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.

#VC & Technology

Comments (Archived):

  1. Julien

    Even during these days with a lot of investors and money to be invested, I feel that entrepreneurs are mostly “ignorant” of how the VC world works. Of course, repeat entrepreneurs have a strong bargaining power and they know the “backstage” stories… but people like me are often times unaware of a LOT of what is going on.We need a better way to align the investors and the entrepreneurs interests, specially in the very very early stages.

    1. fredwilson

      one word “reputation”anyone who truly values their reputation will deal with you honestly and with integrity

      1. Julien

        But then “reputation” is obscure… Who am I to know what to think of SuperAngel A or SuperAngel B? Also, these peeps are influential, so people will have a hard time telling you the truth, because they don’t want to be seen as a “traitor”… Even Arrington isn’t naming them, and he probably doesn’t have much people that he would be scared of.

        1. Edwink

          Hi Julien. I think that the key advantage of serial entrepreneurs vs. first time entrepreneurs is that they are able to parallelize the funding process and create a market for what they do. At the end of the day, competition is the only tool you have to be able to get a fair valuation and fair terms. This is also true when you are trying to sell you company.

        2. reece

          You can try http://TheFunded.comIt's probably not the most accurate gauge, but it’s at least another data point.

          1. Julien

            I use TheFunded… and it’s the “least bad” tool I can use 🙁 I wish the global “Startup investing” market was more transparent.

          2. reece

            we all do. we also wish money grew on trees.oh well… can’t spend time worrying about the calls, just gotta play thegame!

        3. fredwilson

          All true. But I believe that investor reputation is getting easier to figureout for a host of reasons

        4. sbmiller5

          If you’re looking for opinions on specific people, lets chat and I may be helpful.

      2. Holy Schmidt!

        Exactly, after all a reputation is a perception held by others about you, in anticipation of futurebehavior. Which will make any ripple effects from Arrington’s post interesting to watch.

  2. salimismail

    Fred, excellent and thoughtful (as always) post on the subject. Knowing some of these folks and having talked the entrepreneurs in some recent deals, I agree with you.

  3. LIAD

    when I read Mike’s post last night, I knew there was no other topic you could possibly write about todayi like your take that it was more of a crisis meeting than an exploitative one.

  4. ray

    a bit conspiratorial for my liking, but tacit collusion is relatively easy when investors are selling the same stuff

  5. Michael Yavonditte

    Great post Fred. There’s a bigger issue here. I have been largely silent on the issue for a bunch of reasons but now looks like a good time to weigh in a bit.For some context, I am now either directly or indirectly (through a fund) invested in about 30 start-ups. I am not Super and I am not perfect. I am just a person with a track record trying to give back and make good investments because leaving my money in the bank is boring and non-productive in my mind.People should stop calling investors “Super”. Founders and CEO’s are killing themselves trying to make their businesses work. It’s incredibly hard to do that. Some investors will be helpful and some will be useless. Some will help and some might even cause pain.The investors with the best track records should win. The angels that truly know the industry and have “specific domain” expertise instead of a long fruitful history should also do well.Those that do not have a long track record or domain knowledge have to build it over time. This is how the world should work.And let’s also give a shout out to nice guys/gals! Life is short, too short to work with arrogant jerks who think they know it all. No one does! Founders should try to work with people that will treat them with respect.

    1. reece


    2. fredwilson

      MikeGreat pointFrom this moment on, I commit to strike the phrase super angel from myvocabularyI am sure I will slip up a few times but it will be gone

      1. RJ Johnston

        Instead use “Michael”, we’ll know what you mean 😉

        1. markslater

          or “taking the michael”?

          1. Tereza

            Show…me…the Michael.

          2. markslater

            mclure is positively taking the michael. judging by his virtual persona i would be forced to immediately launch my vuvuzela iphone app and vigorously wave it in his face drowning him out. then again i’m just a lowly comment dwellin hata right. 😉

    3. Pascal-Emmanuel Gobry


    4. sbmiller5

      Who cares? – it’s a way to differentiate angels with funds and individual angels – there is a difference and they should be differentiated in some manner .It’s just semantics – maybe “Fund Angels” or “Angel Funds” – but, really, who cares.

  6. itamarl

    Fred, you often say that you like to get to know an entrepreneur, sometime for a year, before investing in him. I think it’s the same on the other side, we’re of course looking for a good deal/valuation, but also an investor with the right experience, network and more important an investor we can trust.If an investor abuses that trust, whether it’s through price collusion or snicky terms, this would ruin that relationship and could have a fatal impact on the company, which is in nobody’s interest. So are the best super-angels in the world colluding? Not sure this would be in their own interest… could work once or twice, but not in the long term.

  7. Guillermo Ramos

    Whenever there is a syndication, there are several parties involved and just one value. That´s not a collusion. The problem arises when the value is set before the deal comes, which is extremely odd in a competitive Angel/ VC market. How would it work? “all pre.moneys for social $ 5 mm” ” all pre moneys for social with serial entrepre´s $ 20 mm”…. don´t think so.

