Dan Primack

The latest on private equity, M&A, deals and movements — from Wall Street to Silicon Valley

Super-angels have dinner, all hell breaks loose

September 22, 2010: 11:33 AM ET

The VC world is abuzz this morning with Mike Arrington's report about a "secret meeting" of super-angels in San Francisco. He alleges collusion against both entrepreneurs and traditional VCs.

One of the meeting participants, Dave McClure, has already written an entertaining screed against Arrington's report, and I don't have enough inside knowledge to take sides. However…

There seems to be an inherent contradiction in Arrington's story: If super-angels are planning to price-fix, wouldn't that enable the very "traditional" VCs that they are purporting to thwart? If McClure, et al. begin offering below-market terms, wouldn't the large checkbooks be emboldened?

Moreover, the very reason that so many individual angels became super-angels was to reduce the need for deal syndication. This would seem to encourage it, since meeting participants would need to work together in order to preempt the aforementioned competition.

Finally, I rarely believe in collusion reports. Sure it sometimes happens (see Gedman, Rich), but usually it's a lot of hot air (see buyouts, big).

I wrote the above in this morning's daily email (sign up here), and already have gotten a bunch of emails from true believers. Here is one of the more thoughtful ones, from a successful (non-angel) venture capitalist:

Your skepticism about the ability for super-angels to price-fix is misplaced.  An entrepreneur will usually get to an angel through a referral from a mutual friend.  The connection is imbued with a certain amount of trust because of that friend's introduction.  Said angel tells the entrepreneur "You really should raise an angel round of $1m - $2m to prove out some metrics before you go and raise a venture round."  And to be "helpful", the angel offers to make introductions to other sophisticated angel investors to seek out their advice as well.  Of course, those other sophisticated angels are the first angel's co-conspirators.  This scenario relies on a certain amount of deal flow being fairly proprietary - which it is - contrary to popular belief, every deal isn't extensively shopped up and down SandHill (for VCs) and Palo Alto or South SF (for Angels).  I would hazard to guess that most deals make half-a-dozen initial connections with a few follow-on referrals.  Venture/angel investing is not a transparent or liquid market.
If the "Super-Angels" are good at anything (and not all of them have proven they are good at investing yet, far from it), they are all good at self-promotion.  Your typical VC isn't in their league WRT that.
Now, I don't know if the collusion story is 100% true, but it wouldn't take much for some prosecutor to figure out pretty quickly.  I had to chuckle at the story though because Angels have been pitching the "we are entrepreneur friendly and venture guys are evil" thing quite effectively and the story, even if only partially true, makes clear that the emperor has no clothes.
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Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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