Tuesday, September 21, 2010

Yes, There Is A Superangel Conspiracy.



I have a confession to make.

There is an angel conspiracy.

It dark, it is devious, and it is far-reaching.

The conspirators number amongst them many of the top people in the Valley, including angels, VCs, lawyers, and yes, even journalists.

We have joined together despite our differences and conflicts for a single, sinister, self-interested purpose.

To get your attention.

* * *

When unraveling any crime, you should always follow Deep Throat's first principle: Follow the money.

Words may lie. Deceptions abound. But the money trail leads inevitably and inexorably to the truth.

And the truth is that we've all conspired together in the rise of the superangels for our own selfish reasons.

The motivation on the part of the superangels should be fairly transparent to all--the more attention they get, the more they benefit, both in terms of dealflow and the ability to raise funds from limited partners.

Don't think its a coincidence that the increased focus on angels was followed almost immediately by many of those same angels raising small venture funds.

The motivation on the part of VCs is a little subtler; the supposed Superangel vs. VC conflict (which I freely admit I played a part in promoting) provides cover for the fact that for the most part, angel investing activity helps venture capital by creating more companies that will eventually require VC investments.

The increase in funding and company formation also helps entrepreneurs (who have access to more capital) and service providers (who have more potential customers).

Finally, some of the most eager participants have been the journalists. As the old saying goes, "If it bleeds, it leads." Nothing generates pageviews like conflict and scandal. TechCrunch has been profiting from these manufactured kerfuffles more than anyone. TechCrunch was the first to promote the superangels; now it's the first to turn on them.

Yet the part about this conspiracy that should scare you the most is that even this backlash IS ALL PART OF THE MASTER PLAN.

What could generate more pageviews than tantalizing rumors of a shadowy conspiracy? Heck, what is this essay but yet another blatant attempt to capitalize on the American public's never-ending appetite for TMZ-like scandal?

* * *

In the end, the claims of a superangel conspiracy don't pass the Deep Throat test. TechCrunch reported that ten prominent superangels met in San Francisco to collude in driving down valuations, shutting out VCs and new angels, and quashing the use of convertible notes.

Mike Arrington stirred up the controversy (masterfully, I might add--I admire the work of a true virtuoso!) by using some key buzzwords: Collusion (and its hint of corrupt, smoke-filled rooms), and saying that the group accounted for "nearly 100% of early stage startup deals in Silicon Valley."

The truth is, both of these claims are laughable.

Even if the top 10 superangels wanted to collude (and knowing many of the folks who might appear on such a list, I doubt that any of them would participate in something they felt unethical), they lack the market power to do so.

When Major League Baseball's owners colluded on player salaries in the 1980s, it was easy for them to maintain control of the cartel since they had a monopoly, and only needed to control the actions of the 24 different owners.

Superangels simply don't have that kind of power.

Let's assume that each of the 10 alleged conspirators possessed a $50 million fund (which I guarantee is not the case). That's $500 million in total funds. Assuming those investments were spread over 5 years, that's $100 million per year in investments.

If the conspirators contributed $500,000 to the average seed round, that's still only 200 deals per year.

The SBA estimates that there are about 500,000 angel investors in the United States, and that they invest about $20 billion per year.

The alleged conspirators only represent 0.5% of the annual angel investing activity in the United States.

Even if we assume that Silicon Valley seed rounds only account for 10% of angel investing in the US, the pot controlled by the alleged conspirators only represents 5% of the local market.

I'm not saying that angels don't wish that valuations are lower (I certainly do). But there simply is no way that such a conspiracy could be effective, given the economics of the market.

As Deep Throat would say, "Follow the money." And in this case, the money leads to one inevitable conclusion: We are all part of the superangel conspiracy.

13 comments:

Roy said...

Agree. Also, if there was a Ron Conway or Chris Sacca there, there is no chance in hell that they were caught tongue-tied...

Derek A said...

That's all good and fine but why Blogspot? I mean I really respect your opinion...but Blogspot???

Chris said...

Derek,

I'm just lazy. I signed up for Blogger in 2001, and never changed.

Anonymous said...

The conspirers may only make up 0.5% of what is invested, but they definitely get to see the best companies and the companies most likely to succeed.

What you missed is that the super-angels lead a round, and other angels fill it. So while they might pour in $500k - the total round could be $2-5M, which means that the total size of investments that they are setting the price for is much higher than your estimate.

I totally believe this story. I raised money on a note recently and heard a lot of moaning about it. I was advising a company more recently and the star angels attempted to reject the note in unison until we found a new lead that would accept it. The other angels fell in line after that.

It is not hard to believe that the top angel investors, those who are often leading the best deals, would come together and agree not to accept notes, agree not to allow valuations to spiral by out-bidding each other, and agree to invest together for mutual benefit.

