A recent piece of journalism sent technology world into a state of shock. Titled "So A Blogger Walks Into A Bar…" the piece was ran on TechCrunch and told a scandalous story of some of the most powerful investors in all of America " the super-angels. The shocking story accuses these influential seed funders of ganging up to commit fraud and price fixing in the early-stage technology sector, but some critics have been calling the story nothing more than hogwash. If the story is true, it could spell serious trouble for Silicon Valley, but could it have all been a farce published for notoriety? Read on and decide for yourself.
The Super-Angel Club
Our story of deception and alleged federal crime takes place not in the jungles of some far away nation, or in the bowels of an American slum, but right in the heart of sunny Silicon Valley. San Francisco is the center of the modern technological movement " it is a place where ambitious entrepreneurs, skilled techies, and hungry investors mix and mingle to form today's hottest start-ups. For a long time, this was thought of as the land of opportunity for nerds the whole world over, but lately some people are saying the investment circle is constricting and organizing into a tight group of angels that run the entire show.
The super-angels, as they are called, are a small group of investors who not only invest in new start-ups, but also take a hands-on roll in running the business with the founders. The Wall Street Journal reports that these investors typically provide between $25,000 to $250,000 in funding for start ups. Many of them, including the legendary Ron Conway and Mike Maples have begun starting angel investment firms " similar to venture capital firms " that pool tens of millions of dollars in investment money from several different angels.
A Top Secret Meeting
Enter: Michael Arrington, a blogger for TechCrunch with a flare for the dramatic. Arrington claims he was delivered a tip that the Valley's most elite super-angels were meeting at a restaurant and bar known as Bin 38. "Do not come, you will not be welcome," he was warned, but being the hard-nosed investigator he is, he defied their wishes and drove to the scene of the meeting anyway. In his report, Michael writes that every one of the highly-influential angel investors at the meeting were personal friends of his, so he didn't expect to be driven away from the table without at least having a drink and saying hello to them.
Instead, he claims that the moment he walked up the table fell dead silent, and not one of the angels in attendance said a word to him until got the hint and walked out. In reflection, Arrington concludes "I've never seen a more guilty looking group of people."
Cries of Foul Play
So far Michael Arrington's experience was strange, but not anything to be too concerned over. That is, however, until later that night when a few of his friends who were in attendance of the meeting called him. These angels, apparently disturbed by the plans of the group, disclosed to him some pretty alarming conspiracies that have been circling the super-angel club for several such meetings so far.
If the report is true, these top investors are actually colluding (joining forces despite competition) to solve a rising tide of problems that threaten their industry. These problems include how to best counteract the growing power of early start-up firm Y-Combinator, how to band together to keep deal valuations low, and how to keep new angel investors who might drive up the cost of deals out of the market. Arrington further alleges that the few who came forward to him shared meeting notes that confirmed the accusations he has made.
Was Arrington's Story Made Up?
Though it would certainly be an industry-shaking discovery if it were true, Arrington is not without his critics. Take Sarah Purewal from PC World, for example, who questions the validity of the story. "If, in fact, this is a top-secret tech cartel that has funded almost all Silicon Valley start-ups, how are the members so dumb?" she wonders aloud. "Not only do they (a) tell Arrington when and where they're meeting, they (b) share meeting notes with him, and (c) even keep a wiki where they can talk about all their illegal colluding and price-fixing. Is it just me, or does something not add up?"
Dan Primack form Fortune Magazine also chimed in with a hard hitting question for Arrington. "If super-angels are planning to price-fix," he challenges, "wouldn't that enable the very "traditional" VCs that they are purporting to thwart?" It is observations like these that have caused many in the tech world to discard the story as a piece of deliberate sensationalism created to drive traffic to the website. However, Mike Masnick of TechDirt reminds us that many of these "friends" Arrington throws under the bus in his expose are his main sources of information for his journalistic career, begging the question of why he would destroy the very fabric that holds his career together unless he was telling the truth.
Is This Behavior Illegal?
If Arrington is telling the truth, the group of super-angels ought to be very careful with their plans. Both the collusion and price-fixing described above are federal offenses punishable by law. The crime of collusion occurs when firms or individuals team up to fix prices, limit competition, and purposely divide the marketplace. Financial terminology resource InvestorWords indicates that this often implies the use of fraud.
Price fixing was the biggest accusation made by Arrington, which is a crime which can devastate an entire marketplace properly executed. The problem the angles were seeking to solve is that competition for a promising new start-up drove up the valuation, since each investor wanted to offer more than the others to seal the deal. By colluding, they could effectively limit the market value of any start-up and force them to take the deals they conspire to create. Such behavior works against the best interest of the entrepreneur and destroys the principle of a free market.
About the Author: Sheena Freestone is a freelance writer for FundingUniverse. Funding Universe matches qualified entrepreneurs to banks, investors and other funding sources. Funding Universe helps small businesses avoid scams and rip offs by securing funding from trusted national banks and financial institutions.