Why We Don't Invest In Competitive Businesses

I was trading emails with one of our portfolio company CEOs last week. The subject was a company that was looking for venture capital that offered a service that was similar to one of the services our portfolio company offered. The CEO was encouraging me to take a close look. He said, "someone is going to invest, it might as well be someone close to our company".

I told him that I completely disagreed with that philosophy. I said "When a VC invests in competitive companies it's like an open marriage. It sounds all well and good, but it's going to create problems down the road."

He laughed and suggested I blog that. And so I have.

I have never understood "open marriages". The idea is you are married but free to have relationships with others too. Maybe there are men and women who can deal with the complexities, conflicts, and uncertainties that such an arrangement would create, but I am certainly not one of them. I like to know where my loyalties lie and I like to know where the loyalties of others who are close to me lie as well.

And that's why we don't invest in competitive businesses. Let's say we had two portfolio companies that both offered a video uploading/sharing service. And let's say we had a relationship with a leading media company that was looking for a partnership in that area. Which of our two companies services would we suggest they adopt? Well we could introduce both companies and let the two slog it out for the business. But it would be hard for us to be an advocate for either one of them and as a result our relationship with the media company partner would be of less value to everyone.

What if one of our companies was approached by a potential buyer? Would we feel obliged to get both of our companies in the process? What if the founders of the company that was approached weren't looking to sell, but the other company's founders were?

Hopefully you see my point. Just like there are some people who can manage being in an "open marriage" there are some investors who can manage these conflicts and complexities. But we can't.

We want to be the best partners we can be to our portfolio companies. That means clearly establishing where our loyalties lie and being consistent and vocal advocates for our companies. That works best for us and as a result we don't invest in competing businesses.

Now occasionally we will have two companies, that by virtue of acquisitions or changes in strategy, will find themselves in competition with each other. We don't control our companies, so we cannot promise that won't happen. But it makes us uncomfortable when it does happen and we work to avoid these situations if at all possible.

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