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Approaching Investors Who Back Competitors

If you’re a founder navigating the fundraising world, you might wonder whether it’s worth approaching angel investors who have invested in your competitors.

Legality vs. Practice

Based on my knowledge (I’m not a lawyer), legally there’s nothing stopping investors from putting money into both your startup and one of your competitors. There are no hard and fast rules that prevent this, though in practice, it’s not something that happens frequently.

Many investors avoid backing direct competitors to maintain a clean portfolio and avoid potential conflicts of interest. However, sometimes it happens that investors back one startup, which later pivots to compete with another company in their portfolio. If this happens, investors often manage these situations by adhering to confidentiality agreements and respecting the terms of their investments.

A Different Ball Game for VCs

The scenario changes a bit for VCs as they are typically bound by stricter guidelines, often stipulated by their Limited Partners (LPs). These guidelines usually prevent them from investing in competing businesses. So, if you're pitching to a VC or fund, you should be aware of these potential restrictions.

So, Should You Reach Out?

Yes, but considering the following in mind:

1. Research First: Before reaching out, investigate how involved the investor is with your competitors. If they have a significant stake in a rival company, they might focus their attention and resources there. You don’t want to waste time pitching someone who might not give your startup the attention it deserves.

2. Ownership Stakes Matter: Find out if the investor is a significant owner of a competitor. Investors who hold 25% or more of a competing company could face legal complications if they invest in you. Ownership thresholds can vary, with some experts suggesting 10% to 12.5% as the critical limit where complications might arise. An investor with stakes below these thresholds is less likely to face conflicts of interest.

3. Check Their Role and Engagement: Assess whether the investor is actively promoting the competitor or if they’re more of a passive investor. You want someone who is genuinely interested in what you’re doing, not just someone who diversifies their investments without much engagement.

In conclusion, approaching investors who have backed competitors can be a viable strategy if done thoughtfully. Ensure you research their involvement with competitors, check their ownership levels, and understand their role in the industry. By doing your homework, you can avoid potential conflicts and find the right investors who are excited about your vision.

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