The Loyalty Tax: AI is Breaking the VC Pact Against Rivals

For decades, the venture capital industry operated under a gentleman's agreement: you don't back two companies fighting for the same slice of the pie. It was a pledge of loyalty designed to protect founders from their own investors. But as the AI gold rush accelerates, that pact is being traded for portfolio diversification.

As TechCrunch first reported, even Benchmark—a firm known for deep, long-term partnerships with early-stage founders—is admitting the rule is under extreme pressure. Speaking at TechCrunch Disrupt, Benchmark partners described the emergence of portfolio conflicts not as a choice, but as a matter of necessity. Eric Vishria noted that because companies are evolving so rapidly, conflicts are simply the "reality of the current dynamic."

From a P&L perspective, the math has changed. When the cost of building software "effectively goes to zero," as Chetan Puttagunta told TechCrunch, founders become more ambitious, attempting to claim a wider "surface area" of the market. This expansion makes collisions inevitable. While Puttagunta suggests that avoiding a direct competitor at the start is an "easy answer," the real friction occurs when portfolio companies pivot into each other's territory over time.

We are already seeing the fallout of this shift. TechCrunch reports that the industry's giants, OpenAI and Anthropic, already share dozens of the same investors. More visceral is the clash between Factory and Cognition, both of which are backed by Khosla Ventures. Factory, which builds AI software agents, recently fired adviser and board observer Chris Degnan for alleged unethical conduct involving Cognition, the maker of the Devin coding agent. While Factory's CEO accused Degnan of discussing a role at the rival firm while privy to board discussions, Vinod Khosla of Khosla Ventures took to X to defend Degnan and dismiss Factory as a "struggling second tier competitor."

Benchmark partner Peter Fenton described this tension as "kryptonite" and the firm's most difficult challenge. Fenton framed the conflict as a spectrum: on one end is the dedicated co-founder, and on the other is the public-market stock picker who allocates capital across rivals without shaping the companies. While Fenton claims Benchmark leans toward the co-founder end and prizes transparency, the admission that the old rules are eroding is a signal to every founder in the valley.

Vishria attempted to downplay the risk of intellectual leakage, claiming that VCs are not "product or technology experts." However, the Factory-Cognition dispute suggests that the most valuable currency isn't just the code—it's the board-level strategy. If the firms most committed to founder loyalty are now viewing conflicts as inevitable, the "no rivals" rule is no longer a standard; it's a luxury that few VCs are willing to afford in the AI era.