[michaelochurch]

Beware, though, that saying things like “our round is closing really fast” when you have no offers usually backfires. Investors talk and will call your bluff.

True, but this sort of investor collusion is unethical and only (possibly) legal because private stock isn't regulated in the way that publicly traded stock is. In fact, the whole and only purpose of the VC-funded economy is to take stock strategies that were made illegal 30-100+ years ago and apply them to fast-growing, private, volatile tech stocks.

Shit like this is why most of us who are paying attention hate VC, and why the U.S. has gone from admiring Silicon Valley to vilifying it (and justly so; the ethics in Wall Street are way better than those in the VC-funded world.)

That this kind of scumbag collusion is tolerated is just unconscionable. Investors are supposed to be competitors, but they compare notes so much as to function as a cartel.

[cwilson]

Just because it's unethical doesn't mean a founder who is fundraising should ignore it. It's happening regardless of your feelings on the subject.

This doesn't mean I don't agree with you, but sometimes you have to play the game.

[minimax]

Collusion is a pretty big charge. If investors are upfront about the fact that they talk to each other (and, hey, it's right there in the blog post) then investor A calling up investor B to verify he has made an offer to a startup isn't collusion. It's just due diligence. I'm also unclear about the analogous situation in the public markets that you alluded to.

[michaelochurch]

On the public markets, using social sway or inside connections to intentionally up- or downregulate the reputation or market price of another company for personal profit (say, a pump-and-dump scheme) will put you in prison. No question about it; it's unambiguously illegal to do that. You don't get to, for example, spread negative rumors about a company and ruin its reputation because you think you should be able to buy it at a discount.

Investors do the same thing, and it wrecks peoples' careers and makes it hard as hell for people to get started amid that feudalistic reputation economy. The excuse is "well, investors talk".

I say: fuck that and fuck them. If Silicon Valley entrepreneurs are really going to tolerate that shit-- which only hurts them-- instead of agitating for proper laws to be written, then they're a pack of self-hating losers for not knowing how to fight for themselves.

[minimax]

It is illegal to give false or misleading statements in order to defraud other investors, but it isn't illegal to "talk your book" if you aren't outright lying about what you are saying. You can flip on CNBC and expect to see lots of hedge fund managers hyping up their positions. That's not fraud.

If you are saying there is some fraudulent behavior involved in one investor calling another investor to fact check a founder's claim, I'm still not seeing it.

[michaelochurch]

The main difference is that, in this case, the investor is playing to screw the founder, not other investors.

If you want to argue that it's only unethical but not strictly illegal, then fine. I still think we should aim to do better, and it's sad that Silicon Valley doesn't care about better than "not clearly illegal" when it comes to ethics.

[lawnchair_larry]

It's really not a big charge, and being upfront about it doesn't make it acceptable.

http://en.wikipedia.org/wiki/Angelgate

That was the one time someone actually caught them. Anyone who thinks that is the only time it happened is very bad at statistics.

[minimax]

Michael Arrington runs into a bunch of VCs having dinner together and that is somehow conclusive evidence of collusion? What?

[spacehome]

Michael,

Would you mind clarifying what strategies VCs execute that would be illegal if the stocks in question were public?

[davros]

Whoah there - that's a huge leap from investors finding out that the entrepreneur is lying to them to the investors colluding on price. One is fine, the other is not.

[michaelochurch]

No. They are the same crime. You are wrong, both morally and factually. As a founder you have the right to represent investor interest however you see fit. It is up to them to judge you independently and, if they cannot do that, then any gain you make in dealing with them is rightfully yours.

[Robin_Message]

Michael, I respect and like a lot of what you write, but you've lost me here. An investor fact-checking a statement like "VC A said they would send us a term sheet" is morally wrong and should/is illegal?

And a founder saying "VC B has given us a term sheet", when no such term sheet exists and in fact they said "Normally we don't say no, but for you, we're going to make an exception. Don't call us again!" is okay and the right of the founder.

Could you explain why those two (separate) things should be like that? As a practical first thought, it seemed to me if investors couldn't fact check, and founders could lie freely, gathering social proof would be harder, not easier, which might make it harder to get investment.

[michaelochurch]

In general, I believe in being as honest as one can, but some people can't be trusted with the truth. That's just a fact. It may be unfortunate, but we're not going to change it just by talking about it. There are many people who are better off not knowing all of the world's state variables (i.e. the truth) because they aren't equipped to handle the complexity and context.

Investors who rely on social proof, if you don't have it yet, fall into that "can't be trusted with the truth" category and it's OK to apply reality tweaks that are ultimately in their interests (giving them the courage to do the right thing) as much as yours.

I don't advocate fraud (lying to people in a way that acts against their interests) but some people don't have the courage to do the right thing unless you pull out some reality tweaks and make them comfortable. That's just life.

Investors who scheme against people who are trying to do that are acting in bad faith, because the ultimate goal of this activity on their part is to bring the devolution of our society into a feudal state. They don't care, at this point, about building or investing in great businesses. They just want to keep others-- people who weren't born into their parasitic social network-- out. I can't respect that in the least and I have no issue with those who choose to mislead them. If the club's purpose is vapid and its selection criteria both meaningless and unfair, then is it wrong to fake membership if it is convenient? Absolutely not.

[ballard]

Only B-players of second string shops investors and founders behave in such a manner. The valley is too small for such to be sustainable. The top people aren't stupid and are hemmed in by social and reputation considerations. The B-string shops will only fuck with you if they assume you don't have powerful enough friends.

[cwp]

Hmm. The founder lies to investors while trying to raise money, and the investors check his story to see if it's true. This makes the investors scumbags?