Venture capitalThe cozy world of Silicon Valley venture capital and angel investors has been rocked by allegations emanating (naturally) from TechCrunch editor and founder Michael Arrington. His charge: A coterie of powerful investors have colluded to keep valuations high and diminish the power of entrepreneurs to get good terms for their companies.

I have no idea whether Arrington discovered some sort of collusion, but I have no reason to doubt his reporting. Certainly, the furious backpedaling that has resulted from his posts would seem to indicate some truth to the allegations.

But that doesn't change the basic laws of economics, in which supply and demand meet at an equilibrium to establish a price. And to suggest that this group of Silicon Valley angels can come anywhere near to controlling the market for hot startups is simply impossible to believe.

Awash in Unused Capital

Here's why. As we've discussed on these pages, the cost of starting a Web-based company built around some idea has plummeted of late. It's gone down so far that venture capital firms designed to invest in Internet companies and pay millions of dollars to help them get off the ground have found themselves awash in unused capital. That's because a startup can run for several years on well under $1 million and some Costco crates of cheap ramen.

With this much capital chasing this many ideas, it's simply inconceivable that a small group of angels could control such a vast and varied market, as VC Fred Wilson explains. What's more, there are literally hundreds of extremely savvy angel investors in Silicon Valley who may not pound the table as loudly as the A-listers. But these quiet angels have serious chops and can easily step into the breach should the marquee guys put their foot down a bit too hard on the necks of entrepreneurs.

Ultimately, the strongest entrepreneurs are less concerned with who their angels are and more concerned with being allowed to run their companies as they please and build them with a modicum of constructive interference. Conspiracy or not, money is like water -- and it flows around all objects of resistance.

Even these powerful angels can't lock up the best and the brightest in the face of a giant pool of angel capital looking for wells of innovation.

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georgesvh

Alex, It is not impossible to fundamentally change Venture, but it requires the compliance to free-makret principles, not the free-for-all madness that is also responsible for the mess on Wallstreet. Best, Georges van Hoegaerden | venturecompany.com

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