on a risky startup and they pivot or fail, you very likely will get fired.If all goes as well as could ever be planned (rarely the case), you might earn a five percent raise.Given the fact that you skew risk adverse because you work for a large enterprise, which decision do you think gets made?It is one of my worries about the “throw it against the wall and see what sticks” theory of startup.Unless there is no pain for customers if there is a failure, you hurt real people.  If there actually is no pain I don’t see how you are serving a need, not just a passing fleeting fling.That doesn’t mention employees and their families which unless we are talking about founders only are the worst hurt.

          1. LE

            “If you a decision maker at an enterprise decide to make a bet on a risky startup and they pivot or fail, you very likely will get fired.”As the saying goes “nobody ever got fired for choosing IBM”.Off the top I can think of even non-startups that have a certain culture that will allow them to kill a product or a service in a whim at the expense of the customer base. Apple is one. Off the top, – killing mac clones, killing newton, killing rack mount servers.

          2. PhilipSugar

            Steve Jobs was always very proud that he did not serve the enterprise market.  He had open distain for it.

          3. fredwilson

            well said Phil

  6. Stephen Albright

    I respect your long view of the venture capital business.  No forget loyalty port.But if a company (x) is competing directly (and well) with a portfolio company (y), then doesn’t (x) have a unique feature or approach that can be duplicated or improved by (y)?Or are UI and UX more difficult to measure?And how accurately can you predict how a startup will change the structure of a market?I like that you want to encourage these companies, but still keep your portfolio companies’ best interests at heart.

    1. Jonathan Berkowitz

      (x) may not have a unique feature or approach – hopefully (x) has a unique asset.  They tend to be more defensible.

    2. laurie kalmanson

      since you used a FG metaphor, i’ll go there. ui/ux *are* the personality– the way iphone turns off the music when you unplug the speaker/headphone jack– the way transitions happen in ios– how zappos has a mary poppins flying cat creature into your shopping basket in ios



    4. fredwilson

      it is not always about features. there are other competitive dynamics that come into play.

  7. Michael Lewkowitz

    This is the thing about values – when true, they permeate every aspect of the business. On this point it speaks to how USV chooses to partner with it’s portfolio companies. And that’s probably the best bet for being in this business long-term.

    1. Tereza

      I’m sure this is the area where younger VCs, esp ones who haven’t been entrepreneurs before, can step in it.Feels like one of those things that is often learned the hard way, no?

      1. fredwilson

        but the older partners in their firms should be on the watch for this

  8. markslater

    that’s great to hear.We had already decided to pass on you anyway. 😉

    1. Aviah Laor

      getabal design is just beautiful. good luck!

  9. Joe Yevoli

    What are some of the things you look for when determining if two companies are competitive, particularly in those situations where it might not be explicitly obvious?Does USV has a systematic approach, or is it a gut feeling?How can the entrepreneurs involved influence this decision, if possible?

    1. leigh

      Sometimes, that is probably an easy question.  They are a dating site and we are a dating site.  But other times, I think that question can sometimes be more difficult then it seems.  When I ran the digital strategy work for General Motors .ca in the late nineties early 2000’s, our company started to work with a number of brands that in my mind were completely competitive to the work we doing with GM.  We were creating automotive community, content, competitive comparisons etc.  Then we had work with MSN (auto section), Canada.com (huge automotive content engine) etc.  Now companies that manufacture stuff are creating lifestyle apps, film projects, trying to connect to their customers passions vs. products…will GM even be considered an automotive company five years from now?It gets really confusing out there some times.  

    2. fredwilson

      we talk to the interested parties and use our gut

  10. John Britton

    I’ve been thinking about competition quite a bit recently. Deciding where to draw the line with a competitor can be very difficult. I’m always friendly and helpful because (especially in the education space) we’re all trying to make the world a better place.I’m curious to hear if there are any specific examples of competitive companies you’ve decided to avoid in the past and how they ended up years down the road.

    1. fredwilson

      i don’t love naming names on issues like this

      1. John Britton

        That’s what I suspected, was more hoping that you could share a historical case that would be ok to make public.

  11. chhhris

    choosing respect and reputation over economics (even if just within a specific transaction) could be the more rational decision over time, or simply a principled stand (or both), but either way it’s refreshing to see. particularly in the context of #OccupyWallStreet and the short-termism endemic to how businesses compensate their executives, the way they manage their businesses to quarterly earnings reports, etc. i came from a hedge fund environment so it’s interesting for me to compare that model with how VC’s operate. hedge fund and private equity investors rather typically invest in several companies within a market segment or industry, particularly as the fund managers will have developed a deep expertise within that market. the relationship of a VC to portfolio company is obviously different than the relationship between a HF/PE firm and their underlying portfolio companies, although i think there can be quite a bit of overlap. finally, do the really large VCs in Silicon Valley also follow this principal, or are they more likely to invest in multiple competing companies?

    1. Francesca Krihely

      Two startups, Slice and Lemon, both in Silicon Valley, both providing cloud-based solutions for storing receipts, were backed by Lightspeed Venture Partners, a Silicon Valley-based VC firm. Total opposite of what Fred is proposing. I would say the one time when you can make a case for investing in competing companies is if your firm invests primarily in people and skills rather than in ideas. Slice and Lemon both have great teams, so that could be the case. But if I were dolling out cash, I would not take that road. It’s great to promote competition, but it’s not good to keep it so close to home. That compromises your portfolio in a way. Here are press links to both companies. http://venturebeat.com/2011…http://www.crunchbase.com/c

    2. fredwilson

      it is hard to generalize. different firms do it different ways

  12. mrcai

    May I hijack this slightly please? Although it is related in the sense of competitors innovating in a space. I’d be interested in hearing thoughts on startups competing within of niches left open by bigger companies. We’ve seen this a lot recently and frequently the bigger company has evolved to swallow the niche. bit.ly -> t.coChartbeat -> Google Analytics liveTwitpic -> TwitterApple (and others) view that delivery of streaming film is ancillary to them selling hardware vs Netflix.None of these companies have been bought out, they’ve simply seen their product copied. The niche has been filled. I assume this is healthy in the long term, as it’ll force the niche companies to innovate to stay alive, or die, and the people go away and make something new. bit.ly offers better analytics than t.co chartbeat for websites is largely dead, but it’s newsroom product seems to have a lot of benefits (next actually seen it live)I suppose this happen in other industries all the time. These specialists can differentiate themselves on quality and service. I’m not sure I’ve ever thought the quality and service I receive from Twitter / Google / Amazon / Facebook etc is that bad.Is this just a case of too many people tackling easy problems?

    1. Cam MacRae

      I’m not sure it’s really a case of too many people tackling easy problems – most solutions are obvious in retrospect. If I had a dollar for every time I heard “Yeah, well I could have thought of that!”… That said, if your niche is indefensible you might find you’ve just grown the market for a larger company.The problem with differentiating on quality and service is that you have to miles and miles better than the opposition to win any customers from the incumbent (and often default player). Marco Arment doesn’t need to worry about reading list, but in my opinion Noah hasn’t done enough with Twitpic to be in the same position.Whenever we found a company doing a great job of filling a niche in our space we’d look at an acquisition. It’s amazing how many of these fall over because the founder is anchored to some crazy valuation, or hasn’t come to terms with the fact that one way or another you’ll be in the space. I’m pretty sure at least one of your examples was approached, so it’s not always a case of being rolled by MegaCorp. Sometimes the passion and self-belief of the entrepreneur causes them to miss time their exit.

