A Conspiracy Worthy of Oliver Stone

A secret meeting in a restaurant back-room, high-powered financiers and a plot to squeeze out rivals.

It sounds like the makings of a Hollywood mobster epic. But it is the premise of a controversy surrounding Silicon Valley’s tight-knit investing community following a widely read report by a technology industry blogger.

Michael Arrington’s post on TechCrunch said a cabal of “Super Angels”—deep-pocketed entrepreneurs who invest in promising Internet startups—conspired to devise ways to drive down valuations of companies and lock out other investors, has set off speculation and strongly worded denials across the Web.

Right or wrong, it cast a harsh spotlight on the sometimes opaque, cozy financial system that plays a crucial role in nurturing the industry’s next generation of companies.

TechCrunch’s account of what happened is being taken seriously enough that, according to one source who spoke to (VCJ online affiliate) peHUB.com that law firm Wilson Sonsini Goodrich & Rosati sent out a note advising recipients that if they had clients who were in attendance at the dinner, they’d be hearing from the FBI.

In the TechCrunch post, Arrington said that after the meeting two participants told him that the group discussed the growing power of the Y Combinator program, how to combat rising valuations as a group, and how the participants might better keep VCs out of deals entirely.

Such dark claims have been dismissed by angel Dave McClure, who said he was at the dinner and wrote about it on his blog. The founding partner of the 500 Startups fund, McClure fired back at TechCrunch in a lengthy and profanity-laced blog post, calling Arrington’s report a “bullshit superangel conspiracy theory.”

McClure, who’s in the midst of raising $30 million for his fund, which he describes as “a micro-venture fund,” said he attended the dinner, but said the purpose was to discuss trends in technology and startup companies. The dinner conversations were just “kvetching” among friends, McClure blogged.

Another angel with knowledge of the dinners — which have been recurrent and are attended by different angels each time — called Arrington’s claims slanderous. Yes, this person said, valuations have gone up and it’s a pain for angels, but the dinners are purely networking get-togethers for friends in the same industry to vent and share what they are observing.

“It’s not like there’s [a formal] organization for angels [akin to the National Venture Capital Association],” said this person. As such, it’s up to interested angels to organize meetings to talk about issues in their fast-changing — and growing — industry. Indeed, he says, the same kind of networking takes place at conferences including the Lobby, D or at Y Combinator Demo Days, he said.

The angels come together “not because we think we’re the best or we’re elitist,” but because they know one another, including, in many cases, in their past lives as entrepreneurs, this person added.

In the meantime, Arrington, who was an attorney before he became a tech blogger, is sticking to his story. In an interview with peHUB.com (an online affiliate of VCJ), Arrington said “the story is 100% accurate. Two different people called me [after the dinner] and I called one person.”

Arrington added, however: “It’s not clear that [the gathered investors] knew what they were doing was wrong. They didn’t come up with a game plan. But just talking about this stuff is hugely illegal.”

The two sources who called Arrington, “called to apologize for not talking to me while I was there, then they launched into how it was weird, and how, ‘personally I wish I wasn’t even there,’” he said.

Arrington added: “One of the guys who talked to me said, ‘Can you imagine John Doerr [of Kleiner Perkins] and Mike Moritz [of Sequoia] having dinner together to talk about deal terms and valuations?’”

Conspiracy Skeptics

Not everyone is convinced that a powerful group of angel investors are scheming.

“I don’t believe in a conspiracy,” said Hans Swildens, the founder of San Francisco’s Industry Ventures, a secondary firm that invests in venture capital and super angel funds, as well as startup companies.

“I’m sure that people are trying to get better prices in the market, because that’s what everyone tries to do when they buy things,” he said. “But I don’t believe in deliberately colluding and forcing a market price down for angel investments.”

Jeremy Liew, managing director of Lightspeed Venture Partners and an investor in social gaming company Playdom, said he found the report’s allegations very surprising, and noted they were at odds with his experience working with Super Angel investors.

An unnamed group of Super Angel investors, who together account for “nearly 100 percent of early stage start-up deals in Silicon Valley,” secretly convened at San Francisco’s Bin 38 wine bar recently, according to Arrington’s report, which appeared on TechCrunch on Sept. 21.

Seated around an oval table in a private room, the attendees discussed how to reduce rising startup valuations as well as how to keep new angel investors and traditional venture capitalists out of deals, according to anonymous sources cited by TechCrunch.

The identity of the other attendees remains a matter of speculation, with online commentators analyzing Twitter posts and other clues to divine who might have been at the table. Reportedly, Bryce Roberts of O’Reilly AlphaTech Ventures and David Lee of SV Angel were part of the group.

Not part of the group that met at Bin 38 was Ron Conway—Silicon Valley’s best known seed stage investor and a mentor and inspiration to many of the angel and seed stage investors to emerge on the scene in recent years.

Following the TechCrunch report, Conway, who was an early investor in Google and continues to hold stakes in Facebook and Twitter, wrote a lengthy email (leaked to TechCrunch) chastising angel investors who allegedly attended the dinner and calling the allegations of collusion “despicable and embarrassing for the tech community in my opinion.”

Conway wrote: “I think you have a different value set and lets agree to disagree and not have to even engage in any idle chit chat or discussion of any sort….ever.”

He went on to write: “I wish the Angel community could have the same integrity and values of the entrepeneur [sic] community, but unfortunately I now believe that is hopeless and your actions prove that. … What do you think the entrepeneurs [sic] you have funded are thinking right now.”

The full text of the email can be read here.

The online dust-up comes as a new crop of startups focusing on social networking and mobile computing is drawing attention from investors looking to get in early on the next Facebook or Google.

“The valuations are twice as high now as they were 12 months ago for these angel deals,” Swildens said.

Meanwhile, organizations, such as Y-Combinator, which hold events to showcase startups to swathes of investors, have increased the competition among investors.

Paul Buchheit, a former Google engineer who has made angel investments in numerous companies, including finance website Mint.com, said it would not be surprising for angel investors to gather to talk shop and exchange notes.

Because angels invest smaller sums of money in startups, it is common for angels to pool their money to invest, he said.

But Buchheit said he thought it unlikely that price collusion would be effective in that world, since investors—if found out—would be shunned by startups and shut out of future deals.

“The way you win is not at getting the lowest prices, but in being able to get in on the best companies,” Buchheit said.