Even Benchmark thinks AI is eroding the venture pact against backing rivals

The longstanding venture capital practice of not funding direct rivals is becoming unsustainable for AI startups.

Benchmark partners acknowledged at TechCrunch Disrupt that the unwritten venture capital rule against backing competing companies is eroding, largely due to the AI boom. This comes after a public dispute where Factory accused its board observer, Chris Degnan, of unethical conduct involving its rival Cognition, with Degnan subsequently joining Cognition. Vinod Khosla, who backs both Factory and Cognition, publicly supported Degnan. Benchmark's partners stated that the rapid evolution of AI companies and the diminishing cost of software development lead to inevitable conflicts, forcing firms to navigate portfolio companies expanding into each other's territories. While Benchmark emphasizes transparency and commitment to founders, they admit the traditional pact is under immense strain and no longer a certainty.

The traditional venture capital tenet of avoiding direct portfolio company competition is being challenged by the rapid, capital-efficient growth characteristic of the AI sector. As the cost to build and iterate on AI products approaches zero, companies are exhibiting unprecedented ambition, leading them to expand their operational scope and inevitably encroach on the markets of other portfolio companies. This dynamic forces VCs to confront conflicts not as exceptions, but as predictable outcomes of the current technological landscape.

Firms like Benchmark, historically built on deep, early-stage founder relationships and a strict adherence to loyalty, are finding it increasingly difficult to maintain the old guard. While transparency remains a stated priority, the inevitability of conflicts suggests a future where VCs may hold stakes in companies that are direct or indirect competitors, shifting the investor-founder dynamic and potentially impacting strategic decision-making within these rapidly evolving AI businesses.