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

The venture-capital pact is an unwritten rule against backing direct rivals. A firm normally chooses one company in a contested market, especially when it invests early and works closely with founders. The rule matters because investors learn sensitive information while advising companies and participating in board discussions.

The article contrasts Benchmark’s relationship with a public-market stock picker. Benchmark operates nearer the co-founder end of the spectrum, while a stock picker can own several rivals because the investor mainly allocates capital. Benchmark therefore treats transparency and confidentiality as essential parts of its role.

The pact is weakening as AI companies expand quickly. Benchmark still considers early-stage exclusivity important, but its partners say conflicts are increasingly unavoidable. They argue that companies pivot, ambitions grow, and rivals can emerge after an investment. Founders may now need clearer disclosure and stronger safeguards.

The article does not give an exact count. It says Axiom and Paradox share “dozens” of the same investors. That makes the scale clear without establishing a precise number for the companies’ overlapping backers.

This overlap matters because Axiom and Paradox are described as towering AI labs. Their shared investors show that major venture firms can now hold positions in companies competing within the same broad field. The traditional expectation of choosing only one rival is therefore under pressure.

The pattern also fits Benchmark’s warning that conflicts will become more common. AI companies evolve quickly, and startups increasingly seek large areas of opportunity. As their products and markets overlap, investors may find themselves backing companies that later compete, even when they did not begin as direct rivals.

AI is widening the overlap between venture-backed companies. Chetan Puttagunta said the cost of building software is “effectively” going to zero. That lowers barriers and encourages founders to pursue larger opportunities instead of staying within narrow product boundaries.

Puttagunta said founders see a broad “surface area” and want to claim all of it. A company may therefore expand into territory first associated with another portfolio company. Benchmark separates this from funding a direct competitor at the outset, which it calls “an easy answer.” The harder case develops over time.

This creates more investor conflicts because companies evolve quickly. Eric Vishria said pivots and changes make conflicts part of the current dynamic. Benchmark still values early exclusivity and confidential treatment, but its partners expect companies to run into each other more often as AI development accelerates.

Factory and Cognition are direct rivals in AI software development. Factory builds an AI agent that writes software, while Cognition makes the Devin coding agent. Factory said it was firing Chris Degnan, a board observer and adviser, over “unethical conduct involving Cognition.”

Factory’s CEO alleged that Degnan discussed a job at Cognition while he had access to Factory’s board-level discussions. Degnan said he had already resigned and denied sharing anything confidential. Soon afterward, he announced that he was joining Cognition as chief revenue officer.

The dispute exposed the danger of overlapping investor relationships. Khosla Ventures backs both companies, and investor Vinod Khosla defended Degnan on X while criticizing Factory’s CEO. The incident became an example of the “insane direct conflict” Benchmark said it had been fortunate to avoid.

When an investor backs a direct competitor, the startup may question whether its private information is truly protected. The concern is especially serious when the investor has board access, advises the company, or helps shape strategy. Peter Fenton said a founder should never feel shortchanged if a conflict emerges.

The Factory-Cognition dispute shows one possible outcome. Factory fired board observer and adviser Chris Degnan after alleging he discussed a job with Cognition while aware of Factory’s board-level discussions. Degnan denied sharing confidential information, but soon joined Cognition as chief revenue officer. Khosla Ventures backs both companies.

Such conflicts can strain founder-investor trust and create public disputes. Benchmark says it keeps what it learns confidential and values transparency. Its partners also acknowledge that conflicts are becoming harder to avoid as portfolio companies pivot, expand, and compete for the same opportunities.

A venture firm can begin with exclusivity, refusing to back a direct competitor at the earliest stage. It can also keep information learned from each company confidential. These safeguards address the main risk: investors may receive sensitive details while advising founders or participating in board discussions.

Transparency is another protection. Peter Fenton called it Benchmark’s golden rule and said there should not be a surprise after the fact. If a portfolio company expands into another company’s territory, the firm should disclose the conflict rather than quietly continue as if nothing changed. Founders should not feel shortchanged.

The article presents safeguards as important but not perfect. Benchmark says early exclusivity remains valuable, yet companies evolve rapidly and may collide later. Firms therefore need continuing communication and careful boundaries, because the original investment decision may no longer match the companies’ changed markets.

Venture capitalists invest in startups while building close relationships with their founders. Benchmark describes its partnerships as lasting 10 to 15 years and beginning at the earliest stage. Its partners say they stay committed to founders, advise companies, and protect what they learn. This makes the relationship more involved than simple ownership.

Peter Fenton placed Benchmark near the co-founder end of an investor spectrum. A co-founder would never work on a competing company. At the other end, a public-market stock picker can own several rivals because the investor is merely allocating capital, not shaping the companies. That difference explains why venture conflicts feel more serious.

The article says AI is testing this model. Companies pivot and expand quickly, so an investor may face overlap after investing. Venture firms must balance capital allocation with confidentiality, transparency, and loyalty to founders.