On Conflicts of Interest & VC

On Conflicts of Interest & VC

During the fundraising for your startup, you might come across an Investor with whom you'd want to work. They might have reached out to you, or you might be wanting to get on a call with them BUT BUT BUT you see — or feel — that they have invested in a potential competitor! Oh no 😭

Your mind immediately starts thinking about conflict of interest and information sharing. Your hopes of working with this Partner/Firm seem dwindling.

First, close your eyes take a few deep breaths. Always remember startup is 80% about managing your own emotions as a founder.

Now, about your reservations on the above topic. I have learned the following things:

1. There is nothing like a conflict of interest at an early stage

Early-stage investing is mostly about putting money and support behind the right teams in the right markets. Pre-seed to Seed startups explore markets and ideas; they also pivot. It is tough to call out the winners at this stage. So unless you're competitor is a Series-A+ startup who that Investor has already backed through multiple rounds, there is no conflict of interest.

However, under some unique circumstances where IP is a competitive advantage or the Investor<>Founder relationship is strong, there might be conflicts, but the better investors have processes to de-risk things.

2. Investors hedge, but the good ones have processes

Good Investors with larger teams have internal processes like informational walls between potentially conflicting Partners to avoid information flow. The good ones are also upfront about this in the conversations.

Funds with smaller teams might not be able to create the necessary air gap to stop information flow. The good ones among these will be clear about this and not get into deeper conversations with you.

3. Be upfront

Building — products, teams, and companies — is an infinite game. Most startups fail. This might not be your first startup. If you are a builder at heart, you will continue taking shots throughout your life. Contrary to popular belief, startup circles are global yet small. The best way to approach this is by being upfront. When you get on a call, even if the Investor hasn't mentioned the potential conflict of interest, you can be upfront and share your concern.

4. Good Investors comfort and engage you

Though conflicts don't matter at early stage, and regardless of who identified the potential concern at the start of the conversation, good Investors will always de-risk the talk for you and help you become comfortable.

5. Assume good intent

Remember the thing about 80% of founding is about managing your emotions. This also means that things that might seem big, urgent, and massive to you, like a potential competitor — without a mature product like you — might be a tiny blip on everyone else's screen. There is a high possibility that the Investor might not be seeing the other startups you see as competition through the same lens. So assume good intent. It generally helps build a relationship and in life in general.

6. Stay paranoid

Lastly, you will also come across people who might not be so upfront, clear communicators, or domain experts who are new to investing. You might not get a clear signal or feel comfortable. Stay paranoid. As a startup founder, you will face rejections, and not everything will go your way. Walk in assuming good intent, with a clear mind, and read the room. Quiet your mind, and listen to your gut on when to walk away.

Thank you Lauren and lesgreys for your feedback.

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I would love to hear your feedback on twitter @osamakhn