  8. HowieG

    Is this any different that syndicated bank financing for major companies? I posit that there is nothing wrong here even if there is collusion for a few reasons.1] the folks needing the capital are free to shop around. Don’t you think they would probably have an adviser looking out for their best interest in most cases? If you feel low balled you don’t have to take the money.2] I would think potential investments over a certain size doesn’t syndication spread risk?3] on the flip side isn’t having too many partners in funding bad for stewardship of the start up. If I had been an investor in Facebook I would be screaming today over the low ROI ad supported business model vs a subscription based that could quadruple revenues tomorrow. And when Facebook in my opinion does fade I would want to sue whatever VC’s blocked my better business model if that was possible.

    1. HowieG

      One quick comment. Do you think most VC’s are as ethical and good people as you are Fred?

      1. fredwilson

        Most areSome aren’t

      2. Vijaya Sagar V

        This doesn’t seem to be a case of 99% of the guys giving the rest 1% a bad name 🙂

  9. Dan Ramsden

    I think the “angelgate” thing more than raising collusion concerns will tarnish the Robin Hood image that “super”-angels have worked hard to cultivate. I think it could also signal that there is indeed a bubble brewing… if such alleged steps are being taken to counter.More and more it seems to me that the only true and real advice that anyone can offer entrepreneurs, and the best way to be supportive, is to encourage them to focus on a viable business model that builds toward profit. Everything else will fall into place, even as whims of capital sources fluctuate.

  10. valto

    Exactly the reasons why we want to bring transparency to whole process and online profiles with reputation to this market. Even the basic setting with mystique, lack of transparency, complex terms are hard enough for new/young entrepreneurs – this kinda behavior on top of that is beyond my understanding.

  11. RichardF

    I’ve always presumed that investors (angels and VC) that knew each other and were considering co-investing alongside each other would be colluding to a degree anyway. At the angel level, it’s probably even easier than at VC.As far as you being welcomed with open arms by angel investors that’s hardly a surprise given the added value that USV can bring to the table. Whether other VC’s would be as welcome is open for debate.

    1. Tereza


  12. Dave W Baldwin

    Thanks for the post.Since there must be some ‘collusion’ based on investors asking opinions of others, the bigger question should be: Is there worry in the Silicon regarding their share of the pie shrinking?The marketplace can take care of this as it always does, weeding out those that are bad.

  13. Rick Bullotta

    I think you’ve accurately described the current situation. Even if there were a subset of firms with some level of manipulation of the market to suppress valuations, there are always plenty willing to break ranks to get a piece of a deal they really want to participate in. Free markets work.”That said”…there is a potentially more insidious and troubling sort of collusion taking shape with the various industry pundits, visionaries, media, and event organizers who, while maintaining a charade of objectivity, are (over) hyping the companies and markets that they or their friends directly or indirectly have an investment in.Simultaneously controlling access to the available outlets for getting the word out about a promising startup or emerging market/technology while maintaining an air of objectivity/neutrality is at a minimum hypocritical and arguably unethical.This is an area where I’d like to see some independent “techarazzi” do some investigative reporting, as it could make for some juicy and embarrasing disclosures about some of the biggest names in the industry.

    1. akharris

      That’s an interesting point, but, from what I’ve seen, every angel/seed/vc that I respect, who also happens to blog (cough cough, Fred) openly acknowledges when they are discussing a portfolio company – even MG Siegler over at TechCrunch openly acknowledges his inability to be impartial when discussing apple. That’s valuable, it lets you view what they’re saying with the appropriate grain of salt. As well, there are so many different media outlets that you are not confined to a single POV. Compare that with the yellow journalism of Hearst, and it’s night and day. That’s the danger of a controlled media pushing an agenda.I think the larger thing you’re reacting to is the fact that the market gets swept up in trends. That happens everywhere you look, though, and it’s fleeting if not based on something concrete. You see it in retail, equities, commodities, and hairstyles. You can’t get rid of that, is the truth.I’d also argue that objectivity is a false premise. There’s no such thing in my mind. There’s a great essay on it by Theodor Adorno in “An Essay on Cultural Criticism and Society,” but that’s an entirely different conversation.

      1. Rick Bullotta

        FYI, I wasn’t referring to VCs who blog. There’s no pretense of objectivity. I was more referring to the general “visionary/pundit/analyst” types.A starting point to cleaning things up is a “full disclosure” policy from those who claim/choose to claim objectivity.Agree with your general premise that objectivity (seemingly like privacy) is a utopian ideal, but it doesn’t hurt to try.

        1. akharris

          Gotcha. I’m hearing echos of the first tech bubble in a lot of places. Difference is, there it was the investment banks driving the froth because of the fees they could pick up. Now it seems like a more complex mix of fame/power driving people. It’s often harder to parse out exactly what that looks like and where it leads.

