Benchmark: AI is Eroding the Venture Pact Against Backing Rivals

For decades, the venture capital industry operated on a foundational, albeit unwritten, rule: a firm does not back two companies that compete directly. This pact was designed to ensure trust, protect proprietary information, and prevent conflicts of interest between founders and their investors. However, the current artificial intelligence boom is fundamentally challenging this long-standing convention, forcing even the most prestigious firms to reconsider their approach to portfolio management.

At the recent TechCrunch Disrupt conference, partners from the legendary firm Benchmark addressed this shifting reality. Historically known for long-term, early-stage partnerships, Benchmark acknowledged that the rapid evolution of AI startups makes the traditional 'no-competitor' rule increasingly difficult to enforce. The core of the issue lies in the nature of AI development, where companies are pivoting and expanding their capabilities at unprecedented speeds.

Recent industry events have highlighted the fragility of these arrangements. A notable example involved the startup Factory, which accused a board observer of unethical conduct related to a direct competitor, Cognition. The situation escalated into a public dispute, drawing in prominent investors like Vinod Khosla, who defended the individual involved. This incident serves as a stark reminder of the tensions that arise when venture firms find themselves with stakes in competing entities.

Benchmark partner Eric Vishria explained that these conflicts are often a matter of necessity rather than preference. As companies evolve, they frequently move into territory occupied by other portfolio companies. Vishria noted that while Benchmark remains committed to founder confidentiality, the reality of the current market is that overlap is becoming more common. He emphasized that the firm is not composed of product or technology experts who could easily leak trade secrets, but rather partners who provide strategic guidance.

Chetan Puttagunta, another Benchmark partner, pointed to the falling costs of software development as a primary driver of this trend. With the cost of building software approaching zero, founders are becoming more ambitious, seeking to capture as much market 'surface area' as possible. This aggressive expansion naturally leads to collisions between startups that may have started in different niches but are now converging on the same AI-driven solutions.

While Benchmark still maintains that exclusivity is vital at the earliest stages of a company's life, the partners conceded that the industry is in a state of flux. The distinction between a direct competitor at the time of investment and a portfolio company that expands into a rival's turf over time is becoming blurred. As the AI landscape continues to mature, venture firms will likely need to develop more sophisticated frameworks for managing these inevitable conflicts, or risk further public disputes that threaten the integrity of the venture capital model.