“We Don’t Consider This a Conflicting Investment”

VCs With Multiple Stage-Specific Funds Are Likely To Rewrite The Existing Etiquette. And What This Means For Founders.

Let’s start out by admitting that the question of ‘competitive conflict’ has always been more of a situational dynamic than industry standard. In some ways it’s ALWAYS to an investor’s benefit to suggest a potential new investment wouldn’t be competitive to an existing portfolio company, and it’s ALWAYS to the current portfolio company’s benefit to suggest it might be.

While a norm of ‘we don’t invest in directly competitive companies’ is likely the median response if you asked a bunch of investors, in truth there’s always an asterisk. Sometimes this applies only to lead investors, and if they consider the investment ‘active’ (eg on the board, still doing their pro rata, etc). Or they’ll give a portfolio startup a window of exclusivity of a few years before considering more companies in the vertical. Maybe restrict the conflict to what a company is currently doing now, not what the founder says is on their roadmap five years down the road. And of course there’s the “unless we’re going to make a lot of money [on the conflicting investment]” asterisk. But in the years since we started Homebrew, I’ve observed the breadth of investor positions to be both more fluid and less restrictive than ever, often to the confusion (and annoyance) of founders. A major driver of this has been the growth of venture firms into cross-stage investing using different funds.

Historically most large venture firms were basic single fund operating vehicles — they raised from their LPs every three years or so, and a firm then invested the capital. Then rinse-wash-repeat. You made initial investments out of the next fund, while making pro rata decisions in the previous fund(s), and each fund had a 10–12 year lifecycle. Then some of these firms began raising their own Growth funds, a mix of extending their pro rata into existing portfolio company’s later rounds but also entering into new investments at later stages of their evolution. Almost every major VC now has at least an “early stage” and “growth/opportunity” vehicle. And most recently, several firms have also created separate substantial seed vehicles to lead those…