I am late in joining this thread and will add only a few observations to supplement the many good comments already here:
1. Competitor collusion and express agreements to restrict the freedom of each to compete (i.e., horizontal contractual dealings) do indeed expose the colluding parties to potentially serious liabilities under the Sherman and FTC Acts. If that is what is going on here, then Mr. Arrington has fired a major warning shot to those involved asking, in effect, "are you insane to let yourselves get caught up in this sort of activity?"
2. The irony here is that competitors are completely free to have contacts with one another, to discuss industry problems, and even to work on solutions for how best to handle such problems, provided that such contacts aren't made for an anti-competitive purpose. This is how trade associations work, among other things, and angel investors can and do meet all the time to discuss common issues and problems. Such benign meetings and contacts are very different from colluding to restrict their ability to compete freely in the marketplace through agreements to suppress valuations, etc.
3. Parallel action by competitors is in itself normally quite harmless and does not subject them to liabilities (for example, the fact that angel investors tend to use common sets of investment documents, tend as a group to dislike convertible notes, etc.). Companies having nothing to complain about legally from the fact that a particular angel investor happens to engage in practices in common with others in the industry that founders happen not to like. All this changes, though, if the competitors (i.e., the angel investors) have engaged in suspicious activities such as secret meetings among themselves to discuss overt ways to limit competition, etc.
4. Nothing under the law stops any one of these angel investors from deciding as a business matter to form a new fund along with others of such investors and to engage through that fund as a competitor in the venture financing industry. In such case, the investors are no longer competitors and have simply combined forces to compete as a different entity in the industry. If, however, the parties effectively remain competitors and simply form a jointly controlled venture whose aim is to serve as a vehicle by which they might collude in suppressing competition, that vehicle would be unlawful.
Putting all this together, the normal give and take among the myriad angel investors in the Valley and elsewhere is lawful and beyond reproach, even when they do meet to discuss problems. Meetings in a smoke-filled room as part of concerted efforts to restrict normal competitive activities by the participants, on the other hand, are almost blatantly illegal on the face of it and especially so when the participants are among the most prominent players in the industry.
It may well be that some or most of these participants hadn't really realized that they were moving from the benign to the illegal in participating in such meetings over time, and this is where it seems that Mr. Arrington is doing a good turn for them by calling them out before they do something that is irretrievably wrong. Just speculating on this last point but that is how the tone of the piece strikes me.
"3. Parallel action by competitors is in itself normally quite harmless and does not subject them to liabilities."
Not sure what your sources are, but courts have ruled that parallel action can be sufficient evidence of conspiracy under Section 2 of the Sherman Act. See e.g. American Tobacco v. United States (1946), available here:
"[The conspiracy's] existence was established, not through the presentation of a formal written agreement, but through the evidence of widespread and effective conduct on the part of petitioners in relation to their existing or potential competitors."
If I remember correctly from my anti-trust class last year, the American Tobacco precedent still stands. You don't need written or audio evidence to get a conviction; anti-competitive behavior in the marketplace is sufficient.
Concerted action can take as many forms as human imagination and ingenuity permit and does not require a formal agreement. And parallel action, coupled with other evidence of collusion (e.g., secret meetings or other suspicious conduct) can be the basis of an antitrust violation.
That said, normally, the mere fact of parallel action is not problematic unless there is more to show suspicious activities. The venture financing industry has many customs and patterns of long-standing, and its participants will happen to conform to them for a variety of reasons having nothing to do with collusion aimed at suppressing competition.
So essentially the red flag here is the secret meeting, right? That is, if they had acted in exactly the same way but openly, with a contract and a trade association and so on, this would not be illegal?
My impression is that the Supreme Court's significantly pared that back in further cases. Copperweld Corp. v. Independence Tube (1984) held that parallel action was inconclusive evidence of antitrust violations, though it could serve as circumstantial evidence. In Bell Atlantic v. Twombly (2007), the Court quoted that approvingly, and held that an allegation of parallel action, without a further plausible allegation of a conspiracy to engage in the parallel action consciously, wasn't even enough to state an antitrust claim sufficient to survive immediate dismissal, let alone prevail.
I'm hardly a legal expert, but I do recall some law-prof bloggers around 2007 claiming that it was confirmation that the parallel-action-suggests-conspiracy rule was dead and buried, even if not explicitly overturned.
I find this somewhat dubious; I wasn't there, but if I was one of those guys, I'm not sure I'd continue the "evil meeting" after Michael stumbled in uninvited. If he came after the meeting ended, why weren't they all "just about to leave."
Having said that, I'm sorry if my confusion gives a way my ignorance of the subject, but are these angels selling anything to a marketplace? I thought angels invested their money. If that's the case, aren't they colluding to the terms of their buying, as a group? Or at least to loosely manage the terms of buying? If that is illegal, why does it apply to angel investing but not, say, Groupon? What I don't understand is what is their "price" that they are colluding to "fix"? I thought antitrust was for the collusion for the price asked, not price willing to pay.
Interesting questions... IANAL, but I imagine they're colluding to bring down the valuations of startups, therefore essentially fixing the "price" of their money, to be paid for in startup equity.
If I, and others, say your company is worth a million dollars, then I'm fixing the price of my $500,000 at 50% of your company.
IANAL(E), but this scenario would seem to be more of a concern if startups in Silicon valley got together over dinner to deny deals that didn't offer similar terms and prices in dollars for securities of all startups represented at said dinner simultaneously.
As for angels fixing the "price of their money" I don't understand how antitrust applies to this anymore than it would to, say, how LIBOR is determined.
If antitrust applies to colluding on the dollar amount to be paid OUT instead of price asked for money coming in, then if I start a boycott of something (colluding to pay $0) am I guilty of violating antitrust laws?
As I understand it (not much, I admit), antitrust applies to goods and services, not cost of money. If antitrust applied to cost of money, the Federal Reserve would not exist since it's basically an extension of the member banks that make up its institutional board of directors (not board of governers). All they do is get together and fix the price of money to be printed and lent out to member banks.
