Here's today's instalment of my Ask The VC series on Yourstory.com:
What happens in a situation where two companies in a VC’s portfolio start off as being indirect competitors, but in the future show potential to becoming direct competitors?
Here are a couple of scenarios of what can happen next:
- Nothing. Both companies continue to operate as they always have and don’t have any formal connection apart from the shared shareholder. This is not a super-common situation but it’s not rare either. In this situation, you want to ensure that you have a commitment from your shareholder that you are not going to be put in a disadvantageous situation (e.g., one company’s information being shared with the other). You should realize that your VC most likely cares a lot about his reputation for professionalism and ethics, and would not want to shred his future prospects for a low-likelihood short-term profit.
- The companies decide to join forces, either purely as business partners or going the whole hog and merging the two companies. This could be a great way forward but can also be difficult to execute if you have two sets of strong-willed founders or two different sets of shareholders who don’t share the same aspirations.
Or perhaps you’re asking what happens if you pitch your company to a VC and learn that they have a potential competitor in their portfolio already. In that case, as I said on my blog some time back:
…on the few occasions when someone has made a pitch to me similar to one of our existing investments, I have either said no straight off the bat or introduced the two companies/teams to see if they can collaborate or, rarely, pursued the new opportunity with the team’s full knowledge that we have another similar investment (overseen by some other investment professional). Other VC firms may have different (not necessarily better or worse) portfolio management strategies, including deliberately making several investments in similar/overlapping areas of interest.
Just as I or any other investor may think about whether it’s okay to invest in more than one company in the same sector, you too can make a decision whether to take money from someone who already has an investment in a competing company.
What are the pros and cons of startups meeting with VCs early for feedback?
The following is for companies only seeking feedback and not a commitment to invest now or in the future and for companies that are at a very early stage of development, not yet ready for a VC round.
- You get feedback! I’m of the school of thought that more feedback is always better than less. Whether one should bestow all feedback with an aura of omniscience is an entirely different question (I don’t recommend it) but learning what the outside world thinks is always a good thing even if you don’t agree with the speaker.
- If you think your company is likely to need VC funding in future, obviously getting feedback from a VC is a good idea.
- Depending on who you speak to, speaking to a VC well before you and they are ready for a formal relationship, may colour your chances of actually closing a funding round in future. Shared your plans to be a 20 crore company in two years and eventually achieved 20 lakhs? Oops.
- At a very early stage of development, not everyone will understand your business. The VC you approach may be the smartest person on the planet but they still may come up with feedback that’s not quite appropriate for you. This isn’t really a “con”, to be honest. It just tests your ability to accept or ignore feedback based on whether it makes sense for you. It also gives you the opportunity to assess whether the particular VC you’ve approached is the right partner for you in future.
What is considered as the perfect time for a startup to start looking for venture capital?
There is no perfect time and there are no formulae. If you’ve done your homework and decide that you need capital, then that is the time. For example, Atlassian raised its first round of funding 8 years after inception, raising a whopping $60 million even though they were already profitable at the time.
Nonetheless, reading between the lines, I suspect your real question is “When and how can I present my company as a credible investment opportunity?”
To answer that, I direct you to this great TED video on how to pitch effectively to VCs.