Partnerships · Competition

Is it a good idea to offer your competitor to be your partner (as an investor) in your start-up?

Kazem Zandi

March 13th, 2015

I was wondering if having a main competitor as a partner in your start-up would be a good idea or not since they would see a competitor for their business in the future.
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Eric Wold

March 13th, 2015

It can be a good idea if you are very careful to have complimentary non-overlapping portions of your model. Then you are really grooming your potential exit along the way. However, for obvious reasons, it can also be very risky. You have to walk a fine line. Keep the project interesting enough they want to keep you around, but have something going on that makes it unattractive for them to suddenly do the same thing inhouse.

It's critical that you have a feel for the personalities involved. This is not a strategy you should go after if you can't predict how the players are likely to behave. Effective if you can tease one key player from that competitor to "join you" in some capacity (advisor?), thus creating a vested interest in both your success and eventual acquisition.

Mint had a former Intuit guy on hand. They knew he could leak what they were doing to friends @ Intuit. They strongly incentivized him to play his role. They executed so fast Intuit could not keep up and it was wiser to buy Mint than try to reproduce it.

On the other hand... I was unable to pull this off with HP as my "competitor and partner" in my last venture. They were our top customer. We solved their own customer problems so well, that the end result is we gave them four years to slowly cook up their own solution. They had the engineering talent, and the money, and the end-customers, and they have such tight control over their employment contracts that I could not incentivize them. Thus we had no long-term strategic ally. There was a time when we almost got acquired, and it looked like the strategy was working, but politics and individual careers inside HP made it pay off fer certain individuals to reproduce our product instead ( My product is still doing well (I sold), but no longer gets very many customers from HP.
Eventually your "competitor and partner" is likely to choose one role or the other... not endure the conflict of interests forever.

Edwin Miller 4x CEO | Founder/CEO at 9Lenses | Board Member | Author | Angel Investor

March 13th, 2015

In our Series A we added the Corporate Executive Board.  We deliver a SaaS platform for Consultants to automate discovery to actions...  CEB sells this expertise.  I have found their involvement to be extremely valuable, but they are ethical, smart, and relentless on building their business.  Given I want to be the same, our efforts have aligned. 

Michael Barnathan

March 13th, 2015

The only way I can see it working is if you're targeting an acquisition by that competitor, and both of you know it. The competitor then sees it as a speculative investment in a complementary product, rather than a separate company.

If that's not the case, it seems like a pretty major conflict of interest.