      2. fredwilson

        my partner Brad’s nephew told him a few years back that he preferred to read sports blogs over the sports pages in the newspapersbrad asked whyhe said “with the blogs, at least you know their biases”

        1. Rick Bullotta

          So true, Fred. Thus to my point – I think it is disingenuous for some of the pundit/analyst types to claim (or not disclaim?) their neutrality/impartiality…

        2. akharris

          As a Yankee fan who lived up in Boston during college, the thought that a newspaper’s sports coverage was un-biased would never even cross my mind.But he’s very right. It’s an even more pernicious effect in the broader media. That’s why Colbert strikes such a chord for me. Stick him on Fox, and he’s no longer satire, or even the most extreme person in the lineup.

    2. Dave W Baldwin

      Unfortunately, that would require work.

  14. Gulp Media

    Regardless of our opinion of Mike Arrington’s post, it has at least elevated the visibility and importance of Seed and Angel investing.The coverage this topic is receiving will perhaps move to highlight entrepreneurship, innovation, creativity and ingenuity. As the Seed and Angel process becomes more mainstream and understandable, it is my hope that our elected officials will write legislation that creates incentives to move even more capital into the space.Start-ups and entrepreneurship have a better chance of creating jobs than any other program. It is the foundation of our great nation and should be embraced.

    1. M. Edward (Ed) Borasky

      Small businesses historically haven’t been able to create jobs at the same rate large businesses destroy them. The current unemployment numbers show that in spades. I don’t know what to make of #angelgate except that it confirms my belief that Silicon Valley today is more out of touch with Main Street and consumers than Wall Street *ever* was, and that includes every historical bubble and crash since the USA was founded.Bluntly put, there’s more to life than dollars and code. On Main Street, we care about food, clothing, shelter, transportation, clean air and water, schools that enrich our childrens’ futures and protection against crime, both violent and white-collar.

  15. zato

    3 cheers for future Congressman Mile Arrington, defender of the working man. (just kidding)

  16. Colin Mathews

    Your points are fair and I agree that any collusion is likely defensive. However, it’s easy to be a good guy when business is easy, returns solid, and competitors few. It’s when things get hard that people are tempted to make mistakes and take shortcuts. If Arrington’s information is correct and these investors represent a sizable percentage of a definable market and were working together to fix prices or keeping out competitors, then they are breaking the law. They don’t have to be successful in the long term in keeping out competitors or keeping prices down, they just have to try to do it and damage enough sellers.You’re right that most investors (and in any business) are generally decent people. But you’re judged by how you behave when business is hard (or when it’s easy to misbehave, like in the post-bubble days), not when things are good.

  17. Mark Essel

    As far as I understand, angels can work together if they want to start a bigger fund with a shared thesis. There’s nothing stopping entrepreneurs from doing the same, except keeping the lights on. Money can mean so many different things to different people. Cash to me is a distraction, and yet it’s the ultimate signal from a potential customer/client, and the ultimate signal of trust from an investor. If I had any, I wouldn’t want to spend it unless I knew it was being burned for the health of the company I was running/helping found.Information exchange isn’t limited to online messaging, let angels, pro investors and founders meet and discuss what’s best for the industry from their perspectives. If seed stage investors are suffering from a social/economic shift, it’s not just YC, TechStars, or some other hot local incubator that’s driving change. There’s no amount of collusion that can stop the trend. It would be like newspapers or big book publishers colluding to try and stop epublishing at this point or Big Telcos stopping open spectrum and the growth of super wifi. Ain’t Gonna Happen. The best investment deals may be moving out of the valley, where competition isn’t as steep.

  18. gbattle

    Every crowded investment strategy eventually eats itself, ergo, I side with Fred that any collusive imbalance by angels, if in play at all, must self-correct due to competition. All Gordon Gecko, “The Informant”, Meeting of the Five Families conspiratorial fodder aside, it’s just not sustainable.Side note: great to compare the thoughtful comments here to the thoughtless comments on the TC article. I wish all the quality TC articles could move to more thoughtful forums where it’s not a war to be heard among the idiots.

    1. fredwilson

      i’ve noticed some improvement recently which i ascribe to disqus (naturally i am very biased)

      1. gbattle

        I love Disqus and the overall sea change in commenting systems in general(Gawker, YouTube, NYT, etc.). Enforced identity, self-policing and earnedshare of voice is great for the space. Just wait, pay-to-convey commentsare coming. Conviction matters.

      2. kenberger

        There is a significant and noticeable difference over there, directly due to Disqus.Among other things, the Likes addition and ability to sort by best rating is a total game changer and fixed TC’s severe signal/noise problem.(If disqus is reading this, it would be even better to have your browser remember that sorting pref *per blog*, rather than disqus-wide).

        1. ErikSchwartz

          While we’re giving suggestions to Disqus…I’d like to be able to sort the comments from commentators that I have “liked” in the past.That would allow my ad hoc community to carry over from site to site.

          1. kenberger

            at first, that seemed like a good idea to me. And then I remembered that it would be like the problem with having a feedreader: you lock yourself in to hearing the same voices over and over, and it’s less dynamic. Some older commenters get tired, new ones rise all the time.

          2. ErikSchwartz

            That’s why “like” works better than “friends”. Friendship is an overt decision about a person. “Like” is a snap judgement about what a person says.I have no clue who I’ve “liked” most here.

