Benchmark says AI boom is eroding the VC pact against backing rivals

AI boom tests traditional VC pact on rival investments

At TechCrunch Disrupt, Benchmark partners Eric Vishria and Chetan Puttagunta acknowledged that the AI boom is challenging the longstanding venture capital norm against backing direct competitors. For decades, the unwritten rule was that firms avoided investing in startups competing head-on, but this principle is now under strain.

According to TechCrunch, the rise of AI has accelerated overlaps between portfolio companies, making conflicts nearly inevitable. Vishria described the issue as a matter of "necessity, not preference," as startups pivot or expand into adjacent markets.

Factory and Cognition rivalry highlights growing conflicts

The rivalry between Factory and Cognition, two startups developing AI coding agents, exemplifies the tensions emerging in the AI sector. Khosla Ventures, another prominent VC firm, has invested in both companies, further complicating the dynamics.

Factory fired Chris Degnan, a former board observer and adviser, for alleged "unethical conduct involving Cognition," according to TechCrunch. Factory’s CEO claimed Degnan had discussed a job at Cognition while privy to confidential board discussions.

Degnan, who denied sharing any confidential information, later joined Cognition as chief revenue officer. Khosla Ventures founder Vinod Khosla publicly supported Degnan on X, criticizing Factory’s CEO and calling the company "a struggling second-tier competitor."

Benchmark’s approach to managing conflicts

Benchmark partners emphasized that while the firm remains committed to exclusivity at the early stage, the landscape is evolving. Puttagunta noted that AI is accelerating the problem of conflicts, particularly when portfolio companies expand into each other’s territories over time.

Peter Fenton, another Benchmark partner, called conflicts the firm’s "toughest problem" and likened it to "kryptonite" for venture capital. The firm has so far avoided direct conflicts like the Factory-Cognition dispute but acknowledged that such scenarios are becoming harder to prevent.

Benchmark’s partners stated that the firm treats its relationship with founders as akin to a co-founder role, prioritizing confidentiality and commitment to each company. However, they conceded that the old rule against backing rivals can no longer be relied upon as a given.

Background: Venture capital norms in the AI era

Venture capital has long operated on an unwritten rule against investing in direct competitors, a principle aimed at maintaining trust and avoiding conflicts of interest. This norm has been particularly strong among early-stage investors, who often take board seats and work closely with founders.

The rapid growth of AI has intensified competition, with startups frequently pivoting or expanding into overlapping markets. This shift has forced VC firms to reconsider their approach to conflicts, as the lines between competitors blur.

What this means

Lazyfounder analysis — our interpretation, not reported fact.

The AI boom is not just reshaping industries—it’s also upending the unspoken rules of venture capital. For decades, founders could expect their investors to avoid backing direct rivals, a pact that helped build trust and alignment. But as AI startups pivot aggressively and markets overlap, that pact is fraying.

For founders, this means fewer guarantees of exclusivity and more potential for conflicts, even among trusted investors. The Factory-Cognition dispute is a stark example: an adviser allegedly leveraging insider knowledge to join a competitor, backed by a VC firm invested in both sides. Such scenarios could become more common as competition heats up.

Benchmark’s public acknowledgment of this shift is notable. The firm’s partners framed conflicts as an unavoidable reality, not a choice—suggesting that founders may need to adapt to a world where their investors’ portfolios are no longer walled gardens. The implication is clear: founders must prioritize transparency, negotiate clearer ethical boundaries, and prepare for the possibility that their investors’ interests may not always align with their own.

Key takeaways

• Founders should anticipate increased conflicts as AI startups rapidly pivot or expand into adjacent markets, blurring competitive boundaries.
• Transparency and clear ethical guidelines between investors and founders are critical to managing conflicts, especially in high-stakes sectors like AI.
• Venture capital firms may need to revisit or clarify their policies on backing direct rivals as the AI boom accelerates competition.
• The role of advisers and board observers demands heightened scrutiny to prevent conflicts of interest or breaches of confidentiality.
• Early-stage startups should prioritize securing exclusive investor relationships to avoid future competitive tensions.

FAQ

Why is the AI boom causing conflicts in venture capital?

The AI boom is accelerating competition, with startups frequently pivoting or expanding into overlapping markets. This blurs the lines between competitors, making it harder for VC firms to avoid backing rivals and increasing the likelihood of conflicts.

What was the role of Chris Degnan in the Factory-Cognition dispute?

Chris Degnan was a board observer and adviser at Factory before being fired for alleged unethical conduct involving Cognition, a direct rival. He later joined Cognition as chief revenue officer, a move that escalated tensions between the two companies.

How is Benchmark addressing conflicts of interest in its portfolio?

Benchmark partners emphasized transparency and commitment to exclusivity at the early stage. They acknowledged that conflicts are becoming inevitable but stated that the firm treats its relationship with founders like a co-founder role, prioritizing confidentiality and support for each company.

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