So A Blogger Walks Into A Bar…

That scene could be straight from the script of a rather poor B-Movie...

I find it hard to imagine a group of grown up investors behave like that.

seems like it would have been prudent to have even just a bit of a cover story prepared, considering how easy it is to bump into other folks in the industry at any time at any place within the city.

1. Competitor collusion and express agreements to restrict the freedom of each to compete (i.e., horizontal contractual dealings) do indeed expose the colluding parties to potentially serious liabilities under the Sherman and FTC Acts. If that is what is going on here, then Mr. Arrington has fired a major warning shot to those involved asking, in effect, "are you insane to let yourselves get caught up in this sort of activity?"

2. The irony here is that competitors are completely free to have contacts with one another, to discuss industry problems, and even to work on solutions for how best to handle such problems, provided that such contacts aren't made for an anti-competitive purpose. This is how trade associations work, among other things, and angel investors can and do meet all the time to discuss common issues and problems. Such benign meetings and contacts are very different from colluding to restrict their ability to compete freely in the marketplace through agreements to suppress valuations, etc.

3. Parallel action by competitors is in itself normally quite harmless and does not subject them to liabilities (for example, the fact that angel investors tend to use common sets of investment documents, tend as a group to dislike convertible notes, etc.). Companies having nothing to complain about legally from the fact that a particular angel investor happens to engage in practices in common with others in the industry that founders happen not to like. All this changes, though, if the competitors (i.e., the angel investors) have engaged in suspicious activities such as secret meetings among themselves to discuss overt ways to limit competition, etc.

4. Nothing under the law stops any one of these angel investors from deciding as a business matter to form a new fund along with others of such investors and to engage through that fund as a competitor in the venture financing industry. In such case, the investors are no longer competitors and have simply combined forces to compete as a different entity in the industry. If, however, the parties effectively remain competitors and simply form a jointly controlled venture whose aim is to serve as a vehicle by which they might collude in suppressing competition, that vehicle would be unlawful.

Putting all this together, the normal give and take among the myriad angel investors in the Valley and elsewhere is lawful and beyond reproach, even when they do meet to discuss problems. Meetings in a smoke-filled room as part of concerted efforts to restrict normal competitive activities by the participants, on the other hand, are almost blatantly illegal on the face of it and especially so when the participants are among the most prominent players in the industry.

It may well be that some or most of these participants hadn't really realized that they were moving from the benign to the illegal in participating in such meetings over time, and this is where it seems that Mr. Arrington is doing a good turn for them by calling them out before they do something that is irretrievably wrong. Just speculating on this last point but that is how the tone of the piece strikes me.