It means that an entrepreneur shopping around a deal, if they want an A-list investor on their team (and 99% of entrepreneurs do), each one of them is going to tell him to do a priced round and at $4M. The entrepreneurs option at this point is to accept an A-list angel round at that price, or go to a b-list angel investor at a better price.

Very similar to what happens with VC's where Sequoia et al can charge a premium price based on who they are.

Jason Schultz said...

You expect people to believe that? Talking strictly about you claiming to be lazy :)

Paul said...

I wondered if you were going to weigh in on this, given that's your playground and backyard.

I admit, I find it interesting all this talk. I don't know where I stand on it - I read Arrington's article a couple hours ago and found it interesting, and credible actually (but I find that I'm typically in his corner and therefore tend to believe him). (the writing was brilliant as I was convinced the whole Valley was there in secret - and who 'tipped' him anyhow? that's curious)

Anyhow, IF the usual test is 'follow the money', it's still not clear to me how Arrington benefits from releasing a story like this. I mean, who needs pageviews so badly they would risk an anal search and a constant headache? I just don't see the upside for him.

Anyone?

As to the actual investing -- when I'm seeking funding I hardly care it comes from an A-lister or a D-lister. To me (and again, I'm in Tennessee soooo) that stuff makes no difference. I just want my business up and running and making money.

Eatai said...

Some great logical explanations in your post. But I honestly don't get it.
Is @arrington plain out lying? (I, for one, truly believe that the media is generally as corrupt as the corruption they report, so I wouldn't be utterly shocked).
Or is the point here that even if the meeting took place, and even if 10 super-angels attended, and even if they did have the intention of conspiring plots and driving valuation to the ground, they simply don't stand a chance of succeeding?
Or was it just a dinner party of 10 friend of @arrington, which they didn't want to invite him to, hence the grave silence as he walked in?

Chris said...

Anonymous,

Now that Dave McClure has outed himself as one of the angel dinner attendees, I can tell you that I've been at a number of angel-only events with him, and Dave definitely is pro-convertible, and very much *not* a valuation hawk.

In fact, Dave and I often disagree violently about valuation (I've gone on record many times saying that price is fundamental, whereas Dave believes it is a minor consideration) even though we've invested in a number of deals together.

Valuation is something that is negotiated on a case-by-case basis. Does it help to fill out a round if a big-name superangel sets a higher price? Sure. But there is no obligation for those superangels to set the price the entrepreneur wants.

The entrepreneurs I've invested will testify that when they ask me about valuation, I'll tell them both A) what the market will likely give them, and B) what I think is right. Usually A > B.

And there are so many great superangels that can lead rounds that there's no way that even the top 10 can collude on price.

If that were the case, would YC conmpanies be doing rounds at $8 million premoney valuations?

Chris said...

Jason,

But I am very lazy about certain things! I compare it to the revolution in battleship armor called "all or nothing" protection. Rather than being hard-working about everything, I try just to be hard-working about the things I think matter.

Chris said...

Paul,

Mike Arrington is a very smart guy whom I admire greatly. He is also a former lawyer. And he is very careful not to write anything libelous.

He doesn't name names, and he doesn't say that angels are colluding. He merely hints at it.

The benefit to Arrington is a flood of pageviews and the approval of entrepreneurs who think of him as a defender of the oppressed. Both provide a boost to his business (friendly entrepreneurs are good sources of breaking stories!).

The only risk Arrington is running is that his friends in the angel community will be pissed. But that's practically no risk at all. Hell, every angel wishes that people thought him or her in attendance at the meeting! I'd claim I was if it wasn't A) false, and B) unbelievable (I am too small and unimportant an investor).

Chris said...

Eatai,

Arrington isn't lying, and he was very careful not to make any firm assertions. The entire piece is speculation and interpretation, and is careful not to name any names.

My point is that Arrington is in on the con, along with everyone else.

My secondary point is that the allegation of collusion is economically laughable.

Paul said...

brevity is the soul of wit (or something like it) ... and I get your points now. Coming from the PR flack angle - as well as having what at one time was one of the largest blogs in this area - I get what you're saying now ... hyperbole never really hurt anyone and the collusion - such that there is any - is between Arrington and the SA's.

Even still, I wouldn't want that anal exam and to do so for the simple outcome of more page-views defies (my) logic.

Anonymous said...

If every angel wishes that people thought that they were in attendance at the meeting to validate their status as A-list superangels at the top of the pecking order, then why don't more of the attendees disclose their attendance and assert their status (especially if they did nothing wrong)? Your logic here doesn't make sense. Some angels seem to be distancing themselves from the entire thing, and the guy from Felicis who tweeted about being there deleted his tweet and now claims on Quora that he was there for another meeting.