Are Silicon Valley Angel Investors Colluding Over Deals?

from the meritocracy? dept

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." -- Adam Smith, the Wealth of Nations

Mike Arrington, over at TechCrunch, has a troubling story about an apparent meeting between some of the top angel investors in Silicon Valley, allegedly to collude on deals. Arrington was alerted to the meeting -- bizarrely held at a restaurant where anyone could see them -- and while he knows these guys well, they were clearly unhappy to see him and wouldn't talk to him at all. After he spoke to some investors later, he got the scoop on what was happening:
This group of investors, which together account for nearly 100% of early stage startup deals in Silicon Valley, have been meeting regularly to compare notes. Early on it was mostly to complain about a variety of things. But the conversation has evolved to the point where these super angels are actually colluding (and I don't use that word lightly) to solve a number of problems, say multiple sources who are part of the group and were at the dinner. According to these souces, the ongoing agenda includes:
  • Complaints about Y Combinator's growing power, and how to counteract competitiveness in Y Combinator deals
  • Complaints about rising deal valuations and they can act as a group to reduce those valuations
  • How the group can act together to keep traditional venture capitalists out of deals entirely
  • How the group can act together to keep out new angel investors invading the market and driving up valuations.
  • More mundane things, like agreeing as a group not to accept convertible notes in deals (an entrepreneur-friendly type of deal).
  • One source has also said that there is a wiki of some sort that the group has that explicitly talks about how the group should act as one to keep deal valuations down.
As Arrington notes, this seems like a classic case of collusion and price-fixing. He doesn't name names, but if you're talking about the 15 angels who represent most of the early stage startup deals, it's not difficult to put together that list if you spend any time in startup circles. Arrington notes that some of the participants he spoke to said they were uncomfortable with the meetings, and there to "gather information, not participate," but it's still troubling. One bit of disclosure here, while I don't know who was at the meeting, if Arrington is being accurate in saying that they represent nearly all of the early stage deals, there's a very good chance that at least one of Techdirt's investors would have been involved.

While there are plenty more angels in Silicon Valley than just 15, it is true that, these days, companies getting investments from some of the "top" angels is seen as the ticket needed to move up the chain to big name venture capitalists as well. So hearing that a group of these investors may be colluding to effectively fix pricing is bad news for the supposed "meritocracy" of funding in Silicon Valley, and should be seen as a pretty serious problem.

Along those lines, I should say kudos to Arrington for publishing such a story. While he doesn't name names, these investors are the key sources for many of his stories, so publishing this story is probably burning some bridges with sources. It's good to see that he wouldn't let that get in the way (not that I thought he would -- Mike's always been great in that a good story trumps all other concerns, which is highly admirable).


Reader Comments (rss)

(Flattened / Threaded)

  1.  
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    Christopher Gizzi (profile), Sep 22nd, 2010 @ 7:49am

    Attracting Attention To Themselves

    I have to say I've always like TechCrunch and Arrington. They've always seemed like straight-laced reporters. I know lots of people don't like Mike and his news organization but they cover and scoop the stories that interest and matter to me the most. And they appear to do it with integrity.

    Every industry has a dark side - most of us can't see it and therefore, we forget its there. I'm sure this article hasn't made them more friends. In fact, I think I saw some tweets about this last night but didn't understand the context because I haven't read TechCrunch since yesterday afternoon - NY time.

    The sad part for me is that I've always thought the startup cultures and the VC industry in general was mostly a good system; I forgot about the dark side myself.

    I hope the participants of this meeting are exposed somehow and their reputations tarnished. And let's hope the feds don't feel the need to regulate VCs anymore than they already want to. VC investors would be wise to not attract the government with oligopolistic practices.

     

    reply to this | link to this | view in thread ]

  2.  
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    Dark Helmet (profile), Sep 22nd, 2010 @ 7:54am

    Re: Attracting Attention To Themselves

    "The sad part for me is that I've always thought the startup cultures and the VC industry in general was mostly a good system; I forgot about the dark side myself."

    It's funny, because I've always thought of VCs as the exact opposite, but in a way that this still surprised me. I kind of always thought of them as shrewd businessmen and women, cutthroat folks that were highly motivated and highly individualistic. The "my wang is bigger than yours" type of folks. (not that all of that is bad; I think we need those kinds of people in business).

    To see this kind of cooperation kind of surprised me....

     

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  3.  
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    Christopher Gizzi (profile), Sep 22nd, 2010 @ 8:15am

    Re: Re: Attracting Attention To Themselves

    I should probably clarify, then.

