Venture Capital Pact Against Backing Rivals Eroding in AI Era

For generations, venture capitalists operated under an implicit understanding: a single firm should not invest in two companies directly competing with each other. This unwritten rule reflected a fundamental principle in the industry—loyalty to founders, confidentiality in board rooms, and the belief that VCs should not find themselves caught between battling portfolio companies.

That agreement, however, is coming apart. At TechCrunch Disrupt this week, Benchmark’s partners openly discussed how the rule no longer holds in practice, describing conflicts as an inevitable consequence of the current market environment rather than an exception to avoid.

The Traditional Venture Capital Pact

The principle underlying the no-rival rule is straightforward. A venture capital firm that holds board seats or observer positions at multiple companies sees sensitive strategic information, technology roadmaps, financial projections, and hiring plans. The trust founders place in their investors depends partly on knowing that such information remains confidential and will not benefit a competitor. When a VC breaks this implicit covenant, it poisons the relationship and creates perverse incentives across the portfolio.

Major AI labs like OpenAI and Anthropic, despite being direct competitors, demonstrate that the rule has already weakened significantly. The two companies share dozens of the same investors, creating a situation where capital is flowing to rivals simultaneously. If the pact were absolute, such overlap would be unthinkable. Instead, it has become routine.

When the Pact Breaks Down

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The weakness of the rule became unavoidable in September when Factory, a startup building AI agents for software development, removed Chris Degnan from his board observer and adviser role. Factory claimed Degnan engaged in unethical conduct related to Cognition, its direct rival and maker of the Devin coding agent.

The Factory-Cognition Case

Degnan’s account contradicted Factory’s allegations. He said he had already resigned and denied disclosing confidential information to Cognition. Shortly after separating from Factory, he accepted a position as chief revenue officer at Cognition, the company Factory accused him of conspiring with. The situation presented a classic conflict scenario: a person with board-level access to one company’s strategy moved to lead revenue operations at a direct competitor. Ordinarily, this is precisely the scenario venture capitalists try to prevent.

How Khosla Sided with Degnan

Khosla Ventures backs both Factory and Cognition, placing the firm directly in the middle of the dispute. Rather than remaining neutral, Vinod Khosla took a public position supporting Degnan. On X, Khosla attacked Factory’s CEO and characterized the company as “a struggling second tier competitor,” effectively endorsing the move of a board observer to the competing company Khosla also finances. The public nature of Khosla’s support signaled that the traditional rule and the discretion it requires no longer apply with the same force.

Benchmark’s Candid Admission

Benchmark has built its reputation on deep, long-term relationships with founders, often investing at the earliest stages. The firm’s durability comes from that consistency, staying committed through company evolution over a 10-to-15-year horizon. For such a firm to acknowledge that the anti-rival pact cannot be reliably honored represents a significant shift.

Eric Vishria, one of Benchmark’s partners, framed the issue at Disrupt with blunt realism. Companies change course constantly, he explained. Pivots happen. As businesses expand and enter new markets, overlap with other portfolio companies becomes increasingly likely. “You are going to get conflicts, and that’s just the reality of the current dynamic,” Vishria said. He attempted to minimize the risk by noting that Benchmark prioritizes founder confidentiality and contended that VCs typically lack the product or technical expertise to transfer competitive insights between companies anyway. He acknowledged that Benchmark had been fortunate to avoid conflicts as severe as the Factory-Cognition situation, implying the firm recognized both the problem and its own luck in sidestepping it.

Why AI Changes Everything

Chetan Puttagunta, another Benchmark partner, attributed the acceleration of this trend directly to artificial intelligence and its effects on startup economics.

Software Costs Have Plummeted

As the cost of building software “effectively goes to zero,” ambition among founders has reached new levels. When capital and engineering time become cheap, entrepreneurs see vast “surface area” of market opportunity and want to claim all of it. The economic barriers that once forced startups to narrow their focus have dissolved.

Founder Ambition Has Soared

The consequence is that founders pursue broader visions faster. What might have taken a company three years to build and expand into in the past can now be attempted in months. This compressed timeline means founders discover overlaps with other portfolio companies in real time, rather than years into their separate journeys.

Companies Now Pivot Constantly

Puttagunta drew a distinction between conflicts that emerge from the start—when two startups launch as direct rivals—and those that arise organically. “It’s probably going to happen more, where you start to run into each other,” he predicted. An initial competitive conflict is straightforward to avoid in principle. But when a portfolio company pivots or expands into territory already occupied by another investment, the conflict emerges from business logic rather than from investor recklessness.

Peter Fenton, also from Benchmark, called the issue “kryptonite” for the firm, describing it as the toughest problem the partnership faces. He outlined a spectrum of investor archetypes to explain why the conflict is now intractable. At one end sits the co-founder, someone so embedded in a company’s success that they would never work on a competing venture. At the other extreme is a public-market investor who buys stock in multiple rivals simultaneously, indifferent to conflicts because capital allocation, not strategy shaping, is the job. Benchmark positions itself closer to the co-founder model: deeply involved, contributing guidance, accessing sensitive information. That positioning creates the tension, committed but not completely aligned, involved but not fully responsible.

A New Framework: Transparency Over Prevention

Rather than declare the rule dead, Benchmark emphasized that transparency becomes the dominant principle when conflicts cannot be avoided. Fenton stressed that founders should never encounter a surprise after the fact. If a conflict emerges, the investor owes the founder clarity and honesty from the beginning, and the founder should never feel shortchanged as a result. This reframing suggests that the traditional solution, preventing conflicts entirely, is being replaced by a new one: managing conflicts through openness and clear communication. It is a substantial change in how the industry operates, one that places more burden on VCs to disclose competing investments and their implications.

What Founders Should Expect

Benchmark’s candor at Disrupt carries particular weight because the firm built its brand on the opposite approach. For decades, Benchmark claimed that founders could trust its loyalty completely, that the firm would never betray confidentiality or allow conflicts to poison the relationship. When such a firm says conflicts are inevitable, founders have reason to wonder whether other investors will be equally transparent or whether conflicts might emerge quietly, affecting capital allocation or strategic guidance without disclosure.

The AI era has compressed timelines and lowered capital requirements to the point where founders launch companies rapidly, pivot frequently, and discover overlap with other portfolio companies in real time. In that environment, the old pact cannot survive in its original form. What remains is whether investors will manage the new reality with integrity or use it as cover for subtle conflicts of interest. Benchmark has signaled its intention to embrace transparency, but founders should test that commitment carefully.

Source: TechCrunch