- Venture firms are increasingly investing in competitive LLM startups such as OpenAI and xAI.
- Traditionally, VCs avoided backing competitors like Uber and Lyft.
- Some VCs argue that investing in multiple LLMs is strategic, while others see it as unethical.
When entrepreneurial firms pull out their checkbooks, there has traditionally been an unspoken rule: Don’t back a competitor. Choose Lyft or Uber, but not both.
“I’ve never seen it before and I assumed no one would,” said Joe Aaron, founding partner at TRAC. “Would you want a company that invested with you to invest in your competitor?”
However, this norm appears to be disappearing as investors pour billions into competing large language modeling (LLM) startups.
I’m seeing more VC investment in competing companies than ever before (all in AI)
— Sheel Mohnot (@pitdesi) October 18, 2024
Andreessen Horowitz has backed OpenAI, Elon Musk’s XAI and Safe Superintelligence (SSI), the AI startup co-founded by former OpenAI chief scientist Ilya Sutskever. Sequoia Capital invested in OpenAI in 2021 and then backed SSI in September. Fidelity and Ark Invest have stakes in OpenAI and XAi. Sound Ventures and Wisdom Ventures backed both OpenAI and Anthropic.
“I think it’s really flawed and very unethical,” said Umesh Padval, managing director at Thomvest Ventures, which backed Cohere, a Canadian LLM developer. “I’m never going to invest in Anthropic or OpenAI, because how can you say ‘I’ll be all in with you, but I’m hedging my bet.’
For Padval, investing in similar companies is an affront to what he sees as the central function of a VC, which is to identify a company and be strongly committed to it.
“Hedging the bet happens when people are not convinced of their thesis,” Padval said. “If the company doesn’t do well, that’s venture capital. But to cover yourself, don’t make another company.”
Padval is also concerned about VCs being privy to confidential information and potentially sharing it with a competitor.
“People make it sound like it’s firewalls, but there aren’t firewalls,” he said.
However, a person whose firm invested in both OpenAI and Anthropic denied they had access to private information.
“We really don’t know the inner workings of any company to a degree where it would be worrisome that we would be carrying information to the enemy camp,” said the investor, who asked not to be identified because they were discussing internal agreements. .
OpenAI reportedly asked investors in its latest funding to refrain from investing in five competitors, something it is uniquely positioned to do, according to Gregg Hill, co-founder and managing general partner at Parkway Venture Capital.
“OpenAI wouldn’t be making such a claim if they couldn’t secure the billions needed for their funding rounds,” Hill said. “Ultimately, the market will decide what succeeds.”
Some VCs have no problem investing in LLM competitors
It may make sense to back multiple LLMs at this relatively early stage because there won’t be a single winner, argues S. Somasegar, managing partner at Madrona Ventures.
“Every company that’s building an AI-driven app is using multiple models, and no one thinks they’re going to limit themselves to using just one model,” Somasegar said. “I think the investment rules may have been more murky in these early days, and I expect they will be resolved as we understand more about what these model companies are developing into.”
There is also the issue of money, with only a handful of firms able to write the colossal checks required to fund LLM companies. The best have raised so much money that investing in them is equivalent to buying shares of similar publicly traded companies on the NASDAQ, said a VC at a firm that has backed both OpenAI and xAI.
“You wouldn’t do that for small private companies where the next round really matters, but once you break billions of dollars, honestly, what’s the difference? said the VC. “They can be public companies and how much money they’ve raised.”