Price Fixing in Silicon Valley?

September 24, 2010 5:50 AM

Adolf Finds Out Bin 38 AngelGate. Originally used as a term to describe wealthy individuals who funded theater productions in great Britain, angel investors have become the go-to people when your start-up needs seed money, but not enough warrant a full fledged venture capitalist firm. Acquiring an angel investor can involve everything from full on formal proposals to an individual visiting your dorm room and writing a check...

So A Blogger Walks Into A Bar…

Fire in The Valley, Fire in My Belly... and Yes, Mike, I Have Stopped Beating My Wife.

Finger-Pointing, Emails, Deleted Tweets, Rage. AngelGate Is Far From Over

Ron Conway Drops A Nuclear Bomb On The Super Angels [Email]

posted by AElfwine Evenstar (26 comments total)

I doubt what they're doing is illegal.
posted by delmoi at 6:03 AM on September 24, 2010

Lord, these people and their bolding and their colors. It's like an AOL chatroom.

+4 for good use of the phrase "haters gonna hate"
-5 for mishearing the word "haters" as "hate on"
posted by the young rope-rider at 6:06 AM on September 24, 2010 [1 favorite]

delmoi, why do you doubt that it's illegal?

Harrington wrote: "I had a quick call with an attorney this morning, and he confirmed that these types of meetings are exactly what these laws were designed to prevent."

So, is he lying? Is the attorney wrong?
posted by the young rope-rider at 6:08 AM on September 24, 2010

Ah, the devil, however, is in the details.
posted by fourcheesemac at 6:10 AM on September 24, 2010

This may be the most esoteric "Downfall" parody yet. Those things are more unkillable than Jason Vorhees and Jesus combined. I wonder if, say, an entomologist has made a Downfall clip where Hitler flips his shit about some hyper-obscure species of Falkland Island penguin louse or something and then sent it to the one other expert in the world who would get it.

After seeing 20 seconds of this clip, I bet that's happened.
posted by Mayor Curley at 6:13 AM on September 24, 2010 [2 favorites]

What I've found most interesting about this whole scandal is discovering that many of these high powered millionaire VCs sound just as petty and inarticulate as normal people.
posted by ook at 6:17 AM on September 24, 2010

I think it's gotten to the point that if you're saying it with a Der Untergang video, you really don't have anything to say at all.
posted by dunkadunc at 6:18 AM on September 24, 2010 [2 favorites]

It is absolutely unlawful for competitors to act together to keep other competitors out of the market, or to discuss ways to keep prices under control.

This is wrong. People who do not understand the antitrust laws should not talk about them.
posted by The Bellman at 6:20 AM on September 24, 2010 [4 favorites]

I doubt what they're doing is illegal.

I'm not a lawyer so I'm not exactly in a position to judge legally but it looks pretty bad.

I didn't know about this movie before seeing this clip I think it came out when I was living in Central America. It is definitely on my to see list now. I also wasn't aware that there were other parodies. Links?
posted by AElfwine Evenstar at 6:24 AM on September 24, 2010

I couldn't handle another Downfall, so I just read "So A Blogger Walks Into A Bar…"...

As far as I can tell, he's accusing a group of people, in a public forum, of a number of Federal crimes based on hearsay, Wikipedia articles, and a chat with an unnamed lawyer.

That's some real Pulitzer prize quality work there, guy. Christ, no wonder nobody would talk to him. I wouldn't tell him what I'm having for lunch today.
posted by a young man in spats at 7:06 AM on September 24, 2010 [1 favorite]

I think it's gotten to the point that if you're saying it with a Der Untergang video, you really don't have anything to say at all.

I don't really think that's accurate. There are certainly lots of bad Downfall videos but that doesn't mean they're all bad. The problem is just that they're so easy to do, lots of uncreative people do them as well.
posted by delmoi at 7:14 AM on September 24, 2010

I doubt what they're doing is illegal.

(I'm not, a lawyer, but:) If it isn't, that's because the law doesn't cover venture capital investments. They are colluding to avoid competition and artificially fix the value of a thing to further their own profit.

In any area involving actual stuff, and not venture capital, that's very illegal for very good reasons.
posted by mhoye at 7:15 AM on September 24, 2010

The Bellman: that describes my (admittedly shallow) understanding of antitrust law, with the caveat that a government will allow certain industries an oligopoly in exchange for heavier regulation.

