

Collusion (Fred Wilson's thoughts on the Bin38 meeting) - bjonathan
http://www.avc.com/a_vc/2010/09/collusion.html

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shawndumas
The Hacker's Guide to Investors [1]

...

16). _Investors collude_.

Investing is not covered by antitrust law. At least, it better not be, because
investors regularly do things that would be illegal otherwise. I know
personally of cases where one investor has talked another out of making a
competitive offer, using the promise of sharing future deals.

In principle investors are all competing for the same deals, but the spirit of
cooperation is stronger than the spirit of competition. The reason, again, is
that there are so many deals. Though a professional investor may have a closer
relationship with a founder he invests in than with other investors, his
relationship with the founder is only going to last a couple years, whereas
his relationship with other firms will last his whole career. There isn't so
much at stake in his interactions with other investors, but there will be a
lot of them. Professional investors are constantly trading little favors.

Another reason investors stick together is to preserve the power of investors
as a whole. So you will not, as of this writing, be able to get investors into
an auction for your series A round. They'd rather lose the deal than establish
a precedent of VCs competitively bidding against one another. An efficient
startup funding market may be coming in the distant future; things tend to
move in that direction; but it's certainly not here now.

\---

[1]. <http://www.paulgraham.com/guidetoinvestors.html>

~~~
spolsky
Ah, that's just baloney. I'm sorry to disrupt your belief that the Canon of
Paul is strong enough to overpower any possible truth and to settle any
possible HN argument, but that is just not true.

Stack Overflow got investors into an auction for our Series A round (including
Fred Wilson, the author of this post, who ultimately invested). So did Quora
(obviously, based on their valuation). So did any number of other hot
startups. When the deal is hot they'll all crap themselves to get into it.
When they think they're going to make 10x or 100x they're not going to worry
about whether the premoney is $10m or $15m because they're dreaming about
selling at $500m.

Paul has a unique view of raising capital, one that comes from the perspective
of dozens of undifferentiated two-person startups with 3000 lines of code
written over ten weeks and no barriers to entry or defensible positions
because they have 3000 lines of code written over ten weeks. That's a position
where maybe you don't have so much leverage with investors. It's only one
aspect of the market.

What is true is that top notch VCs don't like to act like they're in an
auction, because it makes them feel unloved, as if we only cared about them
for their money. This is partially true... there are a lot of factors that are
WAY more important in raising a series A than valuation, but that's a part of
the VCs overall bid. And proper decorum dictates that the auction be done with
finesse, because most VC bidders will drop out if they think they are just
being used to get a higher price. But the idea that there's collusion in
investment is just not borne out by the evidence: post money valuations vary
wildly.

~~~
brlewis
Your examples of Series A auctions help this conversation a lot, shedding
light on how competitive the 2010 startup investment market is.

Your disparagement of pg's view of raising capital doesn't help. Regardless of
its merits, it comes across as ad-hominem. Regarding its merits, you ignore
several things: His experience raising capital did not start with YC; it
started with viaweb. The essay quoted has a paragraph at the bottom thanking
people for reading drafts of the essay. Surely that list includes people whose
opinions you respect, who would have said something if the essay was baloney.
You ignore the phrase "as of this writing" that refers to April 2007, when
from the perspective of someone considering a startup, the Series A auctions
for Stack Exchange and Quora were indeed "in the distant future".

I'm as against fanboyism as anyone, but you have to be careful and factual
when you criticize, else you'll fan the flames rather than quench them.

------
chime
> This is not a market suffering from collusion. It is a market where the
> investors wish they could inject some collusion.

If this is true then there is even more reason to believe that the Bin38
meeting was meant to inject some collusion.

~~~
spolsky
Baloney. These guys didn't get rich by thinking they have market powers that
they don't. There are zillions of angel investors who weren't in the room who
were the ones who were raising the prices, including plenty of loose-cannon
hedge fund guys in New York that fund companies that the Bin38 crowd don't
even know about. The idea that ten or twenty angels could collude is about as
realistic as the idea that you and your friends from Andover could force
Stanford to lower everyone's tuition by meeting at a pizza parlor and making
plans.

~~~
po
I don't know if there was collusion or not, and I wouldn't dare to offer my
uninformed opinion, but with all due respect, saying that there are too many
angels for collusion to even be possible doesn't seem right to me.

If there are zillions of angels and all of them are equal, then sure it's
probably a very hard market to corner. But from my view, there are hot
startups and those startups want the very best angels. I would guess it
follows a power law distribution. Startups want money, but they also want name
brand money and the powerful connections that come with it.

These angels may miss a few deals here and there to the angels who aren't in
on it, but I think they can move the terms in their favor.

I also think your analogy works better the other way around: even though there
are almost 5000 US colleges to chose from - some of them extremely accessible
- I think the top 10-20 schools could easily collude to extract better terms
from students. This is because the name recognition is important.

~~~
notahacker
Apart from name recognition there's also the distinct possibility that the
"super angels' " experience and connections in this area means that _whilst in
competition with each other_ they're willing to invest at much more generous
valuations than those with less ability to evaluate the potential returns from
a particular hot startup would consider. If it was possible for them to
collude, they can invest on only slightly better terms than the rest of the
market would be willing to countenance. It would be equivalent to the
industry's top payers agreeing to cap pay rises.

Just because there are alternatives and they're still offering a better deal
than everyone else doesn't mean that such market manipulation would be legal
or fair.

------
jacquesm
Good to see someone bring some balance to this whole thing. You can read
between the lines that he's pretty careful about not offending anybody, but at
the same time lays out some pretty clear reasons why there likely is nothing
to it.

My personal take on this is that as long as there are more people wanting to
do deals with angels than there are funds it's a buyers market and you'll have
to live with that.

Part of that is that angels set some of the terms and have some influence over
the price. And if they set their valuation too low or you (the start-up) sets
the valuation too high is that there is no deal.

But when there _is_ a deal then you can assume that it is to everybody's
benefit. After all, no deals -> bad for investors and start-ups alike.

------
johnglasgow
"Collusion" can occur at the angel level even if it's only the top 10 angels.
However, there's nothing wrong with them discussing deals and the proper
valuation for a company.

~~~
gthank
Discussing "the proper valuation for a company" is pretty much begging a
regulator to at least investigate price-fixing.

------
rywang
I had trouble following Fred's logic. I follow his argument about VC
collusion: a competitive market and unwillingness to syndicate leads to less
collusion. However, his statement about angels boils down to, "I know most of
these investors and I know what is on their minds right now." Are there market
forces that drive angels not to collude?

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messel
It's not the meeting that's important, but what it implies about SV deal flow.
There's something wrong with it.

[http://www.victusspiritus.com/2010/05/12/epic-the-end-of-
ema...](http://www.victusspiritus.com/2010/05/12/epic-the-end-of-email/)

That's great news to me as I live several thousand miles away.

------
bjonathan
The war seems ON between "Super Angels" and VC.

Fred Wilson's post is passive-aggressive.

I can understand that he enjoys the opportunity to show that "Super Angels"
aren't actually...you know...real angels!

