Competing investments

I was recently speaking with the founder of one of our portfolio companies about a transaction that the company was going through. The transaction is now finalized but had yet to be completed at the time of our talk.

While discussing the conditions of the transaction, the founder requested that we include a clause stating that we wouldn’t invest in any of the company’s competitors. This is a valid request because investing in competition can lead to conflicts of interest down the road. For example, knowing one company’s strategy can be valuable for the competing company. Although you could refrain from explicitly sharing this knowledge, it would be tough to prevent it from influencing your strategic recommendations. Another conflict of interest occurs when deciding which company to make a follow-on investment in in the future.

Since this is a valid request, we included the clause in our agreement. However, there was one important modification. Unlike most funds that only perform direct investments into startups, the fact that we’re investing Hasan’s personal wealth gives us the flexibility to also be an investor in other funds. For example, we’re investors in Earlybird and Revo Capital.

Each of these entities make investments where we have no control over the investment decision. We become an indirect investor in each of their startups, but since we don’t make the investment decision, we can’t prevent them from investing in a startup that may be competing with one of our direct investments. This is an important caveat that we included in the transaction conditions.

Also published on Medium.