      1. mrcai

        I guess I was being a little facetious with the ‘easy problems’ comment :-)I certainly don’t think it’s a problems that these guys are doing what they’re doing. But they seem, inherently short term businesses, but if the business model can sustain that, then that’s ok.I guess the potential for trouble may arise when the people anchored to those crazy valuations are not just the founders, but also investors. With barriers to entry so low you can’t expect multi million dollar exists to MegaCorp. 

        1. JLM

          You raise some great questions and therein lie some great opportunities.There will always be a place for the quick, nimble, creative small company — the elite — that solves a problem the bigger company either fails to solve or is late to solve.Special Forces v the US Army — same guys, different training, better nimbleness.Big companies have another luxury — buy rather than make the next development or to fill the hole in their capabilities.The classic buy or make decision but made sweeter by the fact that the big guy is often buying the people in addition to the code and/or technology.There will always be a place for being better.  Most of the money in the world gets made by being 80% right and done first.This is also the evolution from building companies v building products — both lead to the pay window if done well.Nothing wrong w/ making a great product and going to the pay window as a peddler.

          1. Aaron Klein

            And I would add – nothing wrong with making a great product selling pickaxes to the gold miners. The pay window may be the cash flow from that business, but it can be a darned good pay window.

          2. JLM

            Well said.We fail to place enough emphasis on creating recurring income — to say nothing of jobs, oh, yeah, that fleeting and ethereal nugget called a “job” — by building long term sustainable companies.I like recurring income. 

          3. Aaron Klein

            Geez, JLM, you are so obsessed with this “prosperity for all” thing of yours… 😉

          4. JLM

            @aaronklein:disqus I actually think one of the things going on today is a perception that one cannot get “theirs” unless someone else loses “theirs”.If I were hanging around billionaires (I actually know some), I would not be trying to shoplift their money or pick their pockets, I would be asking them — hey, fat cat, how did you do it?I want everybody to get theirs and hell, I would even be willing to give them a bit of mine (except for the gov’t).

          5. Aaron Klein

            Precisely.Steve Jobs proved that wealth is not a fixed pie for you to get your piece of. He created six or seven new worlds of wealth that have empowered and enriched the entire planet.

          6. JamesHRH

            Chris Dixon compares ‘extractors’ to ‘builders’.I just call it win/win versus win/lose.

          7. FAKE GRIMLOCK


          8. Rohan

            insightful and true as always, JLM 🙂

        2. JamesHRH

          I was stunned when the VC maxim ‘at any given time 5 to 6 technical groups are addressing the same problem / opportunity’ occurred in a startup that I was involved with. Repeatedly.Bottom up tech stack ideas are universally available for people to identify – the prerequisites are standardized by area of interest / academic programs / schools of thought.Market based ideas are more random. Not too many people have the idea that a thermostat should have the aesthetics of an iPod. Lots of people have the idea that websites need analytics.

        3. Cam MacRae

          Sometimes those exits do exist and make a very, very nice signing bonus. Problem is, you gotta know when to fold ’em. 



    2. fredwilson

      complicated question to answer. and facebook is occupying as many market spaces as they can these days. probably good fodder for a full blown blog post

      1. JamesHRH

        Facebook not occupying many of them very well.

      2. mrcai

        @JLM:disqus says above”There will always be a place for the quick, nimble, creative small company — the elite — that solves a problem the bigger company either fails to solve or is late to solve.Special Forces v the US Army — same guys, different training, better nimbleness.”This is definitely how it used to be, even with HP, Yahoo, AOL etc, they became big and lost their ability to innovate at the front of the pack.But Apple isn’t a small elite company. It’s a $370bn Gigantasaurs disguised as a quick, nimble, creative startup. Seems to be happening a bit in the web/tech space. Not saying it’s a bad thing, just different. 

  13. Rohan

    Nice one, thanks fred.Goes back to the thread we exchanged ages ago about ‘it’s business. and it IS personal.’

    1. fredwilson


  14. David Smuts

    What happens Fred if you see a competitor or potential competitor who is just kicking it- better team- better focus- better results than your portfolio compnay. Do  you sit back and watch this opportunity  go by in the spirt of “supporting portfolio” companies. In other words, what do you do with an under-performing portfolio company?

    1. Jonathan Berkowitz

      I know you asked for Fred’s perspective — but our thought here.”Influence w/o authority.” If one of our portfolio companies is languishing (and we’ve encountered it), we do everything we can to influence their forward-looking outlook to change the way they’re utilizing their assets to remain a market leader.  If they have no assets to leverage … we’ve probably made a bad investment decision.I suppose – in some scenario we could have a portfolio customer that we no longer believe in (that hasn’t happened yet).  I don’t have any scar tissue having to make this decision.  I’m sure there are others here w/ more experience that do.

      1. David Smuts

        Great comment Jon,I think there must come a point when you have to say: “Hey Mr CEO/Team I love you guys but you are falling behind. Can I help you?  And if you’re not prepared to listen or accept my help please be on notice that I am really excited about this market and may follow through on other opportunities”.In other words….., give the team options and support ++++ BUT there must come a point where as an investor/supporter you have to say :” Enough is Enough”.My point being: As Entrepreneurs we cannot have it both ways. If we fail to perform we cannot expect our investors to support us regardless. Quid pro Quo.D



      1. JamesHRH

        This is very true.Worst mistake I repeatedly saw in startups was the half-fired founder. Way better for all ( esp. the founder ) to throw the founder all the way out – that punch in the face would have forced them to honestly reflect on their performance.It is similarly to parents that never, ever, allow their children to experience abject failure.

    3. fredwilson

      yes to first questionsecond question is harder to answer simply. it really depends on facts and circumstances

  15. bfeld

    I have exactly the same philosophy, as you know.Another approach, especially if proposed by the founders is to merge the companies. On the 10th anniversary of the Return Path / Veripost merger, this seems especially appropriate to consider.We’ve both blogged about it but I still remember the email from Eric Kirby (Veripost CEO) saying “hey – you should talk to Fred and see if you guys can come up with a deal – Matt and I want to do something” and then the call with you which lasted about 10 minutes and started with me saying “let’s just do a 50/50 deal”, you responding “I have a lot more money in so I need a little more”, me saying “ok – how about 55/45”, you saying “deal”, and then Eric and Matt going to town, getting a deal done, and Return Path emerging.

    1. JamesHRH

      From what I can tell, you & Fred are unaware you are VCs!

      1. bfeld

        That is one of the highest compliments you could pay me. Thanks!

        1. David Smuts

          Brad, you and Fred are Artists not VCs. Your ART just happens to be in identifying and investing in potential innovators. Furthermore, your core differentiators with your “peers” are:you’re both TRANSPARENTyou both “LOVE” what you doI SO dig both of these. Imagine being a catalyst for innovation and loving it too. We need more of you. Go and breed please 🙂

          1. bfeld

            Re: “Go and breed” – I don’t think you want one of our offspring to be wandering the world!