Would you mind explaining why this is wrong, to those of us who are ignorant of antitrust law? Or at least providing a link to some reading for the layman?

(I'd be quicker to buy the argument that the comparison simply doesn't apply; angel investing isn't the same thing as the consumer market. It feels more like the SEC's domain, but then the SEC doesn't regulate private investment in non-security assets)
posted by xthlc at 7:17 AM on September 24, 2010

There is a surprising amount of inarticulate writing in those articles.
posted by a womble is an active kind of sloth at 7:21 AM on September 24, 2010

delmoi, why do you doubt that it's illegal?

Harrington wrote: "I had a quick call with an attorney this morning, and he confirmed that these types of meetings are exactly what these laws were designed to prevent."

It's not really straight up price fixing because they're not selling a product, they're investing. But who knows I'm not a lawyer and I don't really care either way. I think if you think this kind of thing doesn't go on in the business world all the time you're incredibly naive.

It seems to me like there's sort of mindset of "Idealistic entrepreneurship" where people think that the act of starting a business and making money is, by itself, a selfless act that enriches the world. That business all act - by virtue of making money itself - for the betterment of society. It's somewhat absurd but that kind of mindset seems to permeate the Silicon Valley/VC/Startup "scene".

So it's like these people are shocked shocked to find out that these "Angle" investors aren't just throwing their money out the door for fun and actually want as much for themselves as they can get.
posted by delmoi at 7:35 AM on September 24, 2010 [1 favorite]

While there may be some small amount of truth to this, the fact that it comes from Michael 'Asshat' Arrington is enough to convince me it's nothing but shameless self-promotion. Ariington's got nothing, he IS nothing, and the best thing to do is IGNORE him and hope he goes away again soon.
posted by OneMonkeysUncle at 8:01 AM on September 24, 2010

xthlc: I didn't really want to get into it, hence the snark, for which I apologize, but the short answer is that the antitrust laws are complicated and even lawyers who don't practice in the area don't particularly understand them. In fact, even lawyers who do practice in the area will tell you that what counts as a violation of the Sherman Act (and even more so the Clayton Act) varies depending on who is in the White House and in particular what the mood of the FTC happens to be. There's a very good and complete analysis here.

Anyway this sentence: It is absolutely unlawful for competitors to act together to keep other competitors out of the market, or to discuss ways to keep prices under control happens to contain a few rookie mistakes.

"It is absolutely unlawful" implies that what he is talking about is a so-called per se violation of Section 1 of the Sherman Antitrust act. Over the years, per se analysis has fallen strongly out of favor (due in large part to a combination of business-friendly administrations and courts and the rise of the Law and Economics movement). Not many things still count as per se violations, but one thing that probably does is so-called horizontal price fixing--that is an explicit agreement between competitors at the same "level" of the distribution chain to fix the prices they charge to those who directly purchase their goods. There is no implication in the article that the angels were doing that. The implication (the statement, in fact) is that the competitors were meeting to "keep other competitors out of the market" or "discuss ways to keep prices [by which he apparently means costs, but may mean deal terms] under control". Assuming I understand the second phrase correctly, neither of these is per se illegal. If they are not per se violations, then they are subject to "rule of reason" analysis, and in this case they probably fail at least one major prong of that analysis: there is no indication that the actors have market power. That is, there are insufficient barriers to entry to suggest that the angels at the meeting have any ability prevent other rich guys from doing exactly what they do if they try to charge above-market prices. For a violation (other than a per se violation) to exist, the actors must have the ability to collect monopoly rents by exercising market power; in the absence of such power there cannot be a violation. It's hard to see a market definition in which these angels have the ability to shut out every other investor.

Anyway, for example, "keeping other competitors out of the market" sounds like maybe he is talking about information exchange (legal), conscious parallelism (legal), or maybe, at a stretch, some kind of concerted refusal to deal (legal except if you are already a monopolist, which these guys aren't). But unless he's suggesting that these guys got together and made a specific agreement about what they were going to charge their customers -- and question whether that is even possible in the one-off world of angel investing -- he's not talking about anything that is "absolutely unlawful".

