When VCs Fund Competitors

Justin Hibbard

Time to rummage through the reader mailbag. By the way, did you know that you can easily send e-mail to Deal Flow? Just click on the writer's name at the bottom of each post, and voila! Anyway, Todd Klein from Legend Ventures had some thoughts about our Feb. 7 post, "Entrepreneurs Pay Heed." He adds this piece of advice for entrepreneurs: "Always ask whether the VC firm has funded or might fund a competitor. You'd be amazed how infrequently that question gets asked. Good firms don't fund competitors, but some do. It's better to know up front."

Obviously, most startups would prefer that VCs not supply cash to the competition. But beyond that, think about some other problems that could arise. One of the most valuable resources that VCs provide for startups is recruiting. Two startups in the same business probably need the same people: a VP of sales, a CFO, engineers, etc. For which company does a VC reach into his or her network and recruit the best talent? "With more than one portfolio company to choose from, the VC will have to prioritize one over another," Klein says.

Then there's the issue of board conflicts. Suppose a VC serves on the boards of two competing startups. She finds out that a key customer of one startup is disgruntled and on the verge of canceling its contract. Is she obliged to help retain the customer or to help the competitor woo the customer away? "Better firms will not put themselves in these situations," Klein says. "It's not worth the risk of potential conflicts or the breakdown in trust between the board and management that inevitably results."

Some meaty debates about VC-entrepreneur relations have been raging in the blog world lately. Check out entrepreneur Jason Calcanis' "Real entrepreneurs don’t raise venture capital" and VC Fred Wilson's response, "Fisking Calcanis."

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