          2. David Smuts

            LOL- I didn’t mean you and Fred! And I think any offspring of Brad and Amy would contribute SO much to this world. And even if it’s not possible- go and adopt- you have so much to pass down. Also, consider your Entrepreneurs as offspring. We/they are your investment in the future.Don’t think you were put on this Earth just to make money. You were put here to disrupt and to learn and to teach (money is a side benefit). In my honest view, you guys are doing all of the above!

          3. JLM

            Sigh, you have to be so very careful when talking to VCs, they are literalists.Too much time spent counting money and drowning kittens.You cannot use broad similes and analogies or they will follow them exactly.

          4. bfeld

            But at least we listen – sort of.

          5. JamesHRH

            @JLM:disqus now mopping coffee off the floor ‘too much time counting money and drowning kittens.’

          6. JLM

            As listeners, you get top of the class marks.  As for paying attention, ditto.The world does not appreciate how difficult it is to hold a kitten while drowning it.Now, you know I am just joshing you, right?  I don’t want y’all coming down here and occupying the joint or anything.  OK?

          7. bfeld

            I’m smiling – as I almost always do.

          8. JLM

            Actually, the spawn of these guys should become poets, cause they will be able to afford it.  Plus it’s just desserts.

        2. JamesHRH

          Brad – you are welcome.It is hard for me to relate to the traditional VC mode of business.I was introduced to private startup company funding by an exemplary circle of private investors (lucky break, not by design). They were long view and reputation based.The ‘modern traditionalist’ school of VC exemplified by Benchmark, Foundry & USV would fit nicely into their philosophy.6 months ago I asked one of that circle why I would do business with a VC and he was unable to provide me with a strong rationale.I think I can provide one to him, now, but it would come with some pretty strong constraints!

      2. fredwilson

        this blog is called A VC

        1. JamesHRH

          The blog’s title is missing several words that are likely required to qualify it properly.I will spare you the sunshine up your skirt – but I could crank out 3 examples in :30…..

    2. Tom Labus

      Nice way to do business.

      1. bfeld

        It’s the only way to do business. And it makes me nuts sometimes that so many people don’t get this.

        1. Guest

          Hallo Brad,I have been programming a new social internet platform for almost one year now, and it is almost done.Because the idea is global i am gonna need help from venture capitals. What advise can you give me, do i have to kontakt Foundry Group or Union Square Ventures?Thank you

          1. bfeld

            Is there something I can play around with? If so – just email me – [email protected]

        2. Matt A. Myers

          Who else in your mind is similar to you and Fred? Or is that too tough of a public question? 🙂

          1. bfeld

            There are plenty of folks like this, but you’ve got to look for them and they all have different approaches / nuances / quirks – just like Fred and I do. Some of my favorites are Rich Levandov, Mark Suster, and Bijan Sabet.

        3. FAKE GRIMLOCK


    3. Rohan

      that’s a really cool story! 🙂

    4. laurie kalmanson

      awesome. no competitors, only potential mergers

    5. fredwilson

      i recall it took less than 10 minutes to negotiate that equity split

      1. RichardF

        ….and it didn’t involve a horses head?

  16. JamesHRH

    This is by far the most violated tenet ( when it comes to Other VC firms ) that you hold.Most of the ‘theme investors’ seem to develope a theme, keep it to themselves, invest in everything that looks plausibly successful & let the chips fall where they may.Is there a caveat emptor rationale for those actions that can be defended ( in any way? )?

    1. fredwilson

      not sure i can come up with one

  17. john weinerstien


  18. ErikSchwartz

    It is a delicate dance. You don’t want to pitch a VC who has funded a direct competitor. But you also only want to pitch investors who have interest in the space. So you want VCs who are working tangentially in the space.So say I see someone who at the moment is tangentially in my space who I know based on my experience is making a fatal flaw. There’s a ton of them in the TV space right now. Inevitably those companies will figure out their problems a few years down the road and try to pivot towards me. They are not competitors right now, but I know they will fail and they COULD become competitors later.No real question here, this is just the stuff that keeps me up at night.

  19. reece

    i’ve got nothing but respect for this approachany entrepreneur who feels slighted by this, only needs to think of the founders in the portfolio already, and realize what it would feel like if your VC was investing competitively… totally in line with your thoughts on reputation and taking the long view. short-sightedness is what gets us into trouble

    1. Bryan J Wilson

      Couldn’t agree more. This just proves to me how USV ultimately cares more about fostering greater success in the startup community as a whole, not just what’s in their portfolio. That might seem counter-intuitive here, but it’s in the best interest of everyone involved. Especially if USV is being supportive in other ways and pointing you to other investors. Those do exist!

      1. reece

        agree ————————————————————————– i’m running the NYC Marathon to kick cancer’s ass!help me! http://bit.ly/kickingcancer

    2. Matt A. Myers

      I agree. I do find it unnerving though that there are portfolio companies in Ninja-mode, and it’s in the VCs best interest to hear all incoming pitches – ones where there could be a very fine-line as to whether they’re too close of competitors; Worse yet, a hidden company already has funding and therefore getting access to ideas from prototypes, etc.. Hopefully a company seeking funding won’t fall apart just like that, but it could cause a substantial drawback.Just something that is how it is. C’est la vie. Nothing you can do beforehand except ask before you pitch if there’s anything in a market they’re investing in or about to invest in.

      1. reece

        yup. all part of the gameif one is that afraid of the competition, they probably shouldn’t play the game ————————————————————————– i’m running the NYC Marathon to kick cancer’s ass!help me! http://bit.ly/kickingcancer

        1. FAKE GRIMLOCK


          1. reece

            haha agree 100% ————————————————————————– i’m running the NYC Marathon to kick cancer’s ass!help me! http://bit.ly/kickingcancer

          2. Robert Holtz


  20. Neal7799

    Would you decide not to meet a company, if they are too close to one of your portfolio companies? Once you meet a company but realize that it is with direct competition with one of your portfolio would you mention it them? (or if their idea is complementary to one of your portfolio would you reveal it to your portfolio company?)

    1. JamesHRH

      Interesting to see Fred’s response.Here is the traditional VC answer:In 1999 I was part of a startup that got sent by an associate of a brand name VC to a small ‘acceleration fund’ – it was a groovy new thing back then. One of the small firm’s partners had a brother who was a co-founder of our #1 competitor. We were getting passed around as technical due diligence.Lesson learned on the game played by traditional big name VC.

      1. Tom Labus

        Brad Feld’s book, Venture Deals, helps a lot.

        1. JamesHRH

          Yes, although it was a decade too late for us and that startup actually had a great outcome (it was 1999/2000 after all).

    2. fredwilson

      what i like to do is reply to the email with “you know you are close to XYZ, right” i then explain it means it is unlikely that we will invest. but if they want to come in, i am always willing to take a meeting. but i encourage them to be careful with what they disclose in that meeting

  21. Robert Sloan

    As an entrepreneur about to embark on a seed-stage funding round, I have always assumed that, while an investor may not fund our company due to a possible conflict of interest (among other reasons of course), it was always my job to do my due diligence and research the investors I am meeting with or submitting to while keeping an open mind regarding possible competitors. I had never given much thought about the other side of the table desiring to invest, but withdrawing due to pressure from existing investments. Is this reason to go forward with pursuing investors that we would love to work with, but may have a possible conflict of interest, and let them tell us no? Thanks as always Fred.