          3. ShanaC

            me either..good point- it also gives incentive to use the likes

          4. obscurelyfamous

            Pretty good idea. Would you be interested in staying updated (e.g. email digests) on the activity of people you’ve previously liked?

          5. ErikSchwartz

            email might feel a bit stalker-like.I just want to be able to do a sort like I do for newest or popular now. If I hit a huge techcrunch comment thread I want to be able to see what the people I have “liked” at AVC (and other place), my true ad hoc community have contributed to the conversation.BTW, kudos on a great product. You have saved comments from becoming merely noise.

    2. sbmiller5

      GBattle – you’re side note describes my current project. If you’ve got additional thoughts, I’d love to chat.Fred, I know you said you’d be interested in seeing it – fixing some bugs from our prototype and will get it in front of you. FYI, not looking for funding – just opinions, criticism, etc

      1. gbattle

        Absolutely. I’ve thought about that space a bit. Hit me on Twitter@gbattle and we’ll take it from there.

  19. Harry DeMott

    This is nothing new – and nothing to be surprised about.When any group of investors have too much money and not enough deals – you go from single sourced deals to group deals. And not only do you go to group deals – but you go to group deals where the terms demanded by the group continue to get better and better for them as financiers – while the pricing keeps going higher due to the incremental capital put into the system. They might be colluding, but it is purely defensive in nature. When a great start-up hits the wall because people won’t pay any price for it – then you know there is collusion – but right now it is exactly the opposite.Look at what happened in the LBO world. They went from single source deals with lots of equity to club deals with no equity – great terms from their sources of debt financing – and higher and higher prices till the market couldn’t take it anymore. These LBO guys complained about the pricing all the way up – and clubbed together more and more deals (see Clear Channel, Univision, Harrah’s Entertainment, TXU, Sunguard, First Data, Freescale).Just like the angel community (super or just regular) all of these guys (and they are all guys) know each other, hang out together, play golf together, eat at the Four Seasons together – and they all wanted to make sure that they didn’t miss out on anything that might work.The angels are the same right now – it is probably better for them to syndicate out everything. Like a fraternity picking new pledges, they can sit in their back room – put up the logo of the service and vote it up or down – then they can pick one of their own to put on the board and move on. That way everyone plays in everything.As long as they are primarily investing their own money (or friends and others who trust them implicitly with no expectations) there’s no issue – but as soon as any of them have aspirations of running larger funds or explaining how they differentiate themselves – then you will have issues.

  20. LIAD

    Dave McClure was at the meeting.Here’s his response – we got ourselves a real ball game.

    1. Matt A. Myers

      Thanks for pointing that out. I love his honesty, straight-forwardness, bluntness. Kudos to him. Great response. But who to believe. 😉

      1. LIAD

        likewise.i just hope that his fonts and colours don’t set off an epilectic fit for anyone.

        1. sbmiller5

          Honestly, I don’t read his posts as much as I should, as it literally gives me a headache

          1. Aviah Laor

            That’s part of the scheme. It also drops down valuations 🙂

  21. Shawn Hansen

    You saw collusion happening ten years ago? A WHOLE ten years ago? That might as well have been a few days ago.

  22. Harry DeMott

    I’ve already commented once here but another thought came into my head and I thought I would share it.Look at the great series of articles Marc Suster wrote recently: http://www.bothsidesoftheta… and scroll down to the articles on becoming a great angel investor.Now look at meNow back at MarkSadly, I am not a VC like Mark(ooops I digress!)The point is that right now the angel infrastructure has ramped up massively and has gotten organized (Angel list anybody?) and yet the number of companies started by well known founders and alums is not large enough to soak up all of the demand from the investor base. So they have to group together to do these deals – and once they start doing that ultimately they start to look like there is some evil cabal.Now that said, Marks last point – which is that you need to know the right people to get a good exit – still holds true in every way. As long as Google is buying a company a week – and you are funded by 6 ex Googleers with deep connections into the ruling troika and the rest of the apparatus you are going to get out a lot easier.Given that this part of investing is arguably the most important piece of the pie (I can already hear the rebuttal – and as a caveat I would say that in successful companies picking the right team at the right price with proper execution trumps exit because those companies will always have their own fate in hand) when things go sideways or down – and most venture investments do – it is more and more important for this band of angels to exist and thrive.Not sure where I read it (I think it was Vanity Fair) but it mentioned that one of Ron Conway’s early funds was something like 98 strikeouts – and then Google and Pay Pal. I’ve heard the same about one of Kleiner’s funds from that era. Given this – and given the large number of companies that angels fund (500 Start-Up’s?) I would argue that from a portfolio standpoint, from a return on invested capital standpoint, the Google’s and the Pay Pals will emerge regardless of whether the angels are there or not – it is their job to be there – but the key thing will be to make sure that the companies that go sideways or down recoup as much capital as possible. If run correctly, angels will quickly move these companies off and salvage what they can before the end. By reducing losses they will massively increase their ROIC’s. VC’s can’t really do this based on their fund structure and because they are likely less connected to the buyers on a day to day basis – and more importantly, they have to take bigger bets based on their fund size relative to the company size – so keeping the option alive makes more sense.

