OMG. This is super funny. I wrote the post below after work. I had to race to meet my wife for dinner & a movie (we have “date night” once / week) and went to see Town (which was awesome). I figured I needed time to spell check and edit before publishing so I would hit publish when I got home. Wow! I returned to my house, flipped on my Mac and see AngelGate, The Sequel. It makes my post even more poignant.
We all know about AngelGate by now. I thought I’d try to look at it from a different lens, that of the entrepreneur. Here’s what you need to know…
As a funny coincidence I happend to have written about the topic of collusion 3 weeks prior to the fateful dinner. Asked to respond to the topic, “What collusion happens with AngelList, if any” I wrote the following:
“Um, let’s not be naive here and not think that a “form of collusion” doesn’t happen on virtually any financing round. Investors talk to each other. As an entrepreneur you should assume that.
The best behaved investors will only call if they ask you first (for reasons of being burned by this in the past when I was an entrepreneur, I’m now pretty religious about asking and being totally transparent). But the majority of VCs & Angels all speak. They might not actively “collude” and say “let’s collectively keep the price down” but in the resulting discussion pricing information will flow – whether intentional or not.
To be crystal clear – I think AngelList is awesome and I have NEVER heard Nivi or Naval ever reveal or discuss pricing information. My assertion was that information flows outside of their process. People call each other. People call their friends. They’re not in search of price fixing or collusion, they’re in search of diligence information about the company. Typical questions:
- What do you think of management? How well do you know them? Have you reference them?
- Have you looked at competition? How well financed is the competition? What is their market traction?
- How much are they raising? How much is soft-circled (committed)? At what valuation? Convertible or equity? Cap or warrants?
So to be clear I think in the overwhelming majority of cases these are diligence calls to feel out the opportunity in which price discussions exchange hands more as a by-product of the call than the intention of the call.
This also happens with VCs. It is such a small community that it is hard to raise money by stealth. Information flows. That is why I tell people not to shop deals too widely. I’m not defending the practice (actually, I publicly loathed it) of VCs calling each other without consent – but it is. So acknowledge it to yourself and be prepared to deal with it.
I’ll give you an example of information flow at its worst. When I was fund raising for my second company we had agreed a company-wide deal with Salesforce.com to use our product. That was an important part of our “social proof” that we had built interesting technology. I asked every VC not to call Salesforce. I was concerned that too many inbound calls would put pressure on my fledgling relationship.
How did VCs respond? Two emailed Marc Benioff directly. He emailed the head of corp dev to say essentially, “who is this guy who’s telling everybody he’s working with Salesforce.com. Deal with it.” And as I’m sure you’re aware shit rolls down hill. Another group who were close with Parker Harris called him directly to discuss their views of us. I had asked them not to. They did it anyway. I didn’t work with them. Obviously.
So what is an entrepreneur to do?
- Do not mention the other VC firms, angels, seed funds, etc. to any investors that you are working with if you don’t have to. You can simply say, “At this stage I think it wouldn’t be fair to the other firms if I disclosed who they were. Some might prefer that we not.”
- I sometimes ask entrepreneurs. I have never betrayed this trust. I was once cut out of a deal by a firm that didn’t know me (they were the A, I was going to be the B – they shopped the deal to a firm they knew). I swore not to let that happen again. But I don’t call without consent. I usually say something like, “I know a couple of people over there. If at some point you feel comfortable and if it makes sense I’d be happy to speak with them.”
- If you have a “lead” investor agreed then the price is already set and you don’t have to worry about price. But it is still best to try and control information flow where you can.
- If you get the sense that you have interested investors but are worried they might all call each other, it is perfectly acceptable to say, in total earnestness, “listen, I know that investors all talk to each other. we’re intentionally not going wide with this deal. We met with you because we like you. We’d be grateful if you didn’t discuss this with other investors without checking with us first. We’re just trying to keep the information leaks to a minimum.”
- Once you’ve asked it’s pretty tough for investors to want to disregard that advice. It will happen, as I’ve outlined, but much less s0.
So is the market really colluding? I doubt it. I have many investor breakfast meetings and these often involve investors at all stages. We discuss things like what the general prices in the market are but not in a price fixing way but in a general commentary way, like “I can’t believe that guy paid 40 pre!” kind of way. We discuss deal structures. Often it’s to try and persuade people that we’ve found the right model. But I do the same thing with entrepreneurs and I do it publicly on This Week in VC.
Was the secret meeting at Bin 38 illegal? I wasn’t there but I highly doubt it was collusion. Did people say they want to keep VCs out of deal? Probably. That’s OK. It’s called competition. And sometimes VCs want to fund companies where we take the whole round and don’t mind paying slightly higher than angels want us to. It’s healthy competition. But I know virtually all of the people listed as having attended and I know them to be all high integrity people. If anything they’re fighting for the system to be more biased toward entrepreneur success than traditional VC success.
Was it collusion? I asked a person I’m close with who knows about these matters. Here’s what he said (name withheld but if wants to be public he can put it in the comments and I’ll give him attribution:
“To put it really really simply and roughly: 2 separate issues for antitrust claims: (1) abuse of (2) market power. Your question is about 1. But 2 is seemingly not at issue here. Aint no market power here, likely, depending on the definition of “market.” So if two investors even go so far as to agree to fix prices, which is issue 1, the company should say no thanks to that valuation and keep shopping for other lenders, of which there are many, to get a better price. That means there’s no violation of 2. Which means the antitrust claim sucks. Unless that room in the restaurant really did house all early round lenders in the tech space in the US. Which I doubt.”
But more than anything I’d like to plead for, in the words of my hero, Jon Stewart, we need a “Rally to Restore Sanity.” We’re all in the ecosystem together. Entrepreneurs need angels. Angels need VCs. VCs need corporations. Corporations need startups. VC’s need angels. And we all benefit from the tremendous innovation model that Paul Graham has given us in the past few years. Will it fundamentally “change everything?” I doubt it. Will it be crushed? No. The truth always lies in the middle.
[update] Is Ron Conway a great guy with good intentions in writing the letter he did? Sure. I think so. Do I agree with all his points? Not really. If you’re a seed fund that raised money from limited partners your fiduciary responsibility is to “make a buck.” But I bet his broader point was to tone down the rhetoric and stop with inside baseball. That’s probably fair. And of Dave McClure? He’s Dave. And I love him for who he is. Do I wish he’d tone down slightly? Sure. But I have never seen somebody be as tireless an advocate of the entrepreneurs for whom he works so I think it’s unfair to say otherwise.
So please watch this quick video (click on image or link above) for only 2 minutes starting at about minute 7. If you love Jon Stewart and have time start at minute 5. If you REALLY love him start at minute 2. Here it is – your moment of zen.
(Cross-posted @ Both Sides of the Table)