  22. kidmercury

    boo. disagree, thumbs down. in our current world, which can be described as one in which the cost of doing a startup is falling remarkably low (the web-based startups that is), the investing game is going to go down the “lots of small bets” trajectory — i.e. ycombo, techstars, etc. in this world, doing an investment does not require becoming the etnrepreneur’s BFF. having a network of great entrepreneurs and creating network effects amongst them will prove to be the winning formula. perhaps the BFF strategy is more important for companies that receive a larger amount of funding. so, i think the stage that the VC invests in and that the company seeking investment is very relevant. 

    1. JamesHRH

      Traditional early stage investing, not seed investing, is based on backing a team that you believe will win.The moment a funder signals, in anyway, that my team is ‘  an option bet that is part of a network effect investment strategy ‘ is the last moment we will be communciating.

      1. kidmercury

        the lower startup prices go the more liquid the market will become; the more liquid the market becomes the more it will be like public market investing rather than private market/BFF investing. the only road block is government attempts at monopolizing control of securities (government regulations like SEC in the US raise barriers to entry into the market for securities), and the solution to that, the real wall street problem, is political revolution, of the non-violent kind.

        1. Matt A. Myers

          I would want investors who’s reserving funds for my growth though. If they’re investing in many than it’s diluting.

          1. kidmercury

            not necessarily, if startup cost fall by exponential amount, as they are, even relatively small VC funds can make lots of small investments early on and double down on winners progressively. seed capital is increasingly just a filtering mechanism so that capital can more efficiently be allocated in later stages. no need to become BFF until there is lots of users, real revenue, and product market fit. moreover the more a VC can bring a network, the less capital they need to directly inject in each startup, as investments in the network are amortized across all nodes in the network. we are seeing the early stages of this in ycombo/techstars. 

          2. Matt A. Myers

            I fully see and understand what you’re saying, and it works – though I think there’s another more nuanced way to the investing. I think certain businesses will require a higher level of focus and understanding from the VCs before they’ll see what’s intended / possible.Back in the day I doubt you’d see a “Twitter” getting accepted into YCombo. The projects I see getting into those are “yeah – that’s a needed product.” There are hundreads and thousands of tools that need to be created still that no one’s really touched, or not done a decent enough job of yet. I think YCombo etc. fit that model well, but I think anyone who better understands what they’re doing and for long-term wouldn’t necessarily align themselves with those companies.But then again maybe all you need is to hit 1 out of every 10 in the YCombo model – but then they’re dependant on other companies afterward. That’s not a problem with all of the money flowing right now, but if there wasn’t all of that money it would be a different story.

          3. JamesHRH

            @matthewamyers I think I have seen Fred argue that the 500 startups model that Kid is describing will eventually bring market returns. The network becomes an ETF on innovation, whereas USV tries to pick foundational companies in new markets, whose returns skew far higher ( w corresponding risk increases ).Classic VC model is try to hit for average & power, whereas the network model is average only ( Albert Pujols v. Rod Carew / Tony Gwynn – sorry for the sports analogy ).

    2. Matt A. Myers

      It depends what your intent is, and what your goal is.



      1. JamesHRH

        I think USV hand raising the big returns….

        1. testtest

          and that makes sense. if you look at the distribution of value within start-ups each year(s): a few win big.if it were more evenly distributed taking a random proportion of the the total set would yield reasonable returns. but finding the outliers (the few big winners) requires a different method.

      2. kidmercury

        that’s a false trade-off……it is not “if i invest more i have less time to be a bff.” rather it is “i’m not a bff to begin with with any early stage startup that requires very little capital, rather i’m going to find promising entrepreneurs, get a small piece of them early on, and help them all work together and enrich each other.” that is the trajectory that will disrupt the venture capital industry and is a part of the larger disruption of finance in general. 

        1. JamesHRH

          Second formal request for post money / disruption of capital guest post from The Kid Mercury.Maybe GRIM could help with the illustrations?

          1. kidmercury

            i’m building a community for fredland, which will allow members to have their own blog. i’ll use my blog there to share my thoughts on how the world’s money supply dies, only to be re-born via virtual currencies.   

      3. fredwilson

        gourmet free range chickens

      4. OK


    4. fredwilson

      boo. disagree thumbs down.

      1. kidmercury

        ^2although to signal dislike i wish there was a square root key on my computer

        1. testtest

          i wonder if this works √ (html entity)

          1. fredwilson

            works for me

      2. Rohan


      3. Robert Holtz

        In a perfect world @kidmercury:disqus has got it right but the world is NOT perfect.  I see it as an unavoidable probability even likelihood that at least two companies in your portfolio might evolve into rivals.  What do you do when two companies you like and support end up going head to head?

    5. Robert Holtz

      BFF or otherwise, @kidmercury:disqus, what then do you do (as a VC) when two of your portfolio companies inadvertently over time become arch-rivals?Many companies that start with enormous synergy become rivals (i.e. Microsoft and Apple, Apple and Google, Amazon and Apple, Microsoft and IBM, Dell and HP).  The evolution in positioning happens with the blue chips just as with start-ups.  In fact, start-ups redefine themselves even more because they sometimes radically change direction until they find their own wings.You make interesting points but you didn’t really address the case where inevitably two companies you’ve got in your portfolio end up going head to head after the same customer.  What then?

      1. kidmercury

        Every VC already has customers that go after each other. Also, in technology, competitors are also allies. Msft profits from android and writes software for macs. Technology comapnies are like countries.There is no perfect solution, though, absence of bff status does not negate the need for ethics/morals. Ultimately if someone close to you wants to cheat you they are in a position to do so, doubly so if you are bff. Choose the networks you participate in and co-create wisely.

        1. Robert Holtz

          I respect your answer because you support it well.  That said, acknowledging there is no perfect solution, how about an imperfect one?  At least the BFF model is a reasonable attempt to avoid a conflict of interest/strategy and a collision of tactical energies.What is the alternative imperfect philosophy?  Just not negating the need for ethics/morals is too mercurial for me (with all due respect to your namesake of course).”Choose the networks you participate in and co-create wisely” yes… but using WHAT criteria?  And when the inevitable DOES happen, what policy do you rely on to guide your corrective actions?

          1. kidmercury

            Yes, the questions you ask are the foundation for the next level of innovation in the VC industry. Many VCs already have a thesis they operate from, i.e. what type of companies they invest in; this rule set will be increasingly well-defined so that greater network effects will be capable. Wat first round capital is doing regarding facilitating their portfolio companies having shares in each other also reflects this and sets the stage for a less chaotic, more cooperative environment within their portfolio. At least I think that is what FRC is doing- – if not I thik others will go down a path like that. #fs

          2. Robert Holtz

            Fascinating.  Sounds hard to maintain but fascinating nevertheless.  Certainly SEEMS progressive.@fredwilson:disqus, in your professional opinion, is of @kidmercury:disqus’s idea practicable?  What do you think of it?

  23. bijan

    yep. the hardest one is when the current portfolio company considers the other company as a competitive when we know it’s not a competitor now or in the future. we’ve had to deal with this many times. it’s never easy. sometimes it’s extremly painful.the other week a founder that we backed tell me he no longer considers company xyz a competitor (after we passed on the deal).I had a founder last year tell me that company abc isn’t a competitor but this year he does (the two businesses/products haven’t changed) and now company abc wants us to invest. we decided to pass out of respect. that was hard. but we are dealing with people not machines. emotions are part of the deal. and that’s okay by me. 