    For me, Good = Efficient systems where up and coming startups get the appropriate valuation and strong backing from healthy investors vs. a weak system where there isn't much competition and everyone gets screwed but one or two groups.

    I know that business is a kill or be killed world. I've worked on Wall St. for years at all types of companies & roles; I know its not always pretty. But I still felt as if a good startup with real potential would be something VCs would want to nurture - and not just give them low valuations to save money now or make more down the road.

    Besides, a lot of people who start these companies what to be passionate about what they do. The VCs want good terms but if there isn't a happy middle, no one will get what they want. The founders feel screwed, they lose interest in their goals, the startup fails, and the VCs lose money. Everyone loses.

     

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  4.  
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    Chris Maresca (profile), Sep 22nd, 2010 @ 8:53am

    Well, duh

    This has been going on for years, and not just with angels. Everyone always compares notes on companies and asks about what they are interested or working on. I don't know how many times I've been in VC meetings where one or more of these topics are discussed.

    It's not usually this structured (and I have my doubts as to whether is was actually this structured), but most investors always seem to come back to the same themes of backstabbing successful firms, lowering valuations and keeping outsiders away from good deals.

    As for Y Combinator, their deals always seem to be pretty crappy for entrepreneurs, but no crappier than everyone elses. They do seem to have better PR, however.

     

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  5.  
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    DrJoe047 (profile), Sep 22nd, 2010 @ 9:05am

    Re: Well, duh

    "pretty crappy for entrepreneurs" Compared to what? some ideal world where funding rains down like manna each morning? I think that YC has really been a game changer. They have established (and published) standard terms that are generally pretty favorable toward founders, though not infinitely so.

    They may only have been the first of an inevitable trend but they are the FIRST and, if you count Paul Graham's work as YC's work, then you have to give them credit for actually moving the ball down the field. Not only is Paul putting his money where his mouth is, he is driving the discussion on blogs all over the web. He publishes an essay and within short order a lot of influential blogs are talking about the exact same topic (this blog and TechCrunch included). I am not faulting the blogs, but I am pointing out how critical YC has been.

    These angels are in effect admitting that YC has had outsized impact (if Arrington is to be believed).

    Joe J.

     

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  6.  
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    Chris Maresca (profile), Sep 22nd, 2010 @ 9:13am

    Re: Re: Well, duh

    Let's see - $250,000k for 30% of your company? That's what someone I know was recently offered...

    It's a great deal for Phil, not so much for you, the entrepreneur. Sure, he's published a lot, and I'll give him credit for open sourcing some legal docs, but it doesn't mean he's god's gift to entrepreneurs.

    In fact, I would say that off the 70+ startups I've advised, pretty much none of the founders got good deals. Why? Because venture money of any kind is pretty much always a bad deal for entrepreneurs.

    As an aside, I don't think that YC has been the primary driver of changes in startup investing, they were just the first to capitalize on wider industry changes.

     

    reply to this | link to this | view in thread ]

  7.  
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    Chris Maresca (profile), Sep 22nd, 2010 @ 9:35am

    Re: Re: Re: Well, duh

    Since I can't edit my post, I should make it clear that I was talking about typical early stage angel terms.

    They are all in a similar range, YC does $12k for 6%, others are doing $250k for 30% (which is, ironically, better than YC's terms), and it's all very expensive money for entrepreneurs.

    Honestly, it would be MUCH cheaper just to max out credit cards and sell all your stuff.

    Chris.

     

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  8.  
    identicon
    RI, Sep 22nd, 2010 @ 11:15am

    since the genesis of MarkII

    It's been going on, with a degree of illicit oversight for some time.

     

    reply to this | link to this | view in thread ]

  9.  
    identicon
    darryl, Sep 23rd, 2010 @ 6:22am

    Quick get those tin hats on !!

    Oh no put your tin hats on, a group of investors are talking to each other !!! The sky is falling..

    I mean, really SO WHAT Mike, investors meets and make agreements all the time, they talk to each other work out what they think are worthy investments, and may collaborate and pool resources to spread risk and profit.

    Its called business, They could always go away or find some other market to invest in, that would be a great help!!..

    So the next time mike you attend a 'comference' of some kind make sure you tell everyone upfront that you are not trying to collude with anyone, and the facts and your comments should be ignored and no one should agree with them because that would be collusion.. what a joke... as usual Mike it must be a slow week for pro-pirate set.

     

    reply to this | link to this | view in thread ]

  10.  
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    Jake, Sep 26th, 2010 @ 7:23am

    Libertarian Point of View

    From a libertarian or free market capitalist perespective, they (VCs) did nothing wrong.

     

    reply to this | link to this | view in thread ]


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