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VCs Break Unwritten Rule Amid AI Boom
16 Oct
Summary
- Venture capital firms are reconsidering the long-standing rule against backing direct rivals.
- The AI boom is forcing firms like Benchmark to navigate conflicts of interest.
- Founders expect transparency as VCs invest in expanding portfolio companies.
The traditional venture capital practice of avoiding investments in direct competitors is being challenged by the rapid advancements in artificial intelligence. Firms like Benchmark are acknowledging that the current AI boom is straining this unwritten rule, a situation that has been escalating.
Recently, a dispute arose when Factory accused Chris Degnan, an investor and adviser, of unethical conduct involving its direct rival, Cognition. Degnan, who allegedly discussed a job at Cognition while privy to Factory's board discussions, subsequently joined Cognition as chief revenue officer, a move supported by investor Vinod Khosla.
Benchmark partners have admitted that the old rule can no longer be reliably followed. They explain that as companies pivot and evolve quickly in the AI space, conflicts are an unavoidable reality. Benchmark asserts its commitment to founder confidentiality, noting that they are not product experts and aim to avoid direct conflicts.
Chetan Puttagunta from Benchmark highlights that the accelerating pace of AI and the decreasing cost of software development lead to incredibly ambitious founders. This ambition results in companies claiming broader market areas, inevitably causing overlap with other portfolio companies.
Peter Fenton described these conflicts as the firm's toughest challenge, likening it to 'kryptonite.' He emphasized Benchmark's position closer to that of a co-founder than a public-market investor, stressing the importance of transparency and ensuring founders never feel shortchanged when conflicts arise.
