AI expansion is testing venture capital’s tradition of avoiding rival investments
Benchmark’s partners say the traditional venture capital norm of avoiding investments in direct rivals is under growing pressure as AI companies expand quickly into one another’s markets. They described conflicts as increasingly difficult to avoid, while stressing that investor loyalty and protecting confidential information remain important.
The dispute involving Factory and Cognition illustrates the risks: Factory accused board observer Chris Degnan of discussing a role with its rival while privy to board discussions; Degnan denied sharing confidential information and said he had already resigned. Benchmark’s Chetan Puttagunta said AI is driving down software-building costs and encouraging founders to pursue broader markets, while Peter Fenton called conflicts the firm’s toughest problem. Benchmark still favours exclusivity at the earliest stage and says founders should not be surprised or feel shortchanged if a conflict arises.
- AI is making rival venture investments harder to avoid.
- Benchmark says conflicts are becoming an industry reality.
- The firm says confidentiality and founder transparency still matter.
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Venture capital firms invest money in young companies, often taking a board seat or observer role so they can follow the business and offer advice. Those roles can give investors access to sensitive information, so firms have traditionally avoided backing companies that compete directly with one another.
AI tools are making it cheaper to build software and prompting some start-ups to move into markets beyond their original focus. That can bring companies backed by the same investor into competition, creating questions about investor loyalties and how confidential information is protected.
The dispute between Factory and Cognition shows how those concerns can arise: Factory accused Benchmark board observer Chris Degnan of discussing a job with its rival while exposed to board discussions; Degnan denied sharing confidential information and said he had resigned. The issue matters to founders and investors because it can affect trust, access to advice and the terms on which start-ups seek funding.
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The case for
As AI companies move rapidly into overlapping markets, venture firms may find it increasingly difficult to avoid backing competitors without limiting founders’ access to capital and expertise. Investors can argue that carefully managed overlap is reasonable if they disclose conflicts, honour agreements and protect confidential information; early-stage exclusivity can still provide stronger reassurance when companies are most vulnerable.
The case against
Investing in direct rivals can undermine founders’ trust and create doubts about whether sensitive information will remain protected, even when an investor denies any disclosure. Founders can reasonably argue that an investor’s access to board discussions and influence may benefit a competitor, so clear exclusivity and conflict rules are needed to protect companies and preserve confidence in venture funding.
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Originally published by TechCrunch as “Even Benchmark thinks AI is eroding the venture pact against backing rivals”.