Also, this whole "I stumbled in on a secret meeting of powerful men conspiring to start a revolution" thing is somewhat suspect; throughout history this gambit, if it actually happened that way, is usually either desperate grab at 15 minutes of fame (which seems unlikely given Michael's popularity), an attempt to gain instant credibility on some esoteric but useful new subject ("I was the only outsider privvy to what happened there, so you can trust me") or, unfortunately, a cynical move feigned by the men in the room to inspire hasty and possibly faulty reactionary stances by the supposed target of their "envy".
I could be wrong though. I just can't believe guys who are careful enough to get to such a position in life would all simultaneously get so careless. On the same day. In the same place.
I don't know if care has a lot to do with it. A lot of these folks got successful by taking risks without deep consideration of the consequences (for better or worse). That's why they pay lawyers to tell them when they're pushing the boundaries too much, but in this case the lawyers obviously weren't in on the proceedings.
Think of the stock market. That's certainly a marketplace. It's made up of investors seeking to earn a return on their money by investing in companies. Think of the illegalities involved in collusion to manipulate the stock market. Now think of Silicon Valley as a less formal/regulated stock market...
With Groupon nobody is asked to not buy or otherwise participate in the market unless done through Groupon. Instead, it's like a grocery store co-op; members pool their money to get more buying power. This doesn't mean they agree to refrain from shopping elsewhere, as that would be collusion/conspiring to produce a market effect. IANAL
If I have an investing club and we come to define an investment approach, say, what stocks we like and what we think they should be valued at, are we colluding to price fix the market? If I think a company is over priced and I am in charge of executing trades for my investing club, whose members unanimously agreed not to buy the stock in question until it fell down say, $20 more in price - are we colluding? Yes. Colluding to price fix? No. We're simply colluding not to participate in the buy side. That may or may not lead to sellers slowly changing their asking price. But that's a two-way street. I don't see the illegality according to anti-trust. Now if every major instututional house/hedge/mutual/pension fund that owned that stock got together and colluded to refuse to SELL us any stock until we agreed to their higher price, that I understand is illegal. They are fixing the price literally. But I don't see how us refusing to participate in a transaction on the buy side is illegal whether we have 5 members or 5 million.
Saying that the angels are colluding to price fix buys into Michael's assertion that "together, the men in that room account for nearly 100% of all angel deals". That means that their "deals" are the commodity in question, and they are free to do as they wish. If it's their money, then it's hard to make the claim that their money is the market. There's certainly more money in the world than theirs.
"Look, you and I both know your company is worth $50 million. But I only want to pay $10 million, and I've already worked out a deal with my competitors so they won't bid any more than that either. We own the market for investment, so you can take it or your company can die for lack of funding."
You don't see a problem with this kind of artificial market manipulation? This is no longer a market; it short circuits true capitalism and only serves to siphon gains from the seller (in this case, the company's founders) to the buyer, who will turn around and effectively try to resell (or otherwise exit) the company for profit.
Everyone seems to be convinced that price fixing only applies to sellers. That's wrong. It firmly applies to both selling and buying. It's fundamentally about market manipulation; taking steps to undermine the economy of the system for direct personal gain. That kind of behavior destroys wealth and erodes confidence in the marketplace.
"The article was a fun read, but it is a false claim that this is illegal. Collusion, price fixing, and dividing markets is only illegal on the selling side. Think about how people and groups are able to band together for purchasing power and special treatment when buying goods/services. Its not illegal.
Worth noting thought that if this price manipulation happened in relation to a company with over a 100 investors, SEC regulations would begin to apply and this behavior would be illegal"
"Collusion, price fixing, and dividing markets is only illegal on the selling side."
IANAL, but didn't Standard Oil got broken up largely for being a monopsony? In fact the first two complaints from the DoJ were about sell-side issues:
"Rebates, preferences, and other discriminatory practices in favor of the combination by railroad companies; restraint and monopolization by control of pipe lines, and unfair practices against competing pipe lines; contracts with competitors in restraint of trade; unfair methods of competition, such as local price cutting at the points where necessary to suppress competition; [and] espionage of the business of competitors, the operation of bogus independent companies, and payment of rebates on oil, with the like intent."
I know this was pointed at grellas, but I think this is a misunderstanding when we look at price fixing and collusion. The illegality of collusion is secretly forming agreements to benefit competitors at the expense of other parties. Words like defraud can succinctly help you understand whether it is illegal or not when looking at these agreements.
Grellas, would there have to be evidence that the participants were acting anti-competitively, or is being in the room enough? Arrington says that a few of the folks there were uncomfortable with what was going on, and were maybe there just to see what was happening.
Assuming the meeting had an illegal purpose (which is a major assumption at this point), one might infer that anyone present was complicit in that illegal purpose. In my view, that by itself would not normally be enough to subject someone to liability, especially if the participant disclaims affiliation with the group and thereafter does not act in concert with it.
The only observation I've read is that several angels in a bar didn't want to talk to Mike Arrington about why they were meeting. New fund, maybe. Shared problems about Silicon Valley deal flow and seed price inflation, likely.
Collusion is a bit of a jump, and suggests far more market power than a roomful of angels can have over state, regional, national, or global startup macro pricing trends.
Does it matter if the participants have monopoly power over the market? I have a hard time believing Arrington's claim that "ten or so" angels control "nearly 100% of early stage startup deals in Silicon Valley". If they control lets say only 50% of this market would it still be illegal collusion?
It is not required that the participants have monopoly power for them to transgress the law on this point. I agree with you that the "nearly 100% of the early stage deals in Silicon Valley" statement is wildly overstated but this should not affect the fundamental legal analysis here.
Congratulations to PG & company. When I first met Paul years ago, he was musing about spam filters and the finer points of a well-designed lisp. Now he apparently has the top 10 angels in Silicon Valley running scared of him.