  23. Gary Sharma

    Step 1. If a system can be gamed, someone will try to game itStep 2. If he / she gets away with it, others will follow, especially if serious money is to be madeStep 3. Thats when social proof starts kicking in and the party gets crowdedStep 4. Eventually stuff leaks out and someone blows the whistleStep 5. Then comes the witch hunt, the media uproar and casualties followed by tightening of rules & new legislationStep 6. Things quieten down … for a while at least … until it begins all over againThe battle between those trying to create a level playing field and those trying to game it is eternal. Steroids in baseball, creative accounting, insider trading … the list is endless

  24. andyswan

    Anyone want to collude on some bourbon?

    1. akharris

      Think that’s the second time this week you’ve brought up bourbon.I’m in. Maybe it should be the unifying theme of the next AVC meetup.

      1. karen_e

        I spent my morning walk to work debating bourbon vs. Scotch in my head. As a nursing mother I don’t imbibe either too much right now, but my day will come. Anyway, thanks for the deep thoughts, Andy. Ha!

        1. Yulian

          definitely scotch…

        2. akharris

          Spending a semester in Scotland made me a firm believer in the restorative powers of scotch. But I’m trying to broaden my horizons these days with a bit of bourbon.Plus, if we want to talk about a market where valuations have gotten unbelievably out of whack, scotch would be a brilliant case study.

          1. Yulian

            if we are going to do a case study, i think we should start herehttp://www.huffingtonpost.c…

        3. ShanaC

          I will be there when you get a chance- all for the single malt….

          1. Douglas Crets

            Oban, folks. That’s a scotch I can sit behind at any bar that carries it. Irecommend Lillie’s in Union Square, if you are ever in New York City.

    2. ErikSchwartz

      It’s a little early here on the east coast for whiskey.Perhaps this afternoon.

      1. Melanie

        No doubt this is way off topic, but I just came across this thread and am looking for some assistance. I have a small (very small $50k annually) wholesale chocolate business. I’ve been turning away business left and right (some to large national chains) due to a lack of space/equipment/staff. I personally do not have the $$ to take this business to the next level. Any suggestions on how to go about getting assistance? We have great credit, but wouldn’t get approved for a traditional bank loan due to existing home-equity loan. Any suggestions? Thanks! I am also on the East Coast…too early for Whiskey!

  25. ErikSchwartz

    You have to hand it to him. Mike is really great at stirring the shit.

    1. Tereza

      a heat-seeking missile.

  26. Mav8r1ck

    Hmmmph. First three blogs I read this morning sound like the online version of “Professional” wrestling. Sad.

  27. sheynk

    I figured I’d expand my 140 character comment a bit :-)– Fred, I think more “collusion” happens during a sale of a firm, when investors will kill deals while searching for the strategic whale. –On the buy side, we see investors trying to hype the team and technology to a buyer hoping that the field of similar tech stacks and similar (limited) commercial traction companies remains invisible. Obviously its part of the job, but stratospheric valuations and needless secrecy puts a lot of good financial buyers off.The SaaS space is ripe with this … and ironically the closer to the end of a particular “vc cycle” a company is, the more flexible the investors become to non stratospheric valuations… the “magic” of the asset is not as important when the fund needs to close.With tech, the correct assumption is that a huge number of companies will try the exact same thing at the same time and the correct timeline guess (could be earlier or later… as seen with ovp/cdn space) for investing will yield a good exit on the other end. I see this most frequently when during the first few years of a market sector the infrastructure game changes up (do I keep racks at equinix or just virtualize on rackspace or amazon?) and a host of new companies come out of the gate operating at better margins.Though this phenomenon happens at the other end of the cycle you are discussing, it is just as prevalent and often harmful to entrepreneurs. This is where ipo/sell/buy/grow/etc pressure comes in.Cheers,g

  28. Tara Tiger Brown

    As an entrepreneur who is just now talking to investors, I’m not sure who to believe anymore. On one hand it emphasizes that I need to *really* ensure due diligence before conversations start (and during), on the other it makes me reconsider if it is the correct route to take.I think one difference from 10 years ago is that I wouldn’t have heard about this as quickly, and it would have come second hand as opposed to tweets & blog posts from the people involved.While I take my time to weigh all sides, I am at least thankful that more VCs and Angels are sharing insights and being as open as they can be to establish the kinds of people & firms they are.

    1. HowieG

      You need to find someone you trust to look out for you. I have two Investment Banking friends to run numbers by, so I know I am looking at things realistically, and a Lawyer to review any potential deals. We all tend to overvalue our business when it comes to what we can get for selling part of it. If someone objectively tells you the truth you can at least gauge potential offers, negotiate better, or decide not to sell if you feel you are not getting the value you feel it is worth.