    1. William Mougayar

      I realize you need to respect the entrepreneur’s thinking, but also it’s good to make your own conclusion if you see things they don’t. That helps everybody in the long term.

    2. Dave W Baldwin

      Must say, those are two hard stories.  Don’t let the “What if’s” get you moving forward.



        1. William Mougayar

          That’s a gem of a statement Grimlock.This forum is making you smarter by the day, or did you eat somebody really smart recently ?

          1. FAKE GRIMLOCK


          2. Carl J. Mistlebauer

            Ah, FG, to some of us you are always awesome and maybe on the verge of being sexy! Imagine a whole new fad, “Oh, Baby, talk in all caps to me!”

          3. FAKE GRIMLOCK


          4. Carl J. Mistlebauer

            Groupies? You could be the John Wayne and or the Marlboro Man of the 21st century! A sex symbol! A hero that all young people dream of being when they grow up!

          5. William Mougayar

            3000% only? You bum!

        2. testtest

          people know between .5m – 1m separate things. the past supplies more.whether it’s humans or machines (ai) the increased data/information helps with the future — assuming there’s a learning mechanism.   

        3. fredwilson


    3. fredwilson

      you end up with a great reputation and agitai think the tradeoff is worth it but it is painful

  24. Kevin Pillow

    I think it would be a more creative idea to invest in more than one company if they are competitors because essentially It’s like hedging against a total lost. The VC has to make it clear to the investee firms that they have a fiduciary responsibility to the LP’s of the fund to prevent any loss of capital. It is not a personal strike against the entrepreneur, its more of a safe guard against total loss of the investment. If the VC owns a stake in two companies that compete closely and one fails It can exercise provisional rights to take control of the failed company and distribute their assets/resources directly to the other company. Start up firms would need to know that if they fail their company will be recycled into a competitor within the same portfolio, creating a greater chance of success for the competitor and a higher ROI for the hedged portfolio.

    1. Sean Schofield

      VC’s already hedge their bets with the other companies in the funds.  That’s uncomfortable enough (but understandable.)  Your approach would signal a lack of confidence.

    2. JamesHRH

      You are suggesting that you have someone on your BoD who is not committed to your success.No thanks.

    3. fredwilson

      what James said below

  25. Jan

    Thanks for all the inspiration Fred. I gathered all your reading tips on my Helishopter profile. http://helishopter.com/jand…

  26. William Mougayar

    I would expect that a VC such as USV and especially you sees a lot of potential deals, such that this situation is likely to happen quite often. I’ll assume that a recent one has come to mind that you’re probably still mulling. I think you need to put an arbitrage hat, and not because your portfolio company says that the new company is a competitor that you should take that for granted. You may see things others don’t and you have to take the long view, 2-3 steps ahead perhaps. You’ll have to take into account the track record of both companies and see that they have done, not just what they have said.Those two companies could become partners, and not competitors in the future. If there’s just a bit of grey zone, it might be healthy but it will depend if it diverges or converges. My advice is- do not rush into an early decision if you like that newcomer’s idea, even you’re tempted to shelve it, just to move on. Let the 2 entrepreneurs have a candid conversation between each other, and that might inform you, and help you.

    1. fredwilson

      this post is not about one situationit is about literally hundreds of situations

  27. ShanaC

    Directly ajacent companies must be very interesting.On one hand, they could pivot into being competitors.(And what happens when that happens?) On the other hand, they could end up in a place where they actually reinforce and grow each others’ business, where it would make sense to share the same advisement team.Beyond just being friendly and giving good feedback, what should be done?

    1. fredwilson

      the pivot into each other’s turf all the timegot to build big buffers around our investments to protect from that

      1. ShanaC

        I know you are really busy, but could you write a post about building buffers?

  28. Sean Schofield

    The good news is this is fairly standard practice, at least with the VC’s I spoke with recently during my seed round.  As an entrepreneur I hated hearing it and as Fred says the VC’s sometimes hate saying it but both sides appreciate there being a standard.@Fred and Brad: Do you guys ever talk privately amongst yourselves about other VC’s that you notice failing to observe these standards?  Or is it just not discussed?

    1. Aaron Klein

      It’s certainly discussed in the entrepreneurial world – a lot.

      1. Sean Schofield

        Most definitely.  I can recall discussing a particularly brazen move by a strategic investor (not a VC) and saying “Wow!  Those guys must be so pissed.”

    2. bfeld

      Sure – we talk plenty about other VCs. Personally, I’ve scaled back the number of VCs I work with and I am careful about value and behavior alignment.

      1. Rohan

        80-20 I guess 🙂 After a point, you tend to see the 20 clearly.. 

  29. Jason Crawford

    “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.”Very true. You could also replace “the venture capital business” with “life”.

    1. JamesHRH

      The ‘long view’ requires confidence, commitment & character – that’s why it is in such short supply (in VC and in life).

    2. fredwilson

      yes, you can and shouldwell played jason

  30. laurie kalmanson

    in the history of science, centuries go by and nobody has an idea about X, and then someone has a big idea about X and lots of other people start thinking hard about X and having related and supportive ideas about Xtweetdeck is a great example of a very successful app that filled gaps in what twitter did; and did it so well that twitter acquired them

  31. Raj

    The challenge seems to me that anything in content creation/expression looks like Tumblr.Anything in gaming looks like Zynga. Anything broadly social could be Twitter. Anything music could be turntable. 

    1. RichardF

      I was thinking exactly the same thing Raj.  Given that USV invest at an early stage and are pretty awesome at backing the right team, once they’ve invested in a company in a particular area it must get pretty difficult to then choose to invest in another company in the same domain.

    2. Sean Schofield

      If you were an investor in Zynga why would you want to or need to invest in another gaming company?

      1. RichardF

        I think that is Raj’s point.

      2. ErikSchwartz

        If you were an investor in another gaming company that was not getting traction and Zynga came to you what would you do is the better question.

      3. Sean Schofield

        If its an obvious competitor then you just take a pass and suffer the consequences.  Dealing fairly with your current customers is the best way to attract new ones (and the entrepreneurs are essentially your customers.)Maybe you also approach the other company and ask them how they feel about it?  They may not see a problem with it or they may be gracious enough to allow it and not hold back the VC from a great potential investment.

      4. Raj

        USV has been extraordinarily fortunate to work with such great companies.  But their challenge now is equally extraordinary in that they must find winners in areas unrelated to the companies in which they have a financial interest.  USV has money that *has* to be put to work.  Their success in companies like Zynga has made their jobs even more difficult because now they need to invest in other categories aside from gaming, social, expression, etc.  

        1. fredwilson

          no money “has to be put to work”you can always give it back to your LPs and say “there’s nothing left that interests me”that line is such bullshit

          1. Robert Holtz

            Of course you’re absolutely right about that Fred. But one thing that sticks about @7d82d9fc8bf2fabb39924be29f6d5d84:disqus’s comment is that on some level there is kind of a force or pressure to have to constantly diversify your portfolio just to avoid the circumstance whereby two of your portfolio investments are trying to eat one another’s lunch.  Do you just diversify infinitely?  Or say “no” many many times as a lot of other perfectly promising companies have to be passed on just to avoid these collisions and stand by your ideals.