The interesting thing is unlike that group of Angels apparently in the bar PG's interests are less about helping himself, and more about helping entrepreneurs. From an essay by PG entitled "Why YC":
The real reason we started Y Combinator is one probably only a hacker would understand. We did it because it seems such a great hack. There are thousands of smart people who could start companies and don't, and with a relatively small amount of force applied at just the right place, we can spring on the world a stream of new startups that might otherwise not have existed.
In a way this is virtuous, because I think startups are a good thing. But really what motivates us is the completely amoral desire that would motivate any hacker who looked at some complex device and realized that with a tiny tweak he could make it run more efficiently. In this case, the device is the world's economy, which fortunately happens to be open source.
YC's greatest hack is identifying founder material based on technical rather than social proof (the YC app asks for an example of the coolest thing you've ever built, not an example of a cool person that thinks you are cool). This hack is possible thanks to a judges panel full of real nerds. How many super angels or VC's can claim to have the same?
I agree that YC are able to identify great hackers and great founders more easily because they are these things themselves. What's little recognized is how big a difference this is between YC and the other YC-like funds.
Yes. I had a colleague apply for TechStars and her takeaway from the interview was "he was really focused on where the business was." Doesn't seem in line with what I've heard about YC's primary interest (it's not the business model).
It seems kind of obvious that most successful startups don't succeed via the business model they started with. And that great founders can change business models more easily than great business models can change founders. These things are so obvious that they're cliches, in fact, but that doesn't mean that they're common practice.
I don't think anybody's stated interests should be taken as an indicator of their true interests. In this case, with PG, I do believe that his stated intentions are sincere. But there is often so little correlation between actual and stated intentions, that I don't take any such statement at face value.
Correct me if I'm wrong, but isn't it likely that the angels involved also make up a strong percentage of the people who invest on Demo Day in post-YC companies? How can it be a "PG vs Angels" situation when the parties involved are likely some of YC's portfolio companies biggest "supporters"?
One of the outputs from the YC process is better educated founders who have a lot more guidance in negotiating through a deal.
Even if the deal flow was exactly the same, just having the founders suffering less from information assymetry would be a stone in the shoe of the Angels.
Think of it this way : if YC did all the same things, but also turned founders into being Angel patsies at dealtime, do you think they would be upset about it? I would guess it's the information about how to negotiate, and what a good deal looks like is the problem. I'm sure they love the concept of demo-day to go deal shopping, but would prefer it if the products didn't talk back.
Correct me if I'm wrong, but isn't it likely that the angels involved also make up a strong percentage of the people who invest on Demo Day in post-YC companies?
Yes, I believe so.
How can it be a "PG vs Angels" situation when the parties involved are likely some of YC's portfolio companies biggest "supporters"?
That question might be better put to those Angels in the bar...
I'm not defending the angels involved by any means; I actually think it's a great thing that this has been exposed if it is indeed what's been going on. The easy access to YC companies may in fact be what emboldened them to act in this manner in the first place. Once this all plays out, I think it's safe to assume that at least a few of the angels in question are going to have to answer for their actions. Should be interesting to hear what they have to say.
Yes. They are running scared of the growing threat of the Ylluminati. But since they have 100% of all the deals, they also seem to co-invest(?!?).
These anxious (yet all-powerful) group of angels and this unstoppable new seed-stage prominence. They form a closed loop. A loop closed off to venture capitalists and angels not at that meeting ... which is basically everybody.
Except Michael. He got away with his life intact and lived to warn us all.
Actually, I don't know what's scarier - the supposed collusion or the subtle dread that Y Combinator is supposed to evoke in my mind as I ponder the possibility of this event being true.
If it is true - maybe we should be side with these poor angels and help them before it's too late.
To paraphrase Woodrow Wilson, "Since I entered (angel investing), I have chiefly had (angel investor's) views confided to me privately. Some of the biggest men in the (Valley), in the Field of (IT) and (Venture Capital), are afraid of something. They know that there is a power somewhere so organized, so subtle, so watchful, so interlocked, so complete, so pervasive, that they better not speak above their breath when they speak in condemnation of it."
That something ... is Y Combinator.
Um ... no. The dark side doesn't suit you, Y Combinator.
Please stop.
I'm sorry. Maybe I've had too many beers tonight. But this is the kind of scenario that only comes out of the mind of a silicon valley PR firm.
(please don't downvote me too much ... I'd like to get above 100 karma points just once for a change! Noooo!)
I find it fascinating how the very qualities that lead people to call Michael Arrington an asshole are dramatically in evidence here. It takes a staggering immunity to social mores to walk in on a meeting of rich and powerful friends, friends who are connected to his own business in many ways (read: friends with leverage) and behave the way MA says he did, let alone go home and write that article. Very few people could do it. I'm not sure I could, to put it mildly. I particularly doubt if many (any) of Arrington's competitors ever would. It may take a character disorder to be able to act this way.
In an age when journalists grade themselves by which power-brokers deign to have lunch with them (anybody see David Brooks prattling about this on Charlie Rose the other night? lunch and dinner, he said) it's impressive to see anyone act like this. Especially if what he's saying is true and this really is a matter of right and wrong.
I have always felt MA had a certain...brashness, abrasiveness, assholish tone, whatever you want to call it... about him. You could feel it in his articles.
I now feel it is not only helpful but entirely necessary for him to develop that quality in his career path.
Kudos for pushing the boundaries Mr. Arrington. The evidence speaks for itself - you don't see this type of journalism in any industry anymore.
So a blogger gets a tip from a source, knows the people involved, acts on it and smells a rat. He sticks around and talks to a few people he knows, makes a few calls and gets a breaking story.
Sounds to me like bloggers are the new journalists and that traditional media is in big big trouble.
Read Manufacturing Consent or any of the books that have been written about the MSM since then. It's very much about old media verse new media.
If this were the NYT they'd probably tell Arrington he couldn't run the story because it'd interfere with either their ad sales or else their access to sources. For example, just look at how/why they covered up their knowledge of the warrantless wiretapping until after Bush got reelected.
