Venture capital firms are abandoning a long-standing industry norm by simultaneously investing in competing large language model (LLM) startups, marking a significant shift in investment strategy within the AI sector. Traditionally, VCs adhered to an unspoken rule of exclusivity—backing either Lyft or Uber, but never both competitors. However, as billions pour into the AI industry, this principle is rapidly eroding.
Major investment firms are now hedging their bets across multiple AI companies. Andreessen Horowitz has invested in OpenAI, Elon Musk’s xAI, and Safe Superintelligence (SSI), the startup co-founded by former OpenAI chief scientist Ilya Sutskever. Sequoia Capital backed OpenAI in 2021 and then invested in SSI in September 2024. Meanwhile, Fidelity and Ark Invest hold stakes in both OpenAI and xAI, while Sound Ventures and Wisdom Ventures have backed both OpenAI and Anthropic.
This trend has sparked heated debate within the venture capital community. Umesh Padval, managing director at Thomvest Ventures (which backed Canadian LLM developer Cohere), called the practice “really flawed and very unethical.” He argues that the central function of a VC is to identify a company and commit strongly to it, stating that “hedging of the bet happens when people are not convinced about their thesis.” Padval also expressed concerns about VCs accessing confidential information and potentially sharing it with competitors, dismissing the notion of effective firewalls.
However, defenders of the practice offer different perspectives. One investor whose firm backed both OpenAI and Anthropic denied having access to sensitive information that could benefit competitors. S. Somasegar, managing partner at Madrona Ventures, argues that backing multiple LLMs makes sense at this early stage because there won’t be a single winner—companies building AI applications use multiple models rather than restricting themselves to one.
The sheer scale of capital required plays a crucial role in this shift. Only a handful of firms can write the massive checks needed to fund LLM companies. One VC compared investing in these billion-dollar AI startups to buying shares of public companies on NASDAQ, suggesting traditional private company investment rules don’t apply at this scale. OpenAI reportedly asked investors in its latest funding round to refrain from backing five competitors, a request it can make only because of its strong position in securing billions in funding.
Key Quotes
I have never seen it before, and I assumed no one would do it. Would you want a company that invested with you investing in your competitor?
Joe Aaron, founding partner at TRAC, expressed surprise at the emerging trend of VCs backing competing AI companies, highlighting how this practice violates traditional venture capital norms of exclusivity and commitment.
I think it’s really flawed and very unethical. I will never invest in Anthropic or OpenAI, because how can you say ‘I’m going to be all in with you, but I’m hedging my bet.’
Umesh Padval, managing director at Thomvest Ventures (which backed Cohere), strongly criticized the practice of investing in competing LLMs, arguing it undermines the fundamental VC principle of full commitment to portfolio companies.
Every company that is building an AI-driven application is using multiple models, and nobody thinks they are going to restrict themselves to using just one model.
S. Somasegar, managing partner at Madrona Ventures, defended the practice by explaining that the LLM market differs from traditional winner-take-all scenarios, as companies typically use multiple AI models rather than relying on a single provider.
You wouldn’t do this for small private companies where the next round really matters, but once you break billions of dollars, honestly, what’s the difference? They might as well be public companies even how much money they’ve raised.
An anonymous VC whose firm backed both OpenAI and xAI justified the practice by arguing that billion-dollar AI startups operate more like public companies, making traditional private company investment rules less applicable at this unprecedented scale.
Our Take
This development reveals a critical inflection point in AI investment strategy that mirrors the industry’s unique characteristics. The traditional VC model was built on scarcity—limited capital, clear market winners, and the need for focused commitment. But the LLM space operates differently: it requires unprecedented capital, serves diverse use cases, and may support multiple winners simultaneously.
The ethical concerns are valid but may be somewhat antiquated. In an industry where open research, talent mobility, and rapid information dissemination are already the norm, the idea that VC firewalls protect competitive secrets seems optimistic at best. The real question isn’t whether this practice is ethical by old standards, but whether it accelerates or hinders AI innovation. By ensuring multiple approaches receive funding, we may see faster progress and more diverse solutions. However, if this leads to reduced VC accountability and strategic guidance, portfolio companies could suffer. The market will ultimately decide whether this new investment paradigm serves the AI industry’s long-term interests.
Why This Matters
This shift in venture capital investment strategy represents a fundamental transformation in how the AI industry is being funded and developed. The willingness of major VCs to back competing LLM startups signals both the massive potential and uncertainty surrounding which AI models will dominate the market. Unlike previous technology waves where winner-take-all dynamics were expected, investors now believe multiple LLM providers will coexist, each serving different use cases and customer needs.
The ethical concerns raised by traditional VCs like Umesh Padval highlight potential risks around information sharing and conflicts of interest that could impact innovation and competition. If investors have access to confidential strategic information from multiple competitors, it could create unfair advantages or inadvertently influence market dynamics.
For the broader AI ecosystem, this trend reflects the unprecedented capital requirements of developing competitive LLMs, which demand billions in funding that only the largest investment firms can provide. This concentration of capital and the willingness to hedge bets may accelerate AI development by ensuring multiple approaches receive funding, but it also raises questions about whether traditional VC accountability and commitment still apply in the AI era. The outcome will likely shape how future transformative technologies are funded and which investment norms survive.
Recommended Reading
For those interested in learning more about artificial intelligence, machine learning, and effective AI communication, here are some excellent resources:
Recommended Reading
Related Stories
- OpenAI’s Valuation Soars as AI Race Heats Up
- Amazon to Invest Additional $4 Billion in AI Startup Anthropic
- Elon Musk’s ‘X’ AI Company Raises $370 Million in Funding Round Led by Himself
- Mistral AI Launches Le Chat Assistant for Consumers and Enterprise
- The Artificial Intelligence Race: Rivalry Bathing the World in Data
Source: https://www.businessinsider.com/vcs-are-hedging-their-bets-backing-competing-llms-2024-10