The AI Boom is Shaking Venture Capital’s Oldest Rule: Can Co-Investors Still Avoid Direct Conflicts?

For decades, an unwritten code of conduct has governed the world of venture capital: a reputable firm does not back two companies that compete head-on. It was a matter of professional courtesy, fiduciary duty, and trust. Founders trusted their early-stage backers not to fund their direct rivals, and investors maintained clear boundaries to prevent conflicts of interest, protect confidential boardroom strategies, and preserve their reputations as dedicated partners.

However, speaking at the TechCrunch Disrupt conference earlier this week, partners at the legendary venture capital firm Benchmark readily acknowledged that the explosive artificial intelligence boom is placing unprecedented strain on that decades-old rule. What was once considered an absolute safeguard is now on the verge of snapping entirely, as the rapid evolution of technology and the boundless ambitions of AI startups make overlapping territories nearly impossible to avoid.

The tension has been building beneath the surface of Silicon Valley for some time. Today, the towering AI labs dominating the industry—such as OpenAI and Anthropic—share dozens of the exact same investors, a reality that would have been virtually unheard of in previous tech cycles.

The friction reached a boiling point at the end of September when Factory, a startup that builds AI agents designed to write software, publicly announced it was firing its board observer and adviser, Chris Degnan. The reason cited by the company was "unethical conduct involving Cognition," a direct rival and the creator of the Devin coding agent. Factory’s chief executive alleged that Degnan had engaged in discussions regarding a job at Cognition while he was simultaneously privy to confidential, board-level discussions at Factory.

Degnan quickly pushed back against the allegations, stating that he had already resigned from his position at Factory and denying that he had shared any sensitive or confidential information. Shortly after the public dispute erupted, Degnan announced he was officially joining Cognition as its chief revenue officer.

The fallout extended rapidly across the venture capital ecosystem. Prominent powerhouse investor Vinod Khosla publicly sided with Degnan on the social media platform X, blasting Factory’s CEO and dismissing the company as "a struggling second tier competitor." The public spat carried additional weight because Khosla Ventures happens to be an investor in both competing companies, highlighting the messy reality that investors now face as their portfolios collide.

Even Benchmark—a firm whose legendary reputation rests heavily on long-term, 10-to-15-year partnerships with founders at the earliest stages of company-building—conceded that the old rules can no longer be blindly counted on. When asked during their TechCrunch Disrupt appearance whether the traditional pact against backing rivals still holds as modern portfolio companies rapidly expand into each other’s turf, the Benchmark partners described these emerging conflicts not as a matter of preference, but as an unavoidable reality of the current market dynamic.

"The harsh reality of this world is every company is evolving very quickly," said Benchmark partner Eric Vishria during the panel discussion. Companies pivot, change direction, and adapt to shifting market conditions, he explained, noting that "you are going to get conflicts, and that’s just the reality of the current dynamic."

At the same time, Vishria emphasized that Benchmark remains deeply committed to each individual founder and strictly maintains the confidentiality of what it learns behind closed doors. He also downplayed the extent to which a venture capital firm could practically pass along proprietary knowledge even if it wanted to, pointing out that venture capitalists "are not product or technology experts."

Seemingly alluding to the high-profile Factory-Cognition dispute without naming it directly, Vishria noted that Benchmark has been fortunate enough to avoid landing in "that type of insane direct conflict." He maintained that exclusivity remains "really important" at the very early stage that Benchmark traditionally favors, but conceded that the broader landscape is shifting. "Things are evolving. There’s no doubt about that," he added.

Fellow Benchmark partner Chetan Puttagunta elaborated on how artificial intelligence is actively accelerating the problem. As the underlying cost of building software "effectively goes to zero," Puttagunta explained, founders are becoming "incredibly ambitious." Because entrepreneurs today see a massive technological "surface area" and want to claim all of it for themselves, he continued, "It’s probably going to happen more, where you start to run into each other."

Puttagunta drew a sharp distinction between funding a direct competitor right from the outset—which he characterized as "an easy answer" and a scenario to be avoided—versus a portfolio company organically expanding into a peer’s turf over time as their product offerings evolve. "That happens," he said plainly.

Meanwhile, Benchmark partner Peter Fenton described the entire issue as "kryptonite" and acknowledged it as one of the firm’s toughest problems to navigate. Fenton outlined a broad spectrum of how investors relate to the companies in their portfolios. At one end of the spectrum, he said, is the co-founder, who would never dream of working on or supporting a competing enterprise. At the other end is the public-market stock picker, who can comfortably own shares in several competing companies simultaneously simply because they are allocating capital rather than actively shaping any of the businesses.

Benchmark, Fenton explained, sits much closer to the co-founder end of the spectrum, treating transparency as an absolute golden rule. "There shouldn’t be the surprise after the fact," he said, emphasizing that if a conflict does eventually emerge, a founder should never feel shortchanged or betrayed by their backers.

While Benchmark is not officially declaring the traditional exclusivity pact dead, its partners’ candid admissions signal a notable cultural shift within elite venture capital. When a firm that has historically built its entire brand on unwavering loyalty and early-stage exclusivity openly admits that overlapping conflicts are becoming an inevitability of modern tech investing, founders across Silicon Valley are left to wonder who else in the venture community will be this transparent—and how the changing dynamics of the AI boom will redefine the relationship between entrepreneurs and their backers in the years to come.