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<?php
/**
 * Create the image attachment and return the new media upload id.
 *
 * @author Joshua David Nelson, josh@joshuadnelson.com
 *
 * @since 03.29.2017 updated to a class, utilizing code from Takuro Hishikawa's gist linked below.
 *
 * @see https://gist.github.com/hissy/7352933
 * 
 * @see http://codex.wordpress.org/Function_Reference/wp_insert_attachment#Example
 * 
 * @link https://joshuadnelson.com/programmatically-add-images-to-media-library/
 */
class JDN_Create_Media_File {
	
	var $post_id;
	var $image_url;
	var $wp_upload_url;
	var $attachment_id;
	
	/**
	 * Setup the class variables
	 */
	public function __construct( $image_url, $post_id = 0 ) {
		
		// Setup class variables
		$this->image_url = esc_url( $image_url );
		$this->post_id = absint( $post_id );
		$this->wp_upload_url = $this->get_wp_upload_url();
		$this->attachment_id = $this->attachment_id ?: false;
		
		return $this->create_image_id();
		
	}
	
	/**
	 * Set the upload directory
	 */
	private function get_wp_upload_url() {
		$wp_upload_dir = wp_upload_dir();
		return isset( $wp_upload_dir['url'] ) ? $wp_upload_dir['url'] : false;
	}
	
	/**
	 * Create the image and return the new media upload id.
	 *
	 * @see https://gist.github.com/hissy/7352933
	 *
	 * @see http://codex.wordpress.org/Function_Reference/wp_insert_attachment#Example
	 */
	public function create_image_id() {
		
		if( $this->attachment_id )
			return $this->attachment_id;
		
		if( empty( $this->image_url ) || empty( $this->wp_upload_url ) )
			return false;
		
		$filename = basename( $this->image_url );
		
		$upload_file = wp_upload_bits( $filename, null, file_get_contents( $this->image_url ) );
		
		if ( ! $upload_file['error'] ) {
			$wp_filetype = wp_check_filetype( $filename, null );
			$attachment = array(
				'post_mime_type' => $wp_filetype['type'],
				'post_parent' => $this->post_id,
				'post_title' => preg_replace('/\.[^.]+$/', '', $filename),
				'post_content' => '',
				'post_status' => 'inherit'
			);
			$attachment_id = wp_insert_attachment( $attachment, $upload_file['file'], $this->post_id );
			
			if( ! is_wp_error( $attachment_id ) ) {
				
				require_once( ABSPATH . "wp-admin" . '/includes/image.php' );
				require_once( ABSPATH . 'wp-admin/includes/media.php' );
				
				$attachment_data = wp_generate_attachment_metadata( $attachment_id, $upload_file['file'] );
				wp_update_attachment_metadata( $attachment_id,  $attachment_data );
				
				$this->attachment_id = $attachment_id;
				
				return $attachment_id;
			}
		}
		
		return false;
		
	} // end function get_image_id
}

<?php 
/** 
* Sets an image uploaded through the Gravity Forms upload field (not the post image field) as the post featured image.
* Works with the regular upload field and Ajax Upload for Gravity Forms: https://wordpress.org/plugins/ajax-upload-for-gravity-forms/
*
* @author Sallie Goetsch, sallie@wpfangirl.com
*
* Uses Joshua David Nelson's JDN_Create_Media_File class. 
*
* @see https://gist.github.com/joshuadavidnelson/164a0a0744f0693d5746#file-create-image-id-php
* 
*/

add_action('gform_after_create_post_4', 'set_post_featured', 10, 3 ); // Substitute your form ID for the '4'
function set_post_featured($post_id, $entry, $form) {
    $post = get_post($post_id);
    $image_url = rgar($entry, '55'); // Substitute your upload field ID for the '55'
    $create_image = new JDN_Create_Media_File( $image_url, $post_id ); // See create-image.php for this class
    $image_id = $create_image->attachment_id;
    set_post_thumbnail($post_id, $image_id);
}