Venture Fratricide (continued)
I have blogged about this Venture Fratricide concept on a number of occasions.
Venture Fratricide is when other VC firms back companies that compete with an existing venture-backed company.
Venture Fratricide is very common and it is one of the most disturbing aspects of the venture business to me.
In my first post on this subject back in March of last year, Giordano commented:
Uhm... forgive me for asking, but isn't that called "free market"?
Right you are Giordano. Capitalism is about darwinian survival. And maybe it is a good thing that venture capitalists are free to fund whatever strikes their fancy.
Entrepreneurs are also guilty of entrepreneurial fratricide. When they see one of their brethren doing something interesting, they jump in and try to do it better.
So possibly all this competitive frenzy is a good thing.
But what do you do when you have invested in a company which has worked for years to attain a position of leadership in a market which is now developing nicely and you see your friends in the business thinking about funding some new entrants?
Do you sit back quietly and watch them do it?
Or do you actively try to convince them that they are making a mistake?
Or would that just backfire and convince them even more to make the investment?
It's a tricky issue.
I used to take the former approach which was to sit back quietly.
But I am not going to do that anymore.
If other firms are doing their diligence on a competitor to one of our companies, I want to be called by those firms. In return, I am going to attempt to talk to the VCs that are behind any competitors to companies that we consider investing in. I think that is the right way to handle this issue.
I also think it is smart to call or visit the CEOs and/or founders of the companies that a potential investment will compete with. That's the best way to assess the competitive dynamic. You can learn a lot that way.
This all might sound like collusion to entrepreneurs, but I think its the right way for the VCs to behave. And it might just reduce some of the crazy overfunding of market sectors that has plagued the venture business in recent years.
UPDATE: This post caused a lot of controversy and comments. At some level, I like that because it means it struck a chord. But after reviewing all the comments, its clear that I did not communicate my point very well. I am not advocating "club investing" or even "collusion" of any sort. My point was simply that the venture business is full of investors who don't do enough diligence on potential investments, who don't spend enough time assessing the potential size of a particular market, and who don't take the time to understand the extent of the existing competitive dynamic with any degree of care, and therefore pump money into a "hot" market segment until it is grossly overfunded. I think that's a bad thing to do and I am simply advocating more communication and diligence in the VC community to avoid that in the future.