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.

The fundamental risk profile shifts dramatically between venture stages. Early-stage investors bet against business failure, an idiosyncratic risk unique to each company. Late-stage investors are primarily betting on public market multiples and macro sentiment holding up—a systematic risk affecting all late-stage assets simultaneously.

In a hyper-competitive market, a VC's role isn't just to be supportive. Being an enabler who offers feel-good praise while ignoring competitive threats can lead to a 'death spiral.' The best board members are 'founder honest,' providing fact-based, clear-eyed analysis of the competitive landscape to force necessary action.

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.

Venture investors aren't concerned when a portfolio company launches products that compete with their other investments. This is viewed as a positive signal of a massive winner—a company so dominant it expands into adjacent categories, which is the ultimate goal.

Investor Eric Byunn argues against the VC obsession with backing companies pursuing "winner-take-all" monopolistic outcomes. He asserts that, demonstrably, most successful companies are built in markets with multiple winners. Being a strong number two or three can still lead to a fantastic outcome for founders and investors.

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.

VCs' herd mentality stems from a need for job security. To avoid looking foolish to their own partners, they often vet deals with competing VCs first. This cross-firm consensus-building is a defensive mechanism to avoid being fired for a 'stupid' deal.