    3. Guest

      Somehow it is correct :-)So the new idea has not to be a game, a broadly social, music or content creation/expression.Will be very difficult.

    4. John Petersen

      It’s a good point and clearly both Fred and Brad admit how difficult it can be. But I think you are looking a little too high level here.Looking at the USV portfolio and if you really want to stretch it, you can make an argument that the following groups could one day try to eat each others’ lunch.SoundCloud and TurntableMeetup and SkillshareTumblr and WattpadTwitter, Foursquare, GetGlue, HashableOf course it’s a stretch, but in some cases it is probably not totally unreasonable that there may be some overlap one day.I would guess that USV is not completely shut down to investing in startups that organize groups of people to meet in person just because they are already invested in Meetup and Skillshare. There just needs to be a clear case that there isn’t direct competition with the existing portfolio companies.

    5. fredwilson

      yup. so get into the category leaders early and don’t worry about it

  32. Esayas Gebremedhin

    Reputation is paramount. For startups distinction is going to play a big role.

    1. Matt A. Myers

      Just think of it this way.. at Best your chances of funding from Fred/USV is 50/50. Now use those odds to determine what you do, where you put your focus.

      1. Esayas Gebremedhin

        The more innovative you are the closer you get to 100 % (regardless who you seek as a VC) – I like what Fred does. So I prefer supporting his babies rather them competing with them.

  33. daryn

    “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. “Indeed!

    1. William Mougayar

      I disagree completely with these statements. It has nothing to do with the funding status, rather with the maturity of the founders in understanding their real market opportunity. If you are too focused on the competition as an early startup, something is wrong. You should be going after the market that’s out there instead because it is assumed that you are creating a new market demand for your product. What is Twitter’s competition – G+ or Facebook ? neither! Their competition is the other 1.5 billion Internet users that aren’t on Twitter.

      1. daryn

        Market size always seems bigger until you’re strugging to rope it in – then suddenly every remotely related or tangential product is competing for your users’ mind share.

        1. William Mougayar

          My point was that this is unrelated to funding status. It has more to do with the maturity and stage of the company and their market.

      2. Matt A. Myers

        You put words to the off-feelings I had regarding those sentences by Fred. I understand that there are markets, and there are segments to those markets. There are different demographics you can target, different interests, different angle, different intent behind a product, etc.. 10% of a $50 billion market is still big. Even 5% is…The only money I’ve had has been bootstrapped by selling off small businesses and assets of mine I acquired/grew over the years. I know there’s tons I don’t know but I can differentiate well enough, so I can navigate and feel confident navigating.My next focus is finding someone who wants to give me some money so I can give this slower-than-I-want-rolling-ball a swift kick to speed things up.

  34. OK

    Surely understand it from the Entrepreneurs’ side. Of course, it’s not just about the returns but wonder how investors (LPs) respond to this theory? Since a VC has made a directional bet in a sector (e.g. social gaming) wouldn’t the odds of a better return increase if more investments were made in same sector? Also the internal case for economies of scale, experience curves etc…E.g. Technology investors have positions in several competing stocks – the entire fund is focused on that the sector – ‘competitive’ by default. Why doesn’t that parallel transfer to the VC world? Any light you could shed on this “conflict of interest” would be appreciated. Merci!

    1. fredwilson

      you can optimize for returns or reputationi choose reputation as it is the only sustainable way to get into the good deals in the VC businessthis isn’t public market investingyou can’t invest in what you want to invest inyou have to be invited in

      1. Robert Holtz

        Wow… that right there is suitable for framing.  Thanks, Fred, for that gem.

  35. Darren Herman

    Very true.  It’s also true to (ad) agencies.  I wrote about it today in Marketing Wednesdays. 

  36. William Mougayar

    It would be grand of you to refer that 2nd company or even continue to help them indirectly. It’s also a good way to keep them close to you.However, there is flaw in thinking that “competition” and conflicting markets can be clearly delineated and identified in early stages. It’s like having 2 baby brothers, a 2-year old & a 4-year old and trying to predict that they’ll both compete in Athletics one day as being problematic. Well, it turns out that one becomes a 100m sprint runner & the other a triathlon champion. So you’ve got 2 winners that aren’t really competing with each other, although the running part is common.

  37. Geoffrey Weg

    Getting into specifics, I’ve been wondering whether USV would defer investing in a “unique experience” company like SideTour (TechStars NYC Summer 2011), which is competing in an adjacent marketplace to Skillshare. 

    1. fredwilson

      not going to comment on specifics here, but you are thinking about this correctly

  38. Modify Watches

    It’s a long-term play. As an entrepreneur, I’m so much more likely to have a high-perception of USV or anyone else if they’re loyal and have integrity. If you think it’s a gray line, that should be enough to walk away. I *think* that’s what you’re saying. offering support is awesome, and shows a willingness that there can be many winners, not just one

  39. Jon Slimak

    Great post!!! good old human curtesy is at the heart of any sound and long term business decision.

  40. Ronnie Rendel

    So based on this post, I guess it’s always good to look at the portfolio of a VC you are pitching to (a) make sure you are not directly competing with their existing portfolio, and (b) be ready to explain how you are different from the existing portfolio.

    1. fredwilson

      yes, i’d say essential

  41. testtest

    i wouldn’t care either way; someone’s going to fund the competition.i think support is overrated. the main problem that funding solves is just that, funding. it then creates new but less immediately impacting problems — like having to turn on revenue.all this talk of support edges towards the mindset of offloading responsibility.the lazy (and probably just human) part of me would love to think that some metaphoric white knight is going to come along with money, or advice that wins the day.but it won’t.the responsibility stops with the “founder”. they need to know the product/market/customers like no one else, they need to know where the market is going, they need to allocate resource.if you’re unwilling to do that , and it is a choice, then do something else. or try to find someone to hold your hand — but good luck with that! and when i say this, i hope it doesn’t feel negative. it’s just, imo, a fairly unavoidable reality.

    1. fredwilson

      i think you are naive about what actually happens in the seven to ten years a VC works with an entrepreneur

      1. FlavioGomes

        My investor has been instrumental in mentoring and driving me to think differently on certain subjects. I’ve been blessed to have a group thats focused on helping us win.  I consider them part of the team.You just had bad luck with choosing your partner unfortunatelySorry this should have been a reply to Chrishuntis

        1. fredwilson

          which partner?

          1. FlavioGomes

            Sorry Fred, my response was intended to ChrisHuntis.  I wasn’t referring to your partners.

  42. Farhan Lalji

    Urgh, we had an investor talk/discuss investing with us for several months, before declaring that one of his portfolio CEOs thought our business was close to theirs.  That was painful, one minute we thought we were going to get a term sheet, what was even worse was that the investor talked about how they might not follow on in that company cause they weren’t sure if it was going to be worth the added investment.  Talk about a double fail.  I think the key is to be transparent, decisive and quick in responses rather than stringing people along.

    1. fredwilson

      decisive is a trait i like a lot

    2. FlavioGomes

      {Some} string you…cause you add insight.  They are experts at keeping this going for a very long time without hurting your feelings.  They know that you’re willing to drop your pants -with a little persuasion- for a chance at some funding. When they sense you catching on to being bled…they’ll politely decline the opportunity…give you some feedback on how to improve your plan, pat you on the bottom and send you on your way.