Whereas with Arrington there's no one to tell him he can't do it because it's his blog, and because he's not part of some mega corporation the chances of a story like this killing the revenue of some part of his empire are infinitely lower.
>Sounds to me like bloggers are the new journalists
Journalism used to be considered the fourth branch of government, keeping the other branches and large institutions in check. Blogs are the startups of the journalism world.
As America moves from bureaucratic capitalism with large institutions to entrepreneurial capitalism with many small firms & independent players, the responsibility to call out unethical behavior is transferred from news companies to the individual.
a breaking story would name names...him not naming names just means he can use this as a hammer to get better terms for Techcrunch(either I get exclusive to every deal you guys do...or your names will be posted)
I would argue it's more ethical to discourage and prevent crime from ever happening in the first place. Seeking satisfaction from "catching the bad guy" (naming names) is to setup a market dependent on the need for new crimes.
Arrington did the right thing. It's not about whether he caught a criminal, it's about whether he prevented someone from becoming one.
Someone (maybe everyone) in that group knew what they were doing to be wrong.
I doubt that they will abandon their ethical choice; they'll find smarter ways to do what they'd intended all along.
One thing that might work is if someone in the group has damning correspondence, everyone will panic and promise to "never talk about that summer again," genuinely preventing future problems.
Maybe. This approach shows some integrity too, though. Not everything has to turn into a scandal (at least if inappropriate behavior stops quickly). Call me soft on crime.
Him not naming names means that people will continue to give him information in the future. He'd be shooting himself in the foot by naming a source that requested anonymity.
There's an interesting conundrum there too. He can't name names without either omitting (and hence identifying) his source/s, or including (and inditing) them.
Either way he loses that/those source/s for future stories. He did the only thing he could do, besides staying silent. If it happened to be the right thing as well, so much the better.
I do hope he's wrong, or that this a mistake of some sort. The rise of Angel investors has seen a lot of ideas and entrepreneurs get needed money when they might not have under the traditional VC model.
Something like this, if true, will cause the government to step in, and probably regulate and change things for the worse for a great many people. It won't just hurt these few super angels. It will take everyone with it.
Arrington is smart, a lawyer himself, and already know he is headed straight to the witness stand. Thanks for blowing this whistle Mike. That's the TC we like.
I don't know if witnessing a table full of people go silent when he turns up proves anything, and the rest is all info that would put his source on the stand, not him.
If you read the full post, take in account that he was present and saw who was there, and assume he has not chosen to reveal everything about the sources through TC at this time (that's highly understandable - protecting his sources and only disclosing what he feels is verifiable), there is definitely a lot here and absolutely enough for a climb to the witness stand!
This goes well beyond sensationalism. I'm inclined to believe him for three reasons:
1. Mike's not known for boldly lying. He might publish rumors that Facebook is building a phone too liberally, but I've not heard of him saying "I saw x happen" and it wasn't true. Assuming the account of what he himself saw was accurate it's hard to imagine collusion wouldn't be the purpose.
2. This sounds like something that would happen. VCs do this crap all the time, why not angels?
3. Publishing this might be bad for him, and if it were untrue, it would definitely be really bad for him.
Add to that that there is no convincing reasons why this group of angels would manufacture this story to lead him on. Unlike with some other TC stories which turned out to be manufactured to discredit TC, in this one, the sources themselves would risk a lot by leaking this - true or false.
I believe it too. You succinctly enumerate the reasons. The biggest for me was that (he claims) he saw it happen. That puts his personal reputation at stake, which I think will have to meet a far higher standard than the rumour publishing "go tos" of "an anonymous source".
The FB phone was (imho) classic Arrington (the bad side). Posted on the weekend (in the hopes that FB PR would be slow to respond and debunk it), quoting anonymous sources and no substance at all. Basically, link bait. That sort of story does him (or rather his credibility) no favours.
In Arrington's defense his claims are laid out clearly without any weasel words. Either this is happening or it isn't. So while I'm pretty meh about TC as a whole, I'm giving him the benefit of the doubt on this one.
He didn't name a single name. If he really believed this was so certain, he could have. Unless he's trying to make them do something, the only reason to keep names out of it is because he thinks this might be libel.
Yes, but that's the thing — you can't get sued for "obvious names." Even if he's completely making this up, if one of the obvious suspects sues him, he can just say, "Oh, no, I didn't mean him."
The comment I was replying to said, "his claims are laid out clearly without any weasel words. Either this is happening or it isn't." I disagree with that — Arrington is not laying it all out here as a black-and-white truth. He's consciously omitting facts in a way that happens to shield him from repercussions if this is false. As a traditional dead-tree newspaper guy, I'm very familiar with the ways reporters fudge their claims to avoid being responsible if it turns out to be crap. That's what this sounds like to me.
I think your statement was clear. However, I find it hard to believe Arrington would put some of his best sources at risk if his claims were completely unfounded.
Strange how any post that could be construed as being negative about Arrington gets down-modded by about 5 points, regular as clockwork.
That being said, I think he's on the money with this one.
This can only be good for YC overall. The suspicion that YC alternatives are all colluding against your startup is likely to make YC seem more attractive still, to the class of startup that would be wavering between YC and a rival.
The original tweet was removed in the past few minutes (others have dug it up again). His latest tweet doesn't seem to be taking Arrington too seriously:
Thanks Mike for techcrunching me for no reason. Note to self: hold next secret meeting in underground bunker to get the feds off my trail.
In what sense do antitrust laws apply to investors? Why is it unlawful for investors to band together to get better terms for themselves?
Wouldn't it be perfectly legal for these people to sit around a table an agree to merge and start a fund? If that's the case, how could it be unlawful for them to work on a joint venture? Just because I don't like the JV doesn't make it unlawful!
Any time individuals or businesses get together to collaborate on a strategy that restrains trade or supply, thus artificially skewing prices, this runs afoul of antitrust law.
