Collusion

Mike Arrington posted about a secret meeting of angels and super angels in San Francisco the other night. In the post he suggests that they are colluding to keep valuations down, terms intact, and traditional venture capital firms, such as ours, out of their deals. It's the kind of blog post that Mike has become famous for. It's a good read and even if it is partially true, it's a slap in the face of the individuals involved.

Venture capital firms have been accused of colluding for years. The most common form of collusion that VCs have been accused of is on a specific deal. If two or three firms are competing for a deal, and there is no other competition, firms have been known to call each other up, agree to work together on the deal, and then make an offer that is lower than the price each would have had to pay in a competitive situation.

I know that such situations have happened. I've seen it first hand. But I have not seen it happen in a long time. The last time I can recall such a thing happening was the dark days after the bubble burst about ten years ago. And before that, I recall seeing it a few times in the early 90s.

The reality of today's VC market is that it is hypercompetitive. And most venture firms are still managing funds of sufficient sizes that they can't or won't agree to syndicate deals with more than one other firm. And often they don't even want to syndicate with anyone. These market dynamics make collusion a lot less likely. And that is why I have not seen any incidents of collusion in years.

In the angel/seed market, that is less true. Deals are widely syndicated and it is common for everyone who is interested in a given deal to get into it. In that kind of market, collusion is entirely possible.

And yet I don't think that is happening. The very fact that some of the most active and respected angels in silicon valley were meeting to discuss the changing dynamic of their business suggests to me that the opposite is happening. I suspect that the good old days when they could all get together and do a deal are gone. And they are not happy about what they see happening to their market. I wasn't at the meeting and I don't know for sure what was discussed. But I know most of these investors and I know what is on their minds right now.

Our firm does invest in the seed stage marketplace. We've done that in about 40% of our investments. So it is not a central part of our investment thesis but we do it. We are not aware of angels actively trying to keep us out of deals and every time we've expressed an interest in joining an angel round, we have been welcomed with open arms.

Of course, that may change on the next deal we want to participate in. The angel/seed market is really competitive these days, particularly in silicon valley. Valuations have risen and terms are weakening, as I've blogged about here recently. This is not a market suffering from collusion. It is a market where the investors wish they could inject some collusion. But they can't and they won't. Market dynamics, at least as they exist today and for some time to come, will not allow it.

I applaud Mike for raising this issue. But I believe it is a bit of a red herring. The fear of VCs colluding is alive and well. But the act of collusion is pretty well dead in the venture business.