The Death of the VC "No-Competition" Pact: How the AI Gold Rush is Reshaping Silicon Valley’s Ethics

For decades, the bedrock of the venture capital industry was a simple, unwritten gentleman’s agreement: a firm does not back two companies that compete head-on. This covenant served as the moral compass of the Valley, ensuring that an investor’s loyalty, intellectual property, and strategic guidance remained solely with their portfolio founders. However, the explosive rise of artificial intelligence is testing this tradition to its breaking point, forcing even the most storied firms to reconsider what it means to be a "partner" in a world where every startup is trying to conquer the same massive, undefined market.

The Cracks in the Foundation: A New Era of Conflict

The tension reached a boiling point in late September when Factory, a startup developing AI agents for software engineering, accused its former board observer and adviser, Chris Degnan, of "unethical conduct." Factory’s leadership alleged that Degnan—while privy to confidential board-level strategy—was simultaneously negotiating a move to Cognition, a direct rival and the developer of the popular "Devin" coding agent.

While Degnan vehemently denied the accusations, claiming he had already resigned and shared no proprietary secrets, the optics were disastrous. The situation was further inflamed when powerhouse investor Vinod Khosla, whose firm, Khosla Ventures, holds stakes in both Factory and Cognition, publicly sided with Degnan on X (formerly Twitter). Khosla went as far as to disparage Factory as a "struggling second-tier competitor," a move that shocked the ecosystem and signaled that, for some, the era of absolute portfolio loyalty may be yielding to a ruthless, market-driven pragmatism.

Chronology of a Shifting Landscape

The erosion of the "no-competition" pact did not happen overnight. It has been a slow-motion collision between traditional VC ethics and the sheer velocity of the AI boom.

• The Pre-AI Era: Historically, firms like Benchmark, Sequoia, and Kleiner Perkins maintained strict portfolios to avoid conflicts of interest. If a firm backed a company, they were effectively married to that company’s success for a decade or more.
• The Mega-Lab Convergence: As generative AI gained momentum, the lines began to blur. Major AI labs like OpenAI and Anthropic, which have become the central nodes of the modern tech economy, began sharing dozens of common investors. This signaled a shift: VCs were willing to overlook direct competition if the potential upside of an "AI winner" was large enough.
• September 2024 (The Factory Incident): The dispute between Factory and Cognition brought the conflict from the boardrooms to the public square, forcing a conversation about whether investors can effectively "firewall" information when they sit on the boards of direct competitors.
• TechCrunch Disrupt 2024: Benchmark partners took the stage to address the "elephant in the room," acknowledging that the traditional rules are under siege by the "harsh reality" of rapid technological evolution.

The Mechanics of the Conflict: Why AI is Different

According to Benchmark partners Eric Vishria, Chetan Puttagunta, and Peter Fenton, the current climate is defined by an unprecedented "surface area." Unlike the SaaS era, where startups often carved out specific, manageable niches, the AI revolution is characterized by companies that are constantly expanding their capabilities.

Chetan Puttagunta noted that as the cost of building software "effectively goes to zero," founders are becoming significantly more ambitious. "Founders now see a surface area and want to claim all of it," he explained. This drive for total market domination means that two companies that started as niche players in different corners of the tech stack may find themselves competing for the same enterprise contracts within months of one another.

"The harsh reality of this world is that every company is evolving very quickly," said Eric Vishria. "Companies pivot and change. You are going to get conflicts, and that is just the reality of the current dynamic."

Supporting Data and Investor Perspectives

The industry is currently divided between two schools of thought: the "Co-Founder" model and the "Capital Allocator" model.

• The Co-Founder Model: This is the traditional Silicon Valley approach, exemplified by firms like Benchmark. Here, the investor acts as a mentor and strategic partner. They sit on boards, recruit talent, and help shape the company’s culture. In this model, conflict is considered "kryptonite."
• The Capital Allocator Model: Common in hedge funds and late-stage growth equity, this model views the portfolio as a collection of assets. If an investor owns a percentage of both the market leader and the challenger, they are hedged against failure.

Peter Fenton, a partner at Benchmark, described the firm’s position as being closer to the "co-founder" end of the spectrum. He emphasized that for firms like his, "transparency is the golden rule." If a conflict is inevitable, the founder must never be left in the dark. However, even Fenton admits that the "no-competition" pact is no longer an ironclad guarantee, but rather a principle that is increasingly difficult to uphold.

Implications for the Future of Venture Capital

The softening of these ethical boundaries has profound implications for both founders and the venture capital industry at large.

1. The Death of Information Asymmetry

For years, the value of a top-tier VC firm was its proprietary network and the "insider" information it could leverage. If a firm backs both A and B, the ability to protect the secrets of A from the reach of B becomes a legal and ethical minefield. Founders will likely become more cautious about whom they invite into their boardrooms, potentially leading to more restrictive Non-Disclosure Agreements (NDAs) and board observer contracts.

2. A Shift in Founder Power

As the "no-competition" rule fades, founders may seek to consolidate power by demanding "exclusive" backing. We could see a trend where founders force VCs to choose sides before taking a check. If an investor has a stake in a competitor, the founder might leverage that fact to negotiate lower valuation terms or, conversely, demand a seat for a strategic advisor who has no ties to competitors.

3. Increased Transparency as a Competitive Advantage

As the "bad actors" and "conflict-heavy" firms become more visible, firms that maintain strict, clean portfolios may find a new marketing advantage. The ability to guarantee a founder that they are the "only horse in the race" could become a significant differentiator in a crowded VC market.

4. The Regulatory and Legal Risk

While the current conflict is largely an ethical one, the potential for legal fallout is significant. If an investor is found to be leaking trade secrets from one portfolio company to another, it could trigger massive litigation, breach of fiduciary duty claims, and permanent reputational damage. As the stakes in AI continue to rise, the legal scrutiny surrounding VC board participation is likely to intensify.

Conclusion: A New "Candid" Reality

Benchmark’s recent admission at TechCrunch Disrupt marks a pivotal moment for Silicon Valley. By openly discussing the difficulty of maintaining exclusivity, the firm has signaled that the "gentleman’s era" is officially in decline. While they aren’t declaring the pact dead, their candor is a warning to the industry: the rapid pace of AI innovation is creating a "conflict-prone" environment that even the most principled firms struggle to navigate.

For founders, the takeaway is clear: the venture capital landscape is becoming more complex, more aggressive, and less predictable. The days of assuming your lead investor is exclusively on your side are fading. In the new, high-velocity world of AI, the only way to protect your company’s future is to demand the same level of transparency from your investors that you provide to your customers. As Peter Fenton aptly put it, "There shouldn’t be the surprise after the fact." Yet, in the race to build the next trillion-dollar AI company, surprises—and conflicts—are becoming the new industry standard.