What measures do VC’s take to mitigate conflicts of interest between investments?
The best way for a VC to mitigate conflicts between portfolio companies is to avoid investing in direct competitors in the first place! While this can be a bit difficult for seed funds with very large portfolios and limited direct day-to-day involvement, most larger funds are careful to avoid directly competitive investments. The reason for this is simple: why have part of your investment in one company be used for the sole purpose of fighting against part of your investment in another one?
But once the investments have been made, and assuming that (as in 99% of all cases) they are minority investments, the operative approach is the same as the Hippocratic Oath: “First, do no harm”. This means that if two portfolio companies end up competing in the same space, the fund has to be excruciatingly careful about not sharing any confidential info across the two companies, or in any way advising or guiding one of them based on privileged knowledge about the other.
Typically, this would be done by having different partners represent the fund on the two different boards, and even recusing themselves from voting or discussions if board level deliberations verge into specifically competitive areas.
In rare cases, one or both companies may ask the VC to serve as a neutral arbitrator, and help them come to a modus vivendi that works for both parties (although if this gets anywhere within the vicinity of market domination, it may verge on ‘restraint of trade’ and be illegal.)
A parallel case is that of Apple and Google, which had extremely close relations and shared board members. This was fine as long as one was making computer hardware and the other was running a search engine, but when the business models started converging, they had no choice but to go their separate ways.
*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *
Written by David S. Rose
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