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Collusion (Fred Wilson's thoughts on the Bin38 meeting) (avc.com)
143 points by bjonathan on Sept 22, 2010 | hide | past | web | favorite | 16 comments

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

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.

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.

Wow, uh; ok...

I don't disagree with pg or you. You said it best with these two points:

1.) "When the deal is hot they'll all crap themselves to get into it."

2.) "Paul has a unique view of raising capital, one that comes from the perspective of dozens of undifferentiated two-person startups..."

This really is a case of the exception that proves the rule. The presence of a few exceptions establishes that pg's general rule does exist. (Hence your qualifier in your first point that I listed.)

And as to being a fanboy -- I am one of yours as well ;)

> 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.

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.

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.

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.

right on, small groups != market trends But there's a driving force getting those folks together in the same room. I think it's a sign of great seed deals moving out of the valley.

> I think it's a sign of great seed deals moving out of the valley.

I'd consider that good news.

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.

"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.

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

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?

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


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

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!

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