  29. HowieG

    One comment on the blog post by Arrington and it is something I call Mashable on all the time, and the reason Mashable is not a worthy source of news (I call it the People Magazine of Social Media), is the details. As Fred, myself, and anyone else with a Finance background know, we love details. We might not be Micro oriented people, often we are Macro big picture, but we need the details to support strategic decision making.Arrington left out details, and he should be taken to task for blogging about this.1] He is a blogger and runs Tech Crunch. They know this.2] Just because he knows these folks he has no idea what was going on and assumed his thesis (he never claimed any participants told him the real content of the meeting)3] He never said whether or not these guys trusted him with secrets. Would any person at that table tell him about a pending investment that they wanted to keep secret before the deal was signed?4] Also sounds like he was a bit hurt and that is why he blogged.My question to Fred is if you were having a dinner meeting to discuss an investment that was high profile inside your office, that you were really nervous someone might get before you, would you allow a friend who was a very well known blogger/media outlet to sit a dinner to listen to things?And since all the Angels were small time (vs say Kleiner Perkins etc), what if this was a big deal they needed to pool resources or miss out to the big funds?

  30. Douglas Crets

    I don’t know, yet. No avid fishermen, or someone who spent a life on the sea would look at a calm ocean and say that a rogue wave wasn’t swelling up somewhere.

  31. ian_peterscampbell

    My problem with Arrington’s column is his claim that 10 guys are responsible for “nearly 100%” of early stage Silicon Valley deals. That just isn’t true unless “nearly 100%” and “early stage deals” are interpreted so liberally as to be meaningless. <snark>it is certainly possible that his 10 “good friends” fund nearly 100% of the early stage startups that he blogs about, but that isn’t the same thing.</snark>I’d be interested to know whether those people legitimately represent a large enough percentage of the market (the whole market) to be reasonably able to price fix in the first place.

    1. fredwilson

      yeah, that is bullshitthat market is a lot wider than that

  32. William Mougayar

    WOW. You VC’s are full of tricks…:) Poor entrepreneurs who don’t have time to study all these antics. I’m keeping my nose to the grindstone, but watching that fight is more interesting than watching wrestling on TV. I didn’t realize the VC community had so many angry men…McClure and Arrington can start a fire anytime, without any help. Trick is to figure out which half of what’s being said is bullshit and which half is not.

  33. Gorilla44

    I’m an entrepreneur who has closed probably 10+ investment rounds, both angel and VC. I’ve been colluded against in EVERY deal I’ve ever done. Angels calling angels to bully me on terms or VCs calling VCs to push down valuation. EVERY deal. They weren’t even secret about it.The entire industry is based on collusion. The VC industry is very small. I bet Fred can reach any IT VC in the country with 1-2 phone calls. In the biomedical world, it is even smaller. Everyone knows each other.A VC is a pot calling the kettle black if you are criticizing angels for collusion. Collusion is not dead. It is more alive now than ever.

    1. Douglas Crets

      On balance, anyone can call 1 to 2 people and connect to 1 to 2 otherpeople. That has nothing to do with someone’s power or notoriety. It has todo with a connected global internet and vast networks of people working onsimilar ideas.

      1. Gorilla44

        It is still collusion.I don’t have a problem with this. I knew about collusion in the angel/VC financing world before I started my first company. It is what it is.

    2. ShanaC

      I also think, despite the fact that i liked this comment- most people do not realize how porous communities are. One of the most frustrating things we’ve learned from socail networking (and possibly this experience) is that information is leaking out way too easily because your third degree relationships are in fact never who you’d thought they would be. I’m sure if you looked up your network of friends from college, and then looked up their network, and they looked up their network- it isn’t as much collusion as it is people trying to seal off pores for the sake of feeling comfortable we don’t want to know that it is six degrees of separation between us and the outside hordes

    3. fredwilson

      i didn’t criticize anyone for collusionand you are wrong gorilla44i’m working on a deal right now where i could easily collude with a few VCs to push the valuation downwe did the opposite and agreed to a higher price

  34. EddS

    Mike is planning for his exit from TC when he sells the company and rolls the proceeds into, guess what…. A Super Angel fund. He will be a hero among entrepreneurs.

  35. michellegreer

    I sort of wonder if all the hubbaloo has anything to do with the fact that all of those people will be at Disrupt next week, and Arrington wanted to get the conversation started early.I’m not saying he did it mindfully and maliciously, but as a journalist, I would be sure to cross my t’s and dot my i’s before making a statement that is so strong.

  36. Tereza

    What I don’t get, as an entrepreneur, is how to deal with these syndicates of angels and their definitions of what is a “competitive investment”. I don’t know any of these people personally but I hear things like, “Oh, I’m part of a group of 7 illustrious names already in together on a social shopping play.”Now in fact my startup is entirely different from their investment, except for one rudimentary element.So my inclination is to steer as clear as possible from each of those people. But now my list just got shorter.It’s this definition of what makes an investment “competitive” that I just do not understand, and I feel unprotected. So I’d rather stick to people I know personally, have worked with, and trust.Furthermore it would strike me that a “superangel”, if they exist, SHOULD be making competitive investments across a space they believe in. And then should figure out how to create Chinese walls between them. At the seed stage you may have a good sense that the segment will win but precious little hard data to pick the winner.I could be wrong but I sense this obfuscation is used to their advantage.

