A quick look around shows there's not an awful lot of commentary on this subject.
What I did stumble across was a startling comment from Danner Rimer on investment strategy:
"What I am concerned about is that it seems everyone wants to start a company instead of just surrounding an idea and going after it," he said. "When you have mutiple companies going after the same opportunity, things are not going to work out for everyone."[link]
Maybe I am quoting out of context. Maybe Danny was refering more to Entrepreneurs starting competing companies. But Danny seems to be suggesting that if VC1 spots a nice company in a growth market, he shouldn’t back it if VC2 has already invested in a competitive company. Instead he should try and “surround the idea” (does this mean phone up VC2 and try and get in on the next round?). Maybe this is Danny’s point as his portfolio bears it out out: success when he flipped Flutter into Betfair and not long ago Photobox and Photoways merged.
Maybe backing competing companies is a natural consequence of the current market: what happens when VCs "spray and pay" in a market, to quote Barry Maloney commenting on our research in the FT.
Fred Wilson also thinks that what he calls “me too investing” should be avoided at all costs:
“ the only thing a VC firm can do to protect itself from venture fratricide is stay small, avoid overly competitive markets, build your best companies quietly, and avoid "me too" investing at all costs. This may mean passing on some deals you'd really like to do, but that's an important part of the venture discipline.” [Link]
I suppose the idea behind having only one VC-backed business in each sector is based on an expectation that the whole is greater than the sum of its parts (e.g one big business in the online forex swaps market will either IPO or sell for a larger amount than the sum of 3 or 4 smaller exits).
The challenge here is that it's hard to get evidence. Day one of venture captial school teaches us that, where one company dominates a particular market, then its market cap is disportionate to its share of its end market. But this does not exclude a number of VCs making a killing with a number of smaller businesses. For example the traffic management market, one that I know well , has seen healthy exits for a series of players (F5 IPOed, Peribit (Accel & Mayfield) and Redline (Charles River ventures) were acquired and there’s still value left in the market.
I think the key factor however is that as long as there are newer, ambitious VCs snapping at the heels of the established houses, there will always be a temptation to back a competing company. Some have told me that this practice is about ego driven deal doing: I am not so sure.
It seems that every week we get contacted by a new investor looking for deal flow. I see a swath of new money coming back into the market whether is hedge funds trying to knock out Benchmark and Index or media corporates investing to protect their markets.
It just looks to me like healthy competition.
Postscript. I love this photo. Thanks to Wade Rockett for that.