AI Boom Is Pushing VCs to Back Competing Startups

The rapid growth of artificial intelligence is putting one of venture capital’s oldest unwritten rules under pressure: don’t invest in companies that compete directly with each other.

Even Benchmark, a prominent venture capital firm known for its close relationships with startup founders, acknowledges that avoiding conflicts between portfolio companies is becoming increasingly difficult. Speaking at TechCrunch Disrupt earlier this week, the firm’s partners said the pace of change in AI is making competition between their investments harder to prevent.

For years, venture capital firms have generally tried to avoid backing direct rivals. The reasoning is straightforward: investors gain access to sensitive company information, participate in strategic discussions and often help shape business decisions. Supporting competing startups can create conflicts over loyalty, confidentiality and access to information.

But the AI boom is testing those boundaries.

AI Investors Are Backing Both Sides

The overlap is already visible among some of the biggest names in artificial intelligence. OpenAI and Anthropic, two leading AI labs competing in the same market, now share dozens of investors.

A dispute involving AI coding startups Factory and Cognition brought the issue into sharper focus in late September.

Factory, which develops AI agents for software development, announced that it was removing board observer and adviser Chris Degnan over what it described as “unethical conduct involving Cognition.” Cognition is Factory’s direct competitor and the company behind Devin, an AI coding agent.

Factory’s CEO alleged that Degnan had discussed a potential job with Cognition while having access to Factory’s board-level discussions. Degnan disputed the account, saying he had already resigned and denying that he had shared confidential information.

Shortly afterward, Degnan announced that he was joining Cognition as its chief revenue officer.

The dispute also exposed divisions among investors. Vinod Khosla, whose firm Khosla Ventures backs both companies, defended Degnan on X. He criticized Factory’s CEO and described Factory as “a struggling second tier competitor.”

The episode highlights the difficult position investors can find themselves in when their portfolio companies become rivals.

Benchmark Says Conflicts Are Becoming Inevitable

Benchmark has built its reputation on long-term partnerships with founders, often working with companies from their earliest stages and maintaining relationships over 10 to 15 years.

However, its partners acknowledged that the traditional expectation of investor exclusivity is becoming harder to maintain.

Eric Vishria said companies are changing so quickly that conflicts are increasingly difficult to avoid.

“The harsh reality of this world is every company is evolving very quickly,” Vishria said, explaining that businesses frequently pivot into new markets and develop new products.

As a result, companies that once operated in separate markets can eventually find themselves competing for the same customers.

Vishria stressed that Benchmark remains committed to its founders and keeps information learned from one company confidential. He also played down the idea that venture capitalists can easily transfer meaningful technical knowledge between competing businesses, saying, “We are not product or technology experts.”

Appearing to reference the Factory-Cognition dispute, Vishria said Benchmark had been fortunate not to encounter that kind of “insane direct conflict.”

He emphasized that exclusivity remains “really important” when Benchmark invests in very early-stage companies. Still, he acknowledged that the landscape is changing.

Cheaper AI Development Could Create More Overlap

Chetan Puttagunta said artificial intelligence is accelerating the problem by making software development dramatically cheaper.

As the cost of building software “effectively goes to zero,” founders are becoming more ambitious about the markets they want to pursue.

Puttagunta explained that entrepreneurs increasingly see opportunities across a broad range of products and services. Rather than focusing on one narrow market, they want to capture as much of that opportunity as possible.

That ambition could bring more startups into direct competition, even when they initially target different customers or solve different problems.

He distinguished between investing in two companies that are direct competitors from the beginning and seeing an existing portfolio company gradually expand into another company’s market. The first situation, he said, offers an “easy answer,” while the second is a more complicated reality of startup growth.

As AI lowers development barriers, that second scenario could become more common.

Benchmark Wants Transparency, Not Surprises

Peter Fenton described conflicts between portfolio companies as “kryptonite” for Benchmark, calling them the firm’s toughest problem.

He outlined a spectrum of investor relationships. At one end is a co-founder, who would not work on a competing company. At the other is a public-market investor who can hold shares in several rival businesses because the role is primarily about allocating capital rather than actively shaping companies.

Benchmark, Fenton said, operates much closer to the co-founder end of that spectrum.

That position makes transparency especially important. Fenton said the firm treats openness as a fundamental principle and believes founders should know when potential conflicts arise.

“There shouldn’t be the surprise after the fact,” he said.

If a conflict emerges, he added, founders should never feel that they have been treated unfairly or shortchanged.

The Old Venture Capital Rule Faces a New Test

Benchmark has not declared the traditional pact against backing competing startups dead. Its partners still view exclusivity as important, particularly when investing in companies at the earliest stages.

But the firm’s comments suggest that maintaining strict boundaries will become more difficult as AI companies expand rapidly into new markets and compete for overlapping opportunities.

For founders, the issue goes beyond whether an investor backs a rival. It also involves whether the investor communicates potential conflicts clearly, protects confidential information and continues to treat each company fairly.

The venture capital industry has long relied on trust between investors and founders. As AI reshapes how quickly startups can build products and enter new markets, that trust will face a tougher test.

And when even a firm as closely associated with founder loyalty as Benchmark admits that conflicts are becoming inevitable, entrepreneurs may have good reason to ask how other investors plan to handle the same challenge.

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