VCs invest in competing companies all the time. There’s even a saying about it “no conflict, no interest” (as a counter-play to “conflict of interest”). They might not invest in a direct competitor, but startups rarely have direct competitors that are each both looking for VC funding and are fundable. Conflicts happen all the time, though, and VCs don’t worry about them as such. They may worry about a fund company that is doing well, because no intelligent VC is going to potentially hurt a successful investment to fund something that has a 90% chance of failure. But when all else is equal (and especially if it isn’t and they can help their successful investments) they will never worry about conflicts of interest.
The more interesting point here is: word gets around. You can see it in another part of this conversation (top comment right now). VCs are worried about their portfolio, it’s true, but they’re MORE worried about their next fund. The success of this portfolio is simply a good way to advertise to LPs that they should participate in the next fund. They are also worried about deal flow — they can’t get into the hot deals if they have a reputation for turning on founders. If the situation is noisily public (Uber was a good example of this) VCs will think very carefully about what to do. If you’re a small company that is struggling to stay afloat, they will ask themselves one question: is the founder the reason the company isn’t successful? If their answer is yes, then good luck. If not, they will simply chalk it up to it being one of the many investments they make that didn’t work out like they hoped.
The more interesting point here is: word gets around. You can see it in another part of this conversation (top comment right now). VCs are worried about their portfolio, it’s true, but they’re MORE worried about their next fund. The success of this portfolio is simply a good way to advertise to LPs that they should participate in the next fund. They are also worried about deal flow — they can’t get into the hot deals if they have a reputation for turning on founders. If the situation is noisily public (Uber was a good example of this) VCs will think very carefully about what to do. If you’re a small company that is struggling to stay afloat, they will ask themselves one question: is the founder the reason the company isn’t successful? If their answer is yes, then good luck. If not, they will simply chalk it up to it being one of the many investments they make that didn’t work out like they hoped.