Even Benchmark thinks that AI will kill the investment deal against the back-end rivals
Benchmark says it's getting harder to maintain the Valley Rule against back-up rivals.
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For decades, the unwritten rule of venture capital was that one company would not back two competing companies. But earlier this week at TechCrunch Disrupt, Benchmark's partners readily acknowledged that the AI boom is pushing that rule.
It has been on the verge of failure for some time. AI powerhouses OpenAI and Anthropic have dozens of similar investors at this point. Then, at the end of September, Factory, a startup that makes an artificial intelligence agent for writing software, said it was firing supervisor and board adviser Chris Degnan for "cognitively unethical behavior," its direct competitor and maker of the coding agent Devin. Factory's CEO claimed that Degnan talked about a job at Cognition while he was aware of Factory's board discussions. Degnan said he had already resigned and refused to share confidential information. Soon after, he announced that he was joining Cognition as Chief Revenue Officer. Powerhouse investor Vinod Khosla sided with Degnan at X and blasted Factory's CEO, calling the company a "tier two competitor." Khosla Ventures is backing both companies.
Even Benchmark, a company with a reputation for 10- to 15-year partnerships with early-stage founders, said it can no longer rely on the old rule. Asked at Disrupt whether the pact against antitrust protections would still hold as portfolio companies expand into each other's territories, the partners described conflicts as a matter of necessity, not preference.
Eric Visharia said: "The harsh reality of this world is that every company is evolving very quickly." Companies pivot and change, he said, and "you're going to run into conflict, and that's just the reality of the current dynamic."
Visharia said Benchmark remains committed to each founder and keeps what it learns confidential, and he downplayed the amount of VC transfers: "We're not product or technology experts." Apparently referring to the Factory-Cognition dispute, he said that Benchmark has been lucky not to be in "that kind of crazy direct conflict." Exclusivity is very important in the early stages, he said. "But things are progressing. There's no doubt about that."
Chetan Puttagunta said AI is accelerating this problem. Because the cost of building the software is "effectively zero," he said, founders are "very ambitious." Because they now see a "surface area" and want to claim it all, "it's probably going to happen more, where you start bumping into each other," he continued.
He initially drew a line between a direct competitor, which he called "an easy answer," and a portfolio company that expands into other turf over time. "It happens," he said.
Peter Fenton called this issue "Kryptonite" and the most difficult problem of the company. He outlined a range of ways investors communicate with their companies. At one end is the co-founder who never works on a competing company. The other side is the public market stock picker, who can have multiple competitors because he is simply allocating capital, not shaping any of them. Benchmark, Fenton said, is closer to the co-founder's bottom line and considers transparency a golden rule. "There should be no surprises after the fact." He added that the founder should never feel shortchanged if a conflict appears.
Benchmark does not declare this pact dead. At the same time, when a company built on loyalty says conflicts are coming, founders may rightly wonder who will be honest.
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