Valkyrie III, like her predecessor, was designed by G. L. Watson for the Earl of Dunraven. The new Valkyrie was a large, powerful yacht with long overhangs on bow and stern to give her greater directional stablility in fresh winds. The underside of the hull was rather flat in comparison to other designs of the time.

In the first race Defender and Valkyrie sailed side-by-side until the sea became rough, giving the American boat an advantage. On the home run, Defender pulled out a comfortable eight minute lead, and went on to win by the same margin. The second and third races were to lead to one of the controversies that are such a feature of America's Cup racing. In the second, just before the race began, Valkyrie had the weather position with Defender a little behind her. What appears to have happened next was that Valkyrie, so as not to cross the line before the gun was fired, bore to leeward. Defender dropped off a little, but when the gun was fired Valkyrie's mainsail boom end swung out and caught the topmast stay of Defender, which then broke. A protest was raised immediately by Defender's skipper, but the race continued with the Defender's crew carrying out emergency repairs. Valkyrie was to reach the finish line two minutes ahead of her rival, but the end of the race merely marked the beginning of arguments on shore. The committee finally resolved that the accident had been Valkyrie's doing and her victory was thus disqualified. This was a bitter defeat for Dunraven. When the third race began, Valkyrie came to the start line but immediately after crossing it, hauled down her racing flag, thereby not only curtailing the race but concluding the series.