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).

Filed Under: angel investing, collusion, price fixing, silicon valley, venture capital