Collusion between angels to keep valuations low and prevent newcomers from participating sounds like a textbook case. In this case, they're artificially inflating their cost of capital by reducing the overall valuations of the businesses they fund. They artificially reduce the supply of capital by conspiring to keep out new participants.
Similarly, the Department of Justice is looking into Valley hiring, since companies have a gentlemen's agreement not to poach from one another:
In this case, the argument would go that the companies are artificially constraining the supply of paying work for qualified applicants, while reducing the competitive landscape that would drive up their salaries.
It sounds like price fixing, even though they are buying and not selling. Check out Wikipedia for a good write-up:
"Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand. The group of market makers involved in price fixing is sometimes referred to as a cartel.
The intent of price fixing may be to push the price of a product as high as possible, leading to profits for all sellers, but it may also have the goal to fix, peg, discount, or stabilize prices. The defining characteristic of price fixing is any agreement regarding price, whether expressed or implied.
...
Colluding on price amongst competitors is viewed as a per se violation of the Sherman Act regardless of the market impact."
Would it still be price fixing if all of them got up from the table and announced the formation of Super Angel Capital Partners? I can't see how; there's tons of VC firms already. If that's not unlawful, how is a joint venture among them unlawful?
Are we just stuck on the fact that they're "angel investors"? The law doesn't recognize any such sector of the venture capital business.
What? No they don't. There's no such thing as a "monopoly of angel investors". There are as many angel investors as there are people with extra money to invest. In a lot of cases already, groups of powerful people with extra money to invest have already formed very famous companies to do exactly what we're talking about!
Shouldn't the DoJ be going after Kleiner and Sequoia first?
Don't hundreds of doctors and dentists already do stuff like this?
Hah, this made me laugh. As if they owe anybody anything! They're the ones taking the risks with their own money; if they want to be better informed through information sharing, more power to them.
My buddy and I in college colluded to maintain market conditions on Lamborghini prices. As far as I can say, 300 million other Americans are participating in this. Our agreement was specifically regarding price (and lack of 0% financing).
</sarcasm>
I think in buyer's market it only makes sense when the supply of buyers is artificially limited. Not only it doesn't look like there's any shortage of capital, the conversation in question specifically discussed excluding new angel investors, furthering the point.
If the FTC determines that the joint venture would form a monopoly, they could in fact block it on antitrust grounds. The FTC blocks mergers all the time.
Explicit cooperation in restraint of trade is always illegal, though.
According to Wikipedia [1], there were over 250,000 angel investors active in 2007. If 10 of those investors were to get together to form a "super-group", I'm not sure it would match up with the definition of a monopoly.
I don't know anything about the collusion arguments though.
The real question would be their investment market share, right? There might be 500 companies building operating systems, but a Microsoft/Apple merger would probably be a monopoly concern.
That said, while their market share is certainly larger than 10/250,000, it probably doesn't even approach 10%. So you're probably right.
True, but you need to consider possible sub-markets. They might have much less than 10% of angel funding nationwide, but 60% of tech angel funding in the bay area. Or something like that. It all depends on how the regulators draw boundaries around markets.
I agree. Not saying they're a monopoly. The merger-blocking issue is the only reason I can think of for a joint venture being illegal.
The difference is that explicit collusion is ALWAYS illegal. Otherwise innocuous activities that may have an anticompetitive effect (e.g. forming a joint venture) are sometimes legal, depending on what the FTC thinks.
I have no idea whether this specific arrangement is legal or falls under laws regulating price fixing but it is fundamentally different from a JV - there is transparency in the case of a JV so someone looking for financing knows they are dealing with the same entity. If it was the same thing as a JV, parties doing the collusion wouldn't bother to do it in secret.
Why would VC firms meeting and agreeing to change terms for their clients in lock-step not be collusion whereas if the brick and mortar banks did, it would be? (and was: http://redtape.msnbc.com/2008/04/did-banks-collu.html)
I cannot speak to the letter of the law, but I'd venture to say the alleged misbehavior violates at least the _spirit_ of the law, since these angels would be considered competitors outside of that room.
A joint venture (or a legal entity aka as a company) operates under very different rules than parties working together, probably without a contract.
I don't know how the antitrust laws apply, not even if what they are doing collude with any law at all, despite preventing healthy competition, but your questions come from the wrong premises.
As we just saw with TechCrunch v FusionGarage, the paper contract has little to do with whether something is or isn't a joint venture.
Broaden the word "antitrust" to "laws against all contracts in restraint of trade", and re-ask the question to yourself. These people are investors. Investors are allowed to work together, aren't they?
I don't know what law they broke (if any at all). I don't know if they can keep doing whatever they are doing.
I was just arguing against "legal to ... agree to merge and start a fund?", because yes, it would be legal.
You're saying they are one step of becoming something we all agree it's ok to do. But they haven't take this step.
Again, I'm not saying they're doing something illegal. Just that you can't apply the "joint-venture/company" operating rules for them, because this is not what they are.
Bringing "what if" conditions to a situation doesn't change it. You have to analyze for what it is.
Sorry if it looked like I disagree with you about the legality. I just didn't think you had a strong backup for the questions.
Before I turn into "the guy on the thread arguing that the Evil Angels are just peachy", banding together for the sole purpose of pushing back YC and making life harder for founder is a total dick move, and I'm happy Arrington is shaming them for it.
But it is a much more ambitious claim to say that they're breaking federal laws by doing it.
They are a group of people supposedly conspiring to generate the worst possible terms for the people they are providing money to, while trying to force out or marginalize competition.
IANAL though - even if not illegal, it's still pretty stinky, and a big part of me hopes it's not illegal. If it's not illegal, I hope they're outed and shamed if this is true. If it is illegal, it give the government reason to step in and screw everything up.
Or, this is a group of people collaborating to generate the best possible outcome for their own business. Every joint venture can be framed in anticompetitive terms. But in this case, what possible undue market influence can they have? The market will find other people to take these deals.
This is a group of people, comprising the top angel investors in a given area, investing lots of money, into a lot of companies, supposedly discussing - in private - how to "divide the market" and "set prices" and "exclude/marginalize competition". Angel investors, despite being individuals, still have regulations and laws to follow.