  37. albeit

    I don’t care if VCs share information and try to get more for less. Entrepreneurs certainly do that, more so than ever before.And any agreement people make amongst themselves to accomplish their goals is their own business, in my opinion.

  38. bradsvrluga

    With all due respect, Fred, I think you’re being a bit naive on this one. Perhaps you don’t see collusive behavior or angels trying to keep you out because you have achieved the position you have in the pecking order of the industry, but I can assure you that collusion continues in the venture world. I’ve been on the receiving end of a number of collusive calls around competitive deals in the past year or so. It would shock the heck out of me if I hadn’t been. It’s not good behavior, but there’s little mechanism to prevent it – in fact the colluders are frequently rewarded, so people continue to do it.We recently had a portfolio company that we had seeded out raising a large new financing. It came down to term sheet time and we had to very reputable investors, both of whom we liked, come to the table with term sheets. Eerily, each term sheet left space for one more investor, offered virtually the exact same economic terms and, amazingly, made the same very odd error of semantics in one key term. As our very experienced lawyer said, “I’ve not seen anyone make this error once in 15 years of venture deals, to have two firms innocently make the same error within 48 hours is a bit hard to believe.” Then both firms called us up and said, “hey, if there’s another lead who’s interested, why not have them join our round?”I’m normally no fan of conspiracy theory, but this one stinks. And even if we’ve read this situation incorrectly, I can assure you given phone calls I’ve received in the past couple years that despite what you’ve seen, collusion is alive and well in the venture business.

    1. fredwilson

      that is disappointingi had thought our industry had moved on from such things

  39. Matt in SF

    Call me crazy, but I can’t believe all these top angel investors would fight City traffic to trudge up to the northern most tip of the City to a tiny wine bar in a residential neighborhood with hardly any parking to have a meeting in a public place. Something is off here.

    1. Tereza

      LOL.I don’t know the geography or the the players involved…but i LOVE how you think!What fun would life be without conspiracies!

  40. paramendra

    Mike’s post and this post have to be read together. You get both sides of the table. Wait, that phrase might be copyrighted.

  41. Holy Schmidt!

    Hi Fred, when you say “Our firm does invest in the seed stage marketplace. We’ve done that in about 40% of our investments.” Are you talking in # or $$?

    1. fredwilson

      number of dealsin dollars the % would be tiny because the seed investments are small

  42. daryn

    With angels, I think there is a lot more accidental collusion than malicious collusion, as many of them don’t have the ability to determine fair valuation on their own, so they look to others that they know are also considering the investment. More groupthink than anything else. Because the angel rounds are usually less competitive / can fit everyone who wants to participate, it’s much more likely than when VCs are around.

    1. Tereza

      +1My suspicion (or naivete) suggests it is not out of malice. But I am certain it happens all the time, because the system is aligned toward it, with almost zero disincentive against talking.

  43. Simon Olson

    Regardless of what was or was not discussed at this meeting, I can’t help thinking that some of these “Super Angels” brought this upon themselves.When you foster a culture of intolerance, cynicism, paranoia, and a lack of civility, it has a way of coming back to you.In this case, many* of the “Super Angels” have been content to fan the flames, exploiting the normal fears and insecurities of first time entrepreneurs to gain a marketing advantage in their attempt to wrest market share away from traditional players like venture capital firms.It is almost as if the lack of tolerance and civility common in American politics today transcended the political realm and permeated the venture capital ecosystem.Like Cold Warriors content to fan the flames of extremism until one day it was directed at them, now the very paranoia, cynicism, and intolerance that many of the “Super Angels” were content to promote has come home to roost.Living outside the US, you gain a real appreciation for just how special (and sacred) the Silicon Valley ecosystem is.It is a shame to watch it being hamstrung and poisoned by such irresponsible acts.Lets hope that recent events help angels and venture capitalists remember that we are fighting a common enemy–the millions of problems that can kill startups–and not each other.*Not all, but many.

  44. Aviah Laor

    A devils’ advocate comment, since it looks like another brilliant Techcrunch post (to discuss these issues in a restaurant when Arrington is around you have to be super-stupid and not a super-angel). The agenda according to Techcrunch:1. Complaints about Y Combinator’s growing power: Complaining is legal (but tech blogs like the X vs. Y theme).2. Complaints about rising deal valuations: Good. Bubbles should be killed when they are small.3. How the group can act together to keep traditional venture capitalists out of deals: Why not. Angels have to keep their margin. Like everybody else they need to buy cheap and sell high to VCs LATER.4. How the group can act together to keep out new angel investors invading: That’s easy. Just blow a bubble, burst it, and make everybody loose his pants. Just the opposite of this alleged agenda.5. More mundane things, like agreeing as a group not to accept convertible notes in deals : Fair. You take the risk now, so you can’t price it later.

