RPT-Investor conspiracy theory grips Silicon Valley

Thu Sep 23, 2010 12:56pm EDT

(Repeats Sept. 22 story with no changes to the text)

* Influential blogger: investors plotted to fix prices

* Report comes as start-up valuations soar (Paragraph 10 contains language that may offend readers)

By Alexei Oreskovic

SAN FRANCISCO, Sept 22 (Reuters) - A secret meeting in a restaurant back-room, high-powered financiers and a plot to squeeze out rivals.

It sounds like the makings of a Hollywood mobster epic. But it is the premise of a controversy surrounding Silicon Valley's tight-knit investing community following a widely read report by an influential technology industry blogger.

Michael Arrington's post said a cabal of "Super Angels" -- deep-pocketed entrepreneurs who invest in promising Internet start-ups -- conspired to devise ways to drive down valuations of companies and lock out other investors, has set off speculation and strong-worded denials across the Web.

Right or wrong, it cast a harsh spotlight on the sometimes opaque, cosy financial system that plays a crucial role in nurturing the industry's next generation of companies. (here)

"I don't believe in a conspiracy," said Hans Swildens, the founder of San Francisco's Industry Ventures, which invests in venture capital and super angel funds, as well as start-up companies.

"I'm sure that people are trying to get better prices in the market, because that's what everyone tries to do when they buy things. But I don't believe in deliberately colluding and forcing a market price down for angel investments," he said.

Lightspeed Venture Partners' Jeremy Liew, who was an investor in social gaming company Playdom, said he found the report's allegations very surprising, and noted they were at odds with his experience working with Super Angel investors.

According to the report, which appeared on TechCrunch on Tuesday, an unnamed group of Super Angel investors, who together account for "nearly 100 percent of early stage start-up deals in Silicon Valley," secretly convened at San Francisco's Bin 38 wine bar recently.

Seated around an oval table in a private room, the attendees discussed how to reduce rising start-up valuations as well as how to keep new angel investors and traditional venture capitalists out of deals, according to anonymous sources cited by TechCrunch.

Dave McClure, the founding partner of the 500 Startups fund, fired back in a lengthy and profanity-laced blog post on Wednesday calling TechCrunch's report a "bullshit superangel conspiracy theory."

McClure said he attended the dinner, but said the purpose was to discuss trends in technology and start-up companies.

FAT VALUATIONS

The identity of the other attendees remains a matter of speculation, with online commentators analyzing Twitter posts and other clues to divine who might have been at the table.

The online dust-up comes as a new crop of start-ups focusing on social networking and mobile computing is drawing attention from investors looking to get in early on the next Facebook or Google.

"The valuations are twice as high now as they were 12 months ago for these angel deals," said Swildens.

Meanwhile, organizations like Y-Combinator, which hold events to showcase startups to swathes of investors, have increased the competition among investors.

Paul Buchheit, a former Google Inc (GOOG.O) engineer who has made angel investments in numerous companies including finance website Mint, said it would not be surprising for angel investors to gather to talk shop and exchange notes.

Because angels invest smaller sums of money into startups, it is common for them to band together in order to raise a larger amount to invest, he said.

But he thought it unlikely that price collusion would be effective in that world, since investors -- if found out -- would be shunned by start-ups and shut out of future deals.

"The way you win is not at getting the lowest prices, but in being able to get in on the best companies," Buchheit said. (Editing by Edwin Chan)