Frankly, I think the feds would jump at the chance to have an excuse to jump in and more tightly regulate/tax/etc the entire system, including angel investors.
You could very well be right; admittedly, I'm not the smartest tool in the shed when it comes to understanding FTC and government investment regulations, as well as the legal status of angel investors.
Heck, I really hope this is all wrong, because the last thing I want is the feds meddling in this industry even more. I make my living on startups; the last thing I want is the federal government to make it wither and die.
That's an unrealistically high standard and I can't think of any recent case which would meet it. Why didn't the market find a solution to Microsoft in the 90's or Intel in 2000's and, more importantly, why did the Feds feel the need to intervene?
Because bay area technical angel investing isn't just about writing cheques. It's about managing and guiding those startups, helping them find the resources they need. It's about leveraging your connections throughout the industry to help them grow sales, build manufacturing, hire talent, or any of a hundred other things. This is why startups go back to these handful of investors over and over again. Founders aren't stupid. They know these investors wield serious power in the tech world, and they want that power to be on their side.
If you think the only requirement to being an angel investor is having a big bank account, you haven't been paying attention.
If (i)most angel investors are significantly less likely to make investments in early stage tech startups at a given price and/or (ii)due to connections these investors provide a significant non-monetary value-add to the startups they invest in then it's conceivable they might wield a significant amount of market power.
As a former competition regulator, I have to say this blog post is a beauty, in content. Making such a serious accusation, albeit one that is very difficult to prove, especially when the accusation is towards your friends is a gutsy/crazy move. This pretty supports PG's prediction that the power is shifting towards founders and startups when raising capital from VCs. Hopefully, this diffuses any further action on the part of the investors. It may be time for a career change...
he also leaves just enough to the imagination. sure, everyone is assuming the top 3-4 usual suspects, but it was a room full of people -- wondering who were 8,9,10
Mike tends to push posts out as he develops the story (eg. the Scamville saga) so expect this to be the first of many posts.
When he picks up a story like this, watch out - Scamville didn't end until Offerpal lost their CEO, Zynga apologized and Facebook changed their policies.
There's only half the story here because Arrington isn't naming names.
It was a meeting of a group of people in a semi-public place, I don't see why he hasn't named who was there:
"So, I went into the restaurant to find Dave, Ron, Jeff, Mike, Josh, Chris, ..." (I'm just naming, um, random first names here folks for the purpose of illustration!)
He's clearly running a power play around the identities...
Because Dave, Ron, Jeff, Mike, Josh and Chris would have a defamation suit filed by end-of-day. Clearly MA reached out to the attendees.. I wonder what the other 8 or 9 had to say. That's the other half of the story.
If Arrington lists a bunch of people were at a gathering, and they were, then there is nothing to sue over there.
If he says "they were talking about pricing deals and how to club together to avoid convertable notes", and they were, then there is nothing to sue over even if he has named the people there.
I don't actually get your comment. If we DON'T believe this group were talking about what Arrington is claiming then there is a bigger issue here regardless of whether people were named or not.
I spent the earlier part of my career working for independent and free media and campaigning for free press.
Of course you should never publish anything libelous or incorrect but it saddens me to no end to think that people wouldn't publish something that they could stand by as true, right and accurate simply because they were scared they might get sued.
And certainly someone as the proprietor of a publication of record like TechCrunch (which while perhaps not the most whitest-of-white media outlet, still has something to stand for) owes it to his readership to do what's right.
I guess it all comes down to why you are publishing in the first place - to communicate truth and facts or for power and ego (which sure, is hard to tell with TechCrunch at times)
It is a process of journalism. He is using the story as leverage to fill in the remainder of the story. See how the Scamville story evolved.
I think Arrington has shown time and again that he places the story and public interest above all else. To even suggest or insinuate that Arrington is only publishing this story to fuel his own ego is completely wrong. He likely burnt a lot of bridges with todays story and lost a lot of sources in order to give the public a very rare view of what takes place behind closed doors.
This is major. I worked with Michael Arrington years ago. He wouldn't say this without being sure and there is no stopping him now. He went to Stanford Law School and worked at one of the Valley's top law firms (wsgr.com). Mike, get ready for the witness stand!
I'm guessing the top 10 super angels would include Marc Andreessen, Chris Dixon, Ron Conway and the PayPal guys Peter Thiel, Reid Hoffman, Max Levchin, Keith Rabois
The Quora list is very different from yours. And I think we should all be really careful about guessing, considering how much damage you could do to someone's reputation by guessing wrongly. There's at least one person on your list above who I'd be surprised to see part of this.
Vide the cognitive psychology experiments which show that once you mention a person's name, it gets connected in memory regardless of how doubtful the source ought to be, etcetera.
Thiel seems like a clear thinker, but almost anybody can gradually drift in the wrong direction--especially if, as grellas says above, it probably wasn't quite illegal.
My list was complete guessing, just me thinking of famous angels. The Quora list seems to be based on more actual evidence.
In any case, it was Arrington that fingered all these people when he called them the "10 or so highest profile angels" who do "nearly 100% of early stage startup deals in Silicon Valley". Though after seeing Quora's list I think Arrington mischaracterized the group.
Was it the Adam Smith quote "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public."
Why do I know that off the top of my head? Civ IV... who says games can't be educational?
"This group does not have a monopoly position in early stage deals. So getting together to discuss how they as individuals/small firms can better compete against much larger VCs and incubators is not price fixing or collusion."
Is a monopoly even needed? In most fields I thought it was illegal even if only a few businesses in a market get together, e.g. if a dozen gas station owners in my area got together to discuss coordinating price strategy, that'd be illegal, even though those 12 hardly own the whole market. Though there are legal ways to do it if you aren't actually discussing setting prices, e.g. all the local bakers' shops can get together to discuss difficulties in the current market for baked goods, how to better promote the sector, etc., so long as they aren't working out how to collude in negotiating with their suppliers, or agreeing to minimum prices for bread, or things of that sort.
