Venture Capital's Rivalry Rule Buckles Under AI Boom Pressure

The Unwritten Rule Under Strain

For decades, venture capital operated under an unwritten pact: firms avoided backing direct competitors. This gentlemen's agreement kept investor loyalties clear and prevented conflicts of interest. But the artificial intelligence explosion is eroding that foundational norm. High-profile cases have already exposed the cracks. OpenAI and Anthropic, two of the industry's most prominent AI labs, now share dozens of common investors. The situation intensified in late September when Factory, a startup building AI agents for software development, fired board observer Chris Degnan after allegations he discussed a job opportunity at Cognition—Factory's direct rival making the Devin coding agent—while privy to Factory's confidential board discussions. Degnan later joined Cognition as chief revenue officer. Prominent investor Vinod Khosla, who backs both companies, publicly sided with Degnan on social media, dismissing Factory as a struggling second-tier competitor. The incident highlighted how the old competitive boundaries are collapsing.

Why AI Is Different

Benchmark, one of Silicon Valley's most prestigious firms whose entire reputation rests on 10-to-15-year partnerships with founders at seed stage, acknowledged at TechCrunch Disrupt that the traditional pact cannot be relied upon anymore. Partner Chetan Puttagunta identified the root cause: as software development costs approach zero, founders have become emboldened to pursue vastly larger ambitions and claim entire market categories rather than narrow niches. This expanding scope means portfolio companies inevitably collide with one another over time. Partner Eric Vishria noted that companies pivot rapidly and conflicts emerge as a matter of necessity rather than preference in the current environment. The venture ecosystem has become too dynamic and capital too abundant for the old exclusivity agreements to hold.

The Transparency Compromise

Benchmark's partners outlined their approach to managing these intensifying conflicts. They emphasized maintaining strict confidentiality and transparency as offsetting principles. Vishria downplayed how much competitive advantage a venture partner could actually transfer, arguing that VCs are rarely deep product or technology experts and therefore cannot meaningfully leak strategic information even if they wanted to. Peter Fenton framed the tension as existing on a spectrum. On one end sits the traditional co-founder model, where exclusivity is absolute. On the other end lies the public market stock picker, who can own multiple competitors because they're merely allocating capital without actively shaping companies. Benchmark positions itself closer to the co-founder model but acknowledged the ground is shifting. Fenton emphasized that transparency and the absence of surprise are now golden rules—if conflicts emerge, founders should never feel shortchanged or discover problems after the fact.

The Broader Implications

Benchmark is not formally declaring the rivalry pact dead, but its candid acknowledgment that conflicts are coming serves as a significant signal to the startup ecosystem. When a firm built its entire brand on founder loyalty and long-term partnership openly concedes that those commitments may be tested by competitive pressures, other founders have legitimate reasons to reconsider their assumptions about venture firm loyalty. The AI boom has compressed the timeline for competition; what might have taken a decade to unfold now happens in months. This acceleration, combined with the dramatic reduction in startup costs and the abundance of venture capital, creates an environment where venture firms face genuine trade-offs between honoring old commitments and capitalizing on new opportunities. Vishria acknowledged that Benchmark has been fortunate to avoid the kind of direct conflicts Factory and Cognition faced, but he made clear that luck alone cannot hold back the tide of industry evolution.