  45. William Mougayar

    Also, can’t an entrepreneur do a reverse collusion of sorts where they play-up VC’s against each other during a term sheet process?

    1. Tereza

      Isn’t that what the AngelList guys call “mass syndication”?

      1. William Mougayar

        No, that’s not what I had in mind. What I meant to depict is a circumstance where the startup receives 2-3 term sheets about the same time, and they play them up against each other. Conceivably, the startup can plan for this timing to happen.

  46. Seventy_Seven

    What’s wrong with VCs that they need to compete? Shouldn’t there be more quality entrepreneurs and investment opportunities than risk capital available to finance them?

  47. JLM

    Take a deep breath, exhale, deal w/ the obvious. It would be remarkable — in a man bites dog way — if there were NO collusion going on. Think about it and then inspect the evidence from a historical and logical basis.The world is divided between those who are handing out money and those who consume those tasty little handouts. Always has been. The dynamic tension is typical of those adverse situations which make the business world go around — landlord v tenant, supplier v consumer, contractor v owner.In all of these relationships there is an element of symbiosis of common destiny, but there is also some good old fashioned jockeying to see if you can get the “bigger half”. If you grew up in a household w/ siblings, the smartest parents let one kid cut the cake and the other kid pick.The biggest banks in the world used to form syndicates to pursue big loan transactions thereby ensuring they did not really compete with each other and did not experience margin compression because — God forbid — they sharpened their pencils. So, they invented the “loan syndicate”.Borrower v lender — game on.The VC world — from both sides of the table entrepreneur and investor — is trying to standardize everything. A damn good thing. In my view a normal maturation of the market which while certainly streamlining the marketplace also stands for the proposition that a few less frogs will be kissed overall. A good thing. Who likes frog slime?Entrepreneurs have got to get their big girl panties on and do the normal “right” things.Know exactly with whom you are doing business because a BAD reputation has never really ever been reversed. Get some competition into the mix. Force it to happen. Go meet a lot of folks in a short period of time. Get your pitch razor sharp. Watch their eyes and refine it when they begin to bead up. Kiss lots and lots of frogs. Keep your knees crossed until Prince Charming shows up and then enjoy your night of passion.Don’t let anyone push you around and go seek the counsel of folks who have been to the rodeo once or twice. They are willing to assist. I promise you that other entrepreneurs WANT to help. Remember that in the marketplace, you do not get what you deserve, you get what you NEGOTIATE.And, oh yeah, hire a damn good youngish lawyer with whom you have a great connection and relationship. Listen to what he says.So, bottom line, sure there is collusion going on — what the hell do you think a bunch of VCs would talk about when they had a few drinks in them?But it really doesn’t mean anything because the world is getting smaller, the capital is more fluid and mobile, you are getting pretty damn savvy about how the money game is really played and, most importantly, you look marvelous!Do try to do business w/ nice people because it is the most important decision you will ever make.Big secret — the guys with the money only get paid to give it out. They INVENTORY money. Sure, they can be a bit prickly to deal with sometimes, but they live to give out money. Help them do it.

    1. fredwilson

      OMGyou crack me up so muchand you also provide such great advicetake a deep breath, relaxso truei reblogged part of this on

  48. LeTicia Lee

    I hope vd colluding has in fact ended as you say. I realize that there will always be a few that will try to get away with what they can. But nonetheless, overall I’d like to think vc’s realize that a good venture is one worth paying the price.Lee

  49. Mark Montgomery

    Fred,I hope you are correct, but doubt that you are. If there is one thing I have learned in private equity and venturing, particularly when the most money is at stake, is that people will do almost anything — what you don’t see is far more important than what you do.If you have a reputation for being ethical, you will never be invited to a party of market manipulators or collusion. I make a point of making it known that I despise collusion, price fixing, and skimming off the top– it’s bad for markets and the economy.I don’t have much respect for venture capital or the vast majority of angel investors, not so much for collusion– I would be shocked if attempts were not ongoing, but rather for ignorance and laziness. The majority herd, and don’t think for themselves. I have tested with $350billion worth of current value that was considerably less than $100 million when I pitched– most wouldn’t recognize value if it fell out of the sky and landed on their desk.Realize it sounds naive, but our economy depends on it correcting — they haven’t done the work and therefore don’t deserve the reward. The tragedy with the club approach is that everyone else loses trust in the markets, and refuse to participate. I am one of only very many.

  50. Steven Kane

    My problem with collusion is, I keep trying to collude, but all I get is fleeced.

  51. Oladayo

    Fred, was your last sentence an intentional rhetorical exaggeration, a joke, or a mistakenly written sentence? It is serious, surprising, and offers a glimpse of both your conviction and your notion of reality. It is my belief that it was meant to be a joke. Is that correct?

    1. fredwilson

      i am seriousi mean that last sentence

  52. giffc

    I did hear one smart entrepreneur who raised a seed round in NYC fairly recently quietly mutter the word “collusion” and implied that all the syndication in NY was getting dangerously clubby. But as Battle says, that might just be a moment in time. I am only just starting the process for a seed round so cannot speak to it myself, but it is a data point.