Here is something to consider. You have said yourself that as an angel you prefer to follow deals, rather than set the terms. A lot of angel investors are like that. The problem is that the guys who lead the rounds and set the terms are fixing the market.
While there may be hundreds of angel investors out there, the reason why only 10 of them can rig the market in this way is because most of them, like yourself, are followers.
How about the 90% of the other angels step out and actually lead some deals and price them, so that we have a real investment market at the seed stage.
The trend lately is toward convertible notes issued by the startup itself. This means that nobody is leading and nobody is pricing the deal.
There are plenty of other people (VCs, basically) that do lead, when there is a leader. It's just much rarer right now. And the stronger deals, not the weaker ones, tend to be lead; those are the deals where the entrepreneur has the most leverage, not the weakest.
I don't get the impression that anyone is fixing the market, for what it's worth.
I didn't mean to come across as outraged or to make accusations - it was a genuine observation.
When I raised a note I set the price, but it was through talking to the investors. That was a while ago though.
I think the core of what Arrington is saying is that they attempted to fix the market. ie. got fed up with how things are atm and tried to fix it in their own way. I know that some of these guys have been against notes for a while, but end up doing them anyway.
Game theory. 10 players make for a highly unstable equilibrium, especially given the potential for absurdly high profits for deviating to fund one hot company. One of them is even "highly uncomfortable." The key is to shop around and negotiate intelligently.
There's also the game theory going on within the 10. The one uncomfortable person could have gathered data and evidence on the scam while dragging their feet in participating, then informed to the FBI, gotten their main competitors shipped off to prison, and been the only Superangel left in the game with the pick of the litter and their choice of valuations.
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.
Given Arrington's allegations, why would someone in the group or at the dinner admit to the collusion? These are smart guys talking to a prolific, ballsy blogger--what do they expect will happen? What's in it for them?
At least two people attending were extremely uneasy about the meetings, and have said that they are only there to gather information, not participate.
It also strikes me as odd how specific he is when mentioning figures. Why not simply say, "Several people who attended the meeting..."? By specifically saying that there were two, he will have everybody who was there guessing who those two are. Also, if there was just one person, it would make sense for him to specify that there were two to throw off the rest of the group, no?
> why would someone in the group or at the dinner admit to the collusion?
He mentioned that they were uneasy with the direction the talks had taken. I could definitely understand a couple of them seeing this admission as a good way to get out of a compromising situation while not leaving themselves at the disadvantage of being an outsider.
I wouldn't be surprised if that's the last we hear of this story; very unlikely Arrington will name drop in the future. However, if this story is true, hopefully it scares off these Angels from forming an investment 'mafia.'
I disagree -- I can't imagine that Arrington will hold those names back. He's a journalist first, and increasingly, what seems to be a sort old school one -- he's there for the story.
Right now, there's no need to drive traffic with names -- he's got today's scoop. Give him time.
I don't understand how people like this (if the points I'm referring to are truthful, of course) can not maintain some composure.
Guilty silence and a "oh no no" from somebody considered as a friend is a bit ridiculous. I'm searching for the right words right now, but it's sort of ridiculous that Angels like this who have undoubtedly relied on their networking end up handling a situation like this.
i was thinking the same thing. not ONE of them managed to get his wits together and say something to make it look at least a teensy bit less suspicious?
seems like it would have been prudent to have even just a bit of a cover story prepared, considering how easy it is to bump into other folks in the industry at any time at any place within the city.
1. Super Angels networking is expected, allegedly sharing deal terms (convertible notes, etc.) and allegedly working together to try and lower valuations is definitely not representative of a healthy 'free' market.
2. Singling out a successful model and trying to replicate it and improve upon it isn't horrible, but allegedly singling out one entity (YC) trying to limit something inherently doing good by entrepreneurs is horrible.
3. Good or bad / legal or illegal, if this episode results in any increase of government regulation/oversight in any way for funding at this level then both sides lose.
4. This entire episode, for me, reinforces the need for start ups to go bootstrap, achieve revenue and profitability and then, if funding is proved to be needed down the road, go in with a stronger hand when you sit across the table from any funding source.
Convertible notes allow founders to close angel deals one at a time with varying valuations. It makes it much easier for small angels to compete with big angels. The old practice of stock issuance required a big angel to make the whole deal happen, and they could dictate terms. Now, big angels are losing their advantage over small angels.
I understand why they're unhappy, but I encourage them to compete fairly on their merits rather than anything anti-competitive.
Not saying that he's wrong, but does it seem odd to anyone else that a group of people who are clearly very smart and successful would create a wiki to document their illegal scheme of collusion and price fixing?
Issues of price fixing by a group of investors tease at the difference between "mainstream conservative" and "libertarian". A "mainstream conservative" will probably want to have laws in place against price-fixing schemes which can hurt the small business owner/entrepreneur type person because small business is integral to economic stability/growth for the mainstream conservative (like a Jack Kemp, etc.). A hard-core libertarian (Ayn Rand, for instance) would be opposed to any regulations even those against practices which could hurt the entrepreneur. Because whereas in a "conservative ecosystem" the majority of hiring, etc. comes from small business/"main street" or whatever, in a "libertarian/John Galt ecosystem" most of the hiring is done by, you guessed it, John Galt. My point is, a mainstream conservative (a more moderate type) has an interest in preventing price-fixing and helping the small-time businessman whereas the libertarian does not. Therefore, "pro-business" means different things to different people. Pro-small-business (mainstream or moderate conservatism) is different or not always the same at any rate from being pro-big-business (libertarian/Objectivist). Thus, for example Gov. Romney would probably want to keep a lid on price-fixing which hurts mainstreet, while say Rand Paul would not. This is a great topic to tease out the nuances between various so-called "pro-business" or "conservative" viewpoints. Who's right? Who knows, but it is certainly instructive.
Someone please explain the finer nuances of the law; I can't see how this is different from professional athletes forming their own association/union and stipulating a "minimum fee" e.g. NBA.
