There's a strong reluctance in venture capital to fund companies that are number two or three in a category dominated by a "kingmaker"—a startup already backed by a top-tier firm. This creates a powerful, self-fulfilling fundraising moat for the perceived leader, making it unpopular to back competitors.

To win the best pre-seed deals, investors should engage high-potential talent during their 'founder curious' phase, long before a formal fundraise. The real competition is guiding them toward conviction on their own timeline, not battling other VCs for a term sheet later.

When making a potentially conflicting investment, Thomas Laffont informs the existing founder directly rather than asking for permission. This avoids a scenario where a founder says "no" and the firm proceeds anyway, which would break trust. Direct communication, even with difficult news, is key.

In competitive sectors like AI, VCs face a dilemma. Investing in a promising startup early can prevent them from investing in the eventual market winner later due to conflicts of interest (e.g., holding a board seat). This forces a difficult choice between early entry and waiting for more market clarity.

Early-stage, board-sitting VCs face conflicts investing in rivals. In contrast, late-stage, non-board investors must invest in competitors to make a secular bet on a market, akin to a public market fund buying multiple leaders in a sector.

Seed-focused funds have a powerful, non-obvious advantage over multi-stage giants: incentive alignment. A seed fund's goal is to maximize the next round's valuation for the founder. A multi-stage firm, hoping to lead the next round themselves, is implicitly motivated to keep that valuation lower, creating a conflict of interest.

When investing in competing late-stage companies, Coatue's policy is to inform the existing founder directly before the new deal closes. They explain their rationale but explicitly do not ask for permission. This approach of radical, direct communication prevents founders from hearing news secondhand and maintains trust, even in potentially contentious situations.

Firms like Sequoia investing in direct competitors (OpenAI and Anthropic) shows that late-stage venture has evolved. When taking small, non-board seat stakes for hundreds of millions, firms act like public market funds, buying a portfolio of category leaders without the information access that would create a true conflict.

True alpha in venture capital is found at the extremes. It's either in being a "market maker" at the earliest stages by shaping a raw idea, or by writing massive, late-stage checks where few can compete. The competitive, crowded middle-stages offer less opportunity for outsized returns.