Startup Investment Trends and Competitive Dynamics

This morning featured the analysis of three distinct funding rounds. These included ventures in the no-code/low-code sector, the OKR software market, and a company operating within the consumer investing arena. Collectively, these investments totaled $420 million, marking a productive period of review.

This activity prompted reflection on startup niches and the nature of competition. Previously, when undisclosed funding rounds were viewed negatively, SPACs were considered unreliable, and cryptocurrency was largely speculative, a common practice among investors was to avoid competing investments within a single market.

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This principle continues to be relevant today, as demonstrated by Sequoia’s decision to withdraw a commitment to Finix after recognizing its competitive overlap with Stripe, another company in their investment portfolio.

However, as startups broaden their scope and remain private for extended periods, the available investment landscape for venture capitalists may become increasingly constrained – particularly if a successful portfolio company experiences substantial growth, expanding both horizontally and vertically, such as Stripe.

Investment Limitations

Does this imply Sequoia is unable to invest in other fintech companies? Not necessarily, but it does narrow the scope of their potential investments.

This restriction appears counterintuitive. It is unlikely that any investment Sequoia makes today would significantly impede Stripe’s eventual IPO, unless the company were to postpone going public for several years. Such a delay would be imprudent, even considering the current trend of startups remaining private longer.

Consequently, a significant number of investors who have previously invested in Stripe now face limitations in deploying capital, to avoid potential conflict with a large, influential private company that has demonstrated its willingness to assert its position when dissatisfied. Sequoia’s withdrawal of an eight-figure check from Finix was not without justification.

Evolving Investment Rules

Beyond the Finix-Stripe situation, which remains a notable example, the rule against investing in competitors is losing its significance for another reason: the increasing difficulty of avoiding overlap between late-stage startups. Furthermore, the rule’s relevance is diminishing as markets prove to be larger than initially anticipated.

Consider the OKR software market. Following Gtmhub’s substantial Series B funding round, an assessment of growth metrics from other companies in the same niche revealed consistently strong performance. Subsequently, Ally.io, another competitor in the OKR-focused corporate planning space, announced a $50 million funding round.

The company experienced a fivefold increase in growth since its Series B, approximately 15 months prior. The success of all startups in the OKR space suggests a market of considerable size, capable of accommodating multiple players, at least in the near future, potentially up to Series D funding rounds.

Market Capacity and Future Consolidation

Given the expansive nature of the OKR software market, there appears to be ample opportunity for investors to support other startups in related areas of corporate software planning. These companies would likely operate with limited awareness of each other, and their connections would be relatively tangential.

Similar to other venture capital norms that have evolved as VCs adapted to a more founder-centric environment, it is plausible that the “no investing in competitors” rule will gradually become more flexible. With such a vast market, why restrict investment to only one company within a similar, yet distinct, segment of the food chain?