If a venture capital firm is currently funding a company in category X, are they allowed to fund another company in the category X who are direct competitors? Would the first company be able to sue this venture capital, etc?
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Yes, this is permitted and common. For example, see the portfolio of Andreessen Horowitz. It includes Facebook, Instagram (later acquired by Facebook), Pinterest, Skype, Slack, and hundreds more in various tech specializations. It also includes OpenAI (developer and host of ChatGPT) and character.ai (a chatbot service).
The portfolio of Kleiner Perkins includes SpaceX and SpinLaunch; Stripe and Plastiq (two payment processing companies).
Jen
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