Arrington tried to manufacture a happy medium between not saying anything and outing every person at the meeting. Not outing everyone implies you're not entirely sure. Not being entirely sure, yet talking about it anyway is a cheap way to get a story.
Waiting until things are more clear cut would have earned him points in my book- I suppose it's not worth it when the alternative is having everyone follow the story on TC from now until its conclusion.
I'm assuming he's trying to both get a good scoop AND stop the damage these angels can do to startups - the longer he waits, the more damage might be done.
I think he's struck a pretty good balance here by saying what needs to be said and no more, while still keeping it interesting.
This is so disappointing. Firstly, I am glad Mike called them out. Took a lot of cajones to do it, and say what you will about TC and Mike...stumbling across something like this and not shutting up takes major balls.
Secondly, here I was rooting for these 'Super Angels' to finally revolutionize the VC industry and send the 'old guard' packing by better understanding the founders (not just talking a good game). Turns out that they are all the same.
I would not be surprised if this further turns founders off of taking angel money altogether and deciding to just get to profitability as quickly as possible - further shifting the funding tide in the founders direction...which weeds out a good amount of these 'Super Angels'.
Either way, I suspect there is a shake-out coming.
On the flip side, are valuations becoming over-inflated? I also think it's entirely appropriate for this group to be discussing strategies to increase their competitiveness versus YC, newcomers, and VCs. The real sinister claim is that they were talking about "more mundane things, like agreeing as a group not to accept convertible notes in deals." I wonder how that will pan out now.
The way to combat over-inflation is to simply not buy. You don't need a secret meeting for that. When investors aren't buying, that's a collective signal to founders selling that their valuations are too high.
I bet it's people leaking fake conspiratorial meetings just to screw with Arrington.
We need more information though. Were there any, ahem, cons there? How about any balding acebookfay employees? Were there fewer, greater than, or exactly 500 hats in attendance? Was there anybody there using saccharin? Did your spy camera catch theone?
It's important not to get too caught up in the legal technicalities. A strong startup (ideas/execution) still has tons of market power, no matter what a secret group of super-angels agree to do behind closed doors.
And, most importantly, bootstrapping is more feasible than ever and (as noted) YC is coming on strong.
I changed it to add "[Allegations of investor collusion]", but then I changed it back because it looked weird. PG or one of the mods can modify the headline if it needs clarity; I generally prefer to use whatever the post title is.
Obviously, this came out an hour ago because Arrington (despite being a trained lawyer himself) spent the day and maybe last night also (knowing him) checking with lawyers about what to write, how to write it, when to release it, etc. Good luck on the witness stand Michael!
I could have guessed that http://paulgraham.com/future.html would have scared quite a few traditional VCs. I'm surprised that it scares the big angels so much.
Is Y-Combinator not considered a super-angel? Arrington says the superangels at the meeting comprise almost 100% of early stage startup funding, but PG wasn't there. What's YC then?
The difference is that YC get in before these guys do.
Edit: I think there's another difference too: YC is significantly more founder-friendly. Just like angels have traditionally been more founder-friendly than VCs.
Thanks, from reading alot of the comments it sounds like Incubators like YC take startups from nothing to working product/proof of concept, then Angels step in and get them to the VC phase.
Lets file a class action lawsuit naming the top ten (virtually 100% eh?) super angels then call Michael as a witness. The case is simple: price fixing led to lower sized deals and higher valuations.
I almost never advocate lawsuits, but in this case it is totally justifiable. Just for the record, I'm actually not against collusion and price fixing as an idea (I believe that eventually market forces will correct it), but I'm against it if it is illegal because the market should be able to trust that laws are enforced.
1. Competitor collusion and express agreements to restrict the freedom of each to compete (i.e., horizontal contractual dealings) do indeed expose the colluding parties to potentially serious liabilities under the Sherman and FTC Acts. If that is what is going on here, then Mr. Arrington has fired a major warning shot to those involved asking, in effect, "are you insane to let yourselves get caught up in this sort of activity?"
2. The irony here is that competitors are completely free to have contacts with one another, to discuss industry problems, and even to work on solutions for how best to handle such problems, provided that such contacts aren't made for an anti-competitive purpose. This is how trade associations work, among other things, and angel investors can and do meet all the time to discuss common issues and problems. Such benign meetings and contacts are very different from colluding to restrict their ability to compete freely in the marketplace through agreements to suppress valuations, etc.
3. Parallel action by competitors is in itself normally quite harmless and does not subject them to liabilities (for example, the fact that angel investors tend to use common sets of investment documents, tend as a group to dislike convertible notes, etc.). Companies having nothing to complain about legally from the fact that a particular angel investor happens to engage in practices in common with others in the industry that founders happen not to like. All this changes, though, if the competitors (i.e., the angel investors) have engaged in suspicious activities such as secret meetings among themselves to discuss overt ways to limit competition, etc.
4. Nothing under the law stops any one of these angel investors from deciding as a business matter to form a new fund along with others of such investors and to engage through that fund as a competitor in the venture financing industry. In such case, the investors are no longer competitors and have simply combined forces to compete as a different entity in the industry. If, however, the parties effectively remain competitors and simply form a jointly controlled venture whose aim is to serve as a vehicle by which they might collude in suppressing competition, that vehicle would be unlawful.
Putting all this together, the normal give and take among the myriad angel investors in the Valley and elsewhere is lawful and beyond reproach, even when they do meet to discuss problems. Meetings in a smoke-filled room as part of concerted efforts to restrict normal competitive activities by the participants, on the other hand, are almost blatantly illegal on the face of it and especially so when the participants are among the most prominent players in the industry.
It may well be that some or most of these participants hadn't really realized that they were moving from the benign to the illegal in participating in such meetings over time, and this is where it seems that Mr. Arrington is doing a good turn for them by calling them out before they do something that is irretrievably wrong. Just speculating on this last point but that is how the tone of the piece strikes me.