      1. Farhan Lalji

        Yep.  We learnt that the hard way.  Problem is when you speak to people and they give the investors a positive review and then you have an experience like this.  Can really shake your faith in investors in general.

        1. FlavioGomes

          Its a learning experience Farhan…in fact I wouldn’t trade getting suckered a few times by them…it made me better entrepreneur.Two things:1. I learned how to feed/time just the right amount of info to gauge interest.2. I learned more about my market place with the never ending research and thinking about questions I couldn’t immediately answer.I bet you, that you came away from that experience with some positives….and you’ll realize eventually that it was a worthwhile investment….just not quite the same tho as getting a check.

  43. Diego

    What do you do if a company you backed is not performing well, and you get approached by other company showing great performance, in an unmissable space?

    1. fredwilson

      we tell them they are doing great and suggest other firms they should approach for capital and ask if there is anything else short of investing we can help them with

      1. Robert Holtz

        Fred, what do you do when you’ve ALREADY invested and through the natural maturation process two portfolio companies evolve and emerge as rivals?What do you do about that?  As a number of convergences and consolidations continue to happen, it seems that is apt to happen more and more in the future.

        1. fredwilson

          we try the one partner on each, don’t talk about it to the otherthat sucks and we hate it

  44. Luke Chamberlin

    The President of Kiva.org (a microloan nonprofit) recently stated in an interview that their biggest competitor was not other nonprofits but Zynga.As companies and websites become channels they all compete with each other at some level for the attention of a population with a limited number of hours in a day.What do people think about this? How do you balance a portfolio when the basic unit becomes mindshare and not market share?Great interview for anyone who is interested: http://techcrunch.com/2010/

  45. William Mougayar

    Competition is overrated in startups.It’s all about execution & focus.The smart non me-too startup who is first to market has no real competition when they start if the idea is innovative & needed.

    1. matthughes

      I couldn’t agree more.Go with your idea and don’t look back. 

      1. William Mougayar

        You bet. That’s what we have been doing

    2. Robert Holtz

      Agreed….But that isn’t the point of Fred’s post.  Two companies can be extremely focused and executing well and pursuant to that execution & focus, two portfolio companies that once were nicely diverse can evolve into head-to-head rivals.  They didn’t start as competitors and they weren’t fixated on competitors either.  Nevertheless, in executing and satisfying the customer, the two suddenly cross paths and suddenly want the same territory.The dilemma is what does the VC company who is managing this portfolio do when that actually happens?

      1. William Mougayar

        But I don’t think the starting point was 2 portfolio companies. I think the starting point was 1 in the portfolio, and 1 outside and being considered.

  46. nishantkdixit

    This philosophy is not unique to the VC business, many professional service companies like consultancies and advertising firms operate or operated under the same ethos.  However, when confronted with the opportunity for growth or faced with competition many change their philosophy.  In the firm’s early days, Bain was able to differentiate itself from McKinsey and Boston Consulting Group, by working with one client in an industry.  As the firm grew, it was forced to make a choice and help multiple clients in the same industry and reassure firms that their confidential information was not being compromised.  However, as recent scandals have illustrated the temptation for abuse is often too great when dealing with multiple clients in the same space. As a venture firm USQ is still relatively small, do you see this as a potential challenge as you look for growth? or are you content with the current size?

  47. Eric Leebow

    It’s interesting to think about, many of your portfolio sites can work together.  For instance, a checkin or an update can be done on Foursquare, GetGlue, Tumblr, or Twitter can be done.   All of these services can be considered coopetition if you combined them.  3 out of 4 of these are just different ways to microblog.  One is a TV show or Topic, another is status update, and the other is a location update.  Now, if you have services that work in tandem, then is it really competition?  Someone could check into Foursquare using GetGlue at a Meetup using Hashable to show who they are #with and chatting away on the mobile chat service Kik.  Is this competition or some kind of partnership amongst the services. In a way GetGlue and Boxee could be considered compliments or distant relatives who meet at party once and while and work well together, yet the problem is that not everyone uses both services in tandem. I can’t be on the Boxee tablet app the same time I’m on the GetGlue or vice versa. Someone can search Twitter using DuckDuckGo using the !tw bang code. In a way, competing services can very much so work together in some way. It’s just there’s a time and a place for everything. Many startups don’t like to integrate a new service right away because it might confuse some.

    1. William Mougayar

      Well said Eric. What’s more important is to have thriving businesses.Competition is overrated in startups. Did I say that already? Well, you get my point.

      1. Eric Leebow

        Yes, in theory everyone is competing for a subscriber or user.

    2. fredwilson

      yupyou have to have a view of where things are headed

  48. Tereza

    Wrote 3/4 of a Disqus comment on iPhone today and it locked up.  Not working smoothly.Wanted to say this is a post I’ve wanted to hear for a long time.  In career-switching into this game it’s been my #1 head-scratcher. VCs’ definition of a competitor is often really different from mine.I’m sure it’ll shock no one if I admit I’m a really open person.  Which can create pretty choppy waters. Or the way I look at it, an awesomely efficient way to find out if someone’s a dick. (I start by giving them the benefit of the doubt. But screw me and my mind’s a steel trap.)It is critical to prequalify investor meetings. TMostly because if you’re operating at a certain level of play, YOU are sharing THEM the gift of YOUR insight into the world.  Not to mention the gift of your time. Yours is as valuable as any VC.  And if you know ahead of time someone’s a definite No, don’t do the meeting.  You need to be a heat-seeking missile for Yes.BTW all of this is a great reason to keep early stage fundraising to your local market and people you know personally. They really have no choice but to treat you fairly (everybody knows that news of bad behavior in NYC or SF spreads as fast as lice at sleepaway camp).  Remember, when you fly into another market to unknown people, they’ll take the meeting because it’s a cheap way to find out what’s happening elsewhere. But they DON’T want to invest out of town and there’s insufficient tension to keep them from plugging your insights into a local pet company, right after your flight home has hit cruising altitude. Sorry to sound cynical but this happens plenty.I have a great vocabulary, but this year taught me a new word.  “Orthogonal”.  What that means they’re kinda sorta working with a company that might be related or competitive to you although it’s probably too early to tell but we all want to be friends and just be safe, so we’ll call it “orthogonal” and agree to not discuss it at cocktail parties because that would be a little icky.Two more observations.  One is — and sorry to play the girly card here — but it’s not uncommon for there to be confusion when someone’s invested in something that has to do with women, and then everything else that has to do with women is competitive.  (From a purely intellectual standpoint it’s a great way to measure knowledge of our market…until you realize this artificially cuts off funding possibilities which you really can’t afford to do).Final observation — the horizontal early-stage play.  Early on, it’s so esoteric at that stage, who can honestly say if it’s competitive?  This is where in a single day one person tells you you’re too broad while another tells you you’re too narrow, one tells you you’re just a feature while another says you’d be a great acquisition for Facebook; one loves your well-thought-out business model and another thinks it’s over thought. A third thinks it’s not enough.Bottom line — listen to VCs for feedback….a little.  But not too much.  They have their own stuff going on and a bunch of it has nothing to do with you.

    1. RichardF

      Brilliant comment Tereza with the insight that can only be gained when you have pitched to a number of VCs.”They have their own stuff going on and a bunch of it has nothing to do with you.”  Sums it perfectly

    2. Ron Jeremy

      “an awesomely efficient way to find…a dick. (…But screw me…)”Excellent use of mixing metaphors.

