Whenever I’ve been involved in fundraising, I’ve hit a frustrating rejection: “Sorry, but I have an investment that could be competitive.”
As an entrepreneur, this drives me nuts. I always marshal the same counterarguments:
- I know what they’re doing, and we’re COMPLETELY DIFFERENT!
- Let’s have an initial conversation. I won’t disclose any ‘secret sauce’, and you can be better informed and decide whether or not there’s a real conflict.
- I don’t mind if you invest in both companies. I trust you to keep information confidential.
I didn’t actually grok what was going on until I sat on the other side, looking at investments. Now I understand the problems with each of these, and the real, underlying problem that I missed completely.
Objection 1: We’re not conflicting
I always said (and felt) this with such conviction! But in truth it’s just a stupid assertion. You only know as much as their last press release. The company may be planning to enter your market next week, for all you know. Telling an investor that there’s no conflict is like telling them what they should eat for dinner – no matter how much you know about the situation, they know more.
Objection 2: Let’s have an initial conversation
It’s a common misconception that investors are looking to thoroughly evaluate startups so they can make the best decision about each one. In fact, most investors are looking for reasons to say no. A typical angel has many competing priorities for their dollars – their existing investments, other new investments, their stock portfolio, their mortgage, a new car. If you’re unlikely to be an investment because of what they suspect is a conflict, they’d rather spend the time on one of those things instead.
A typical VC is going to say “yes” to between 1% and 0.1% of pitches; that means they need to triage opportunities aggressively, and guess what? You Just Got Triaged.
Objection 3: I don’t mind!
Yeah, but what about the established company they’ve already invested in? They mind! Good investors feel a strong obligation to their existing portfolio, and they don’t owe you squat.
Super Top Secret Reason
The previous three point nonwithstanding, there’s a fourth reason that most investors don’t bother to explain. It’s simple: investing in conflicting companies is a huge risk. Here’s the scenario:
- Jane Angel is an investor in Cantaloupe.ly, a promising cantaloupe vending machine startup. Cool, crisp cantaloupe on every street corner! The mind boggles at the opportunity.
- Jambalaya to Go pitches Jane Angel on their investment opportunity. Their secret sauce: bundled napkins with every bowl. Jane thinks this sounds really cool, but doesn’t invest because she’s already invested in the messy-food-dispensing vertical with Cantaloupe.
- A month later, Cantaloupe.ly announces that they’re expanding in to the soup business with their own napkin-dispensing technology.
Now, Jane didn’t leak JtG’s napkin breakthrough to C.ly. It was a good idea, and C.ly came up with it independently. And she had no idea the soup pivot was coming. But now she’s in a crappy position. JtG is going around telling everyone that Jane forwarded their pitch deck to C.ly, because – hey, look at what happened, and what are the odds? (pretty good, actually, that two companies will wind up doing the same thing, and that they will have both talked to the same person about it).
So through no fault of her own, her reputation suffers. C.ly even gets caught in the smear, because they’re accused of blatantly ripping off JtG, even though they’ve had an ongoing napkin dispensing research project since before the Cantaloupe guys graduated from college.
And thank goodness Jane didn’t actually invest in both companies. If she did, she could be an easy target for a lawsuit. Or even worse, she could wind up in a bind: sitting on the board of Cantaloupe.ly, listening to a discussion of napkin dispensing technology, in possession of material information about a competitor, but uncertain of whether she is obligated to keep it secret (because of confidentiality) or obligated to disclose it (because of her fiduciary obligation as a board member).
So the big thing is this: your investor chose their horse because they thought it could beat all comers, including your horse. Placing a second bet jeopardizes them both legally and ethically.
“Conflict” is a subjective label. Different investors have different levels of tolerance for it. Companies pivot to become competitive, so this kind of mess is sometimes unavoidable.
But this kind of conflict is unpleasant and uncomfortable, so don’t be surprised if the answer to your pitch is simply, “Sorry, I already have an investment in your space.”