A top Silicon Valley blogger has leveled explosive charges at some of the most influential angel investors in technology, alleging they are engaged in a conspiracy to collude and fix price levels for early-stage investments.

Techcrunch editor Michael Arrington, a former Silicon Valley lawyer, made the incendiary charges Tuesday, describing how three sources told him of a plot by angel investors "to keep other competitors out of the market, or to discuss ways to keep prices under control."

Eric Goldman, director of the High Tech Law Institute at Santa Clara University School of Law, says the allegations are "very serious."

"At the most extreme, they could be criminal," Goldman told DailyFinance. "If there are any collusion efforts among angel investors, then it would be a huge public service to expose the collusion and get it to stop."

Collusion occurs when two or more parties team up to illegally stifle competition in the market; price-fixing occurs when two or more parties (known as a cartel) agree to set prices -- or in this case, valuations, for tech startups.

He Says, They Say, but It's All Hearsay

Arrington says he was tipped off to a meeting of the group at the restaurant Bin 38 in San Francisco, barged in, was kicked out, and then later spoke to three attendees who detailed how the angels are colluding to combat the growing power of startup incubator Y Combinator.

Arrington says his sources told him the angels also discussed "how they can act as a group" to reduce deal valuations, exclude traditional VCs from deals, and shut new angel investors out.

Very serious charges indeed. As The Wall Street Journal reports today, startup valuations have been soaring in recent years to levels not seen since the Internet bubble burst. Higher valuations give entrepreneurs more leverage and put angel investors at a disadvantage.

One of the meetings' attendees, well-known Valley investor Dave McLure, responded with a profanity-laden tirade in which he he called the charges "bullshit" and accused Arrington of sensationalism.

"The agenda was drinks, good food, & shooting the shit," McLure wrote. "It wasn't to collude, to price fix, to put out a hit on [Y Combinator founder] Paul Graham, or generally bust a cap in any founder's ass." McClure did not return a request for comment.

Can Collusion Be Proved?

Bryce Roberts, another Valley investor, copped to being at the dinner, but disputed Arrington's portrayal. "I was at a very different investor dinner than the one Mike wrote about," Roberts wrote. "The dinner I was at didn't have agreement on anything, let alone agreements and pacts as outlined in his article."

One prominent Silicon Valley angel investor, Ron Conway, told DailyFinance that he was not at the dinner and knew nothing about it. Another early-stage Silicon Valley investor who has not participated in the meetings said the allegations sounded far-fetched: "People have dinner. Big deal."

Goldman notes that at this point the allegations don't rest on much hard evidence -- it's all hearsay. "I'm skeptical that the facts are that extreme, especially because Arrington wasn't at the meeting, and so is relying on secondhand information where people might view the conversations very differently," he said.

That said, if Arrington can proves his allegations, then this could become a serious matter. "If Arrington's factual predicates are true, his conclusions follow from the premises," Goldman said. Arrington declined to comment.

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I am surprised that the world is surprised about this. If you know anything about the internals of Venture Capital where syndication (rather than free-market driven competition) is the norm, you will have witnessed like I did that price-setting and collusions happen every day. I have even seen them on the buy-side of technology at acquisition time. Hence the reason why I call Venture Capital an impromptu cartel (because entrepreneurs have no other option to achieve full runway support). And still only 35 out of 790 VCs can make any consistent money for their LPs. It tells you how dumb these investors are...to believe that as a derivative to the investment marriage between assets of the Limited Partner (money) and the assets of entrepreneurs (ideas) you can actually survive by not taking good care of either participant side of the investment marketplace. Best, Georges van Hoegaerden Managing DIrector | The Venture Company | venturecompany.com

September 28 2010 at 11:06 AM Report abuse rate up rate down Reply
Big John

This is the definition of Capitalism!!!!

September 22 2010 at 3:53 PM Report abuse rate up rate down Reply