    3. Rohan

      lovely last line, Tereza. 

    4. fredwilson

      i will send you the t-shirt that came out of a comment thread here last week”listen to users, not VCs”so good

      1. kidmercury


    5. Ela Madej

      Thank you for Tereza. It makes so much sense, yet it isn’t very obvious for someone who’s just going to start the “fundraising tour”. Eye opening…

    6. Dale Allyn

      What a fantastic comment, Tereza. Required reading, really, for the uninitiated or fledgling entrepreneur, as well as an important reminder to the more experienced. 

      1. Partner Source

        Dale,I second your opinion adding only that the very last statement she makes about listening to VCs might not work all the time depending on their expertise.Glenn Wright | VPPartner Source(Ranked #2 | B2B & B2C Lead Generation – Sales Outsourcing)www.thepartnersource.com

      2. Partner Source

        Dale, I second your opinion adding only that the very last statement she makes about listening to VCs might not work all the time depending on their expertise.Glenn Wright | VPPartner Source(Ranked #2 | B2B & B2C Lead Generation – Sales Outsourcing)www.thepartnersourceDOTcom

        1. Dale Allyn

          Fair enough, Glenn. My process is to listen to all input, but one must filter it appropriately. Tereza’s remark in that line is an important reminder to be circumspect as one considers the value of input. That includes understanding the level of expertise of both parties. Edit: Oops! called you Peter instead of Glenn. Sorry. 🙂

  49. Eric Leebow

    You may find this kind of interesting as I’ve been reading your blog since 2006.  I was thinking about a post you did a while back about the Implicit Web, and possibly you could revisit this topic again. http://avc.blogs.com/a_vc/2…

    1. fredwilson

      will consider

  50. gilchristh

    Ironically timely post for me. Sometimes I wish I could take two or more teams pitching related ideas and meld them into one “superstartup.” The implications of that, however, aren’t quite so simple, either.Thanks for more awesomeness.

    1. fredwilson

      you can’t do that. i wish i could.

      1. FlavioGomes

        I like to understand why you can’t Fred? There should be some way to align interests no?

        1. gilchristh

          I’d love to hear Fred’s thoughts on this, but in my admittedly very novice opinion, there are several problems that would prevent such an approach.1) Equity issues arise. Who gets what stake? Smaller founder equity stakes would be available to larger founding teams. How do you prevent that from serving as an amotivational force?2) Too many chiefs, not enough indians. I imagine that team dynamics would kill most of these teams right off the bat. Who’s responsible for product vision? Which startup’s culture will be the dominant culture? How do you overcome the demoralization of the other team whose culture has forcibly suppressed? Moreover, with new companies and often new entrepreneurs, often a lack of historical data exists to aid in choosing the “winner” in the inevitable battles for each leadership role. That’s something the market is uniquely suited to do best.3) Competition is good. It keeps companies pivoting. It spurs customer development and creates more customer value. This approach would be effectively anti-competitive.Think about mergers and acquisitions: one company acquires another. Maybe they do it for the technology, maybe for the team… whatever the case, the highly complex deals explicitly state the terms. Leadership roles and future procedures for filling leadership vacancies are established as part of the deal. In startup culture, this kind of laborious proceduralism would suck so much bandwidth from other vital needs.Combining related startups would solve some superficial problems, but would cause even deeper–and likely more fatal–rifts.

  51. Donna Brewington White

    It’s not so much this philosophy/approach that is admirable (although it is) but that it represents a deeper value and that same value probably influences your approach to other types of decisions as well, I’d think.Is this true?If so, is this an articulated value or just one that is inherently accepted by the partners?

    1. fredwilson

      our values aren’t actually articulatedwe just know what they arethat’s the best part of being five partners instead of fifty or five hundred

  52. Richard Kligman

    You can’t own both the Yankees and the Sox

    1. fredwilson


  53. Kasi Viswanathan Agilandam

    ” 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. ” That needs a separate post i guess….more insightful than the actual post. It would be a great learning for all young entrepreneurs like me … why we view there is no competitor for what we am doing.

  54. Jlevy

    Sometimes this happens by accident. Happened to me when we had invested in both KickApps and BuddyMedia and they began to set course on a collision path. We set up a very clear Chinese wall and at Partner meetings did not discuss how the other was doing or what there results were. It put a real strain on my relationship with Michael Lazerow, who was a friend, but since I was on the KickApps Board, we mothballed our relationship for a few years. After selling KickApps, we have renewed our relationship and all is well. It was a tough few years, we did not see this as competitive when we invested, so to matin our credibility, we established some very clear and stringent rules. So, it’s not always so clear but as companies evolve, pivot or adjust strategies, with large portfolios, this sometimes does happen.

    1. fredwilson

      yup, you can’t stop companies from pivotingbut when that happens, it hurtsand business can be personal, contrary to what michael told sonny

  55. FlavioGomes

    I agree William…understanding the real market opportunity is key and it should be organic and consistently reviewed,.Competition is a good thing…it supports the notion that there is a viable opportunity, its bad when it threatens your market share.Its rare opportunity that has no competition, rarer still to convince a VC of same.

  56. Andrew K Kirk

    If you really like a competitor, is it appropriate for your company to join a group of other investors and invest from a distance. Without your direct support, you can still benefit financially. Basically, hedging your bet. Is that approach improper, either because it’s because against your moral fiber or may be more simply that you just don’t invest without having a voice at that portfolio company? 

    1. fredwilson

      not in my bookI dont like to hedge my bets

  57. testtest

    delete, wrong post

  58. vruz

    There’s two possible ways to do this:1) treat apps as content. use expert curators knowledgeable with genres, categories, people who can honestly assess the quality of the apps.massive curatorial endeavours like tumblr’s indicate that this is well possible for various types of media.  I can’t see why apps should be treated differently.2) make the app developers expose a manifest with certain internal metrics of the apps. especially if the app is a game, a number of measurements can be extracted from apps. for example: number of 3d meshes, quantity of polygons per mesh, total run length of original audio effects, total run length of original music, etc.it doesn’t necessarily give an idea of what the game looks like, or how fun it is (you can have a pretty game that is a total bore)  but it helps to sort out apps quantitavely, hopefully helping to measure and rank professionally produced, well polished apps.Ideally a decent applications market should have both things, and I can’t see neither Google nor Apple getting this right soon enough.  iTunzzzzzzzzzzzzzzzzzzzzzzzZZZzzzzzZZZ…..

  59. Dale Allyn

    Fred, I enjoyed this post very much, and especially the comment thread. I was in NYC this week and fell behind on my A VC reading (especially longer comment threads), but now in catch-up mode. I felt like your position was pretty clear on the topic, but the post is a great expression of that topic. As others have stated here, your philosophy of placing reputation before material gains is the correct approach and applies equally to all businesses, as well as life in general. Cheers!

  60. FlavioGomes

    I keep coming back to this thread because I think competitive analysis is a very important part of plan building.I’d be grateful if some folks here could share their views on how they go about sizing up their competitors and various tools to organize and articulate their findings?  SWOT analysis, Quadrant charts etc?

  61. JamesHRH

    I love the ‘sigh’. Spilled my coffee on my lunch & may not be able to read my notes for my next call!