Okay, so that's a very long answer and it's a gloss on a very complicated subject. Other lawyers will disagree. IAAL; IANYL; IANAAntitrustL (anymore). But it is best not to accuse people of violating the antitrust laws unless you know what you're talking about, and this guy plainly doesn't.
posted by The Bellman at 8:14 AM on September 24, 2010 [7 favorites]

I'm a very small winged angel investor and cluefree about this angelgate stuff, but man that Downfall was good. Having fallen for Web 2.0 stuff, it hit home. Ah, the stuff you believe when you get greedy....

BTW, where are the Downfall parody pornos, as per rule 34?
posted by acheekymonkey at 8:15 AM on September 24, 2010

where are the Downfall parody pornos, as per rule 34?

They're watching the original film and whacking off to the uniforms, of course.
posted by hippybear at 8:24 AM on September 24, 2010

"It's somewhat absurd but that kind of mindset seems to permeate the Silicon Valley/VC/Startup "scene".

So it's like these people are shocked shocked to find out that these "Angle" investors aren't just throwing their money out the door for fun and actually want as much for themselves as they can get."

I have a good friend who spends a lot of time finding and talking to angel investors, because he has a great piece of software in development that will, if he can get it funded, completely change the way that scientists handle grants, organize research teams, and share results. He spends a lot of time talking about the many benefits it will bring to the people who use it, because that's what motivates him, and that's what motivates many of these investors. It's not going to make anyone rich.

Your cynicism betrays a lack of knowledge about human motivation. Rich people give their money away to charity all the time--and they don't earn 10% on it. Why would it be surprising to hear that people invest in for-profit companies with a similar motivation to innovate and improve the world?
posted by the young rope-rider at 9:11 AM on September 24, 2010

This whole episode is just Arrington being a huge whiner. He hangs out with VCs all the time and now he's pissed that they gave him the brush-off. so he's all "boo-hoo... ANTITRUST BITCHES!"

You're not a VC Arrington. You're just a hack that they use for free press. They're not actually your friends.
posted by GuyZero at 9:20 AM on September 24, 2010 [2 favorites]

You're completely ignoring the letter from Ron Conway, who was at the meeting and called the actions of other participants "despicable", as well as the multiple sources who were at the meeting and fed Arrington information about what went on there.
posted by the young rope-rider at 9:30 AM on September 24, 2010

Ron Conway isn't exactly a slouch either.
posted by AElfwine Evenstar at 9:40 AM on September 24, 2010

Conway doesn't want to have anyone to subpoena his shit. It is, as TechCrunch commenters have notes, pretty much a CYA letter.

I mean, maybe, sure, it's possible these guys were all cigars and back-room deals and talking about preferential convertible debentures or whatever. But maybe they're just kicking the tires and getting ready to stab each other in the back -oh wait - too late, Conway stabbed first.
posted by GuyZero at 10:01 AM on September 24, 2010

This story is killing me. I have no doubt these angels meet and discuss deals and that some of their conversations are at the expense of entrepreneurs. OTOH it's Techcrunch, a totally untrustworthy and inflammatory blog that is in no way proper journalism. And the article comes from Arrington, himself an angel investor and therefore hopelessly conflicted. I'd just throw up my hands and say they're all a bunch of scoundrels except I really care about entrepreneurship. Ugh.
posted by Nelson at 10:12 AM on September 24, 2010

Angel Investor seems to be a new synonym for "Rich guy with inflated sense of own importance" AFAICT.

I think Paul Kedrosky called the future trajectory of this bunch, some months ago...

If you accept the preceding assumptions, and you see the rapid rise in the number of seed-centric firms across the country, but especially in the Valley, you see a classic (eventual) overshoot going on, in ecological terms. A host of well-adapted and fast-growing organisms, perfect for the current funding environment, are emerging in a hurry, driven by need, incumbent stupidity and low marginal cost of super-angel creation, with the result, sooner or later, almost certain to be a population crash. Arguing otherwise requires you to believe that this time is different -- perhaps supply creates its own demand, or the consumer opportunity is far bigger than it looks, etc. -- and that is a tough case to make.

Now, I'm prepared to accept that super-angels who mutate past/beyond consumers will find things considerably easier going, and that there are great brands out there among angels doing consumer funding who will continue to do very well (and we all know their names, so I won't list them), but as incumbent VCs justifiably vanish en masse, niche overshoot seems almost ecologically inevitable among super-seed funds.

(link)

You could take this current bickering as a sign that the end is nigh - these guys are fighting over the scraps.
posted by pascal at 1:26 PM on September 24, 2010