Monday, March 21, 2011

More angels? Sometimes they won’t leave you alone

Where’s the disclosure in this?

The WALL STREET JOURNAL had an article entitled “Investor Criticizes 'Shadow' Market” on March 17, 2011. The author should be ashamed. The entire article doesn’t contain a single criticism by an investor. Rather, it is based entirely on an interview with a Venture Capitalist. The author has clearly been made a tool of a Venture Capitalist.

The VC doesn’t come off much better than the author. Judging from what he says, he comes off as a bit of a shark, certainly not someone a serious journalist should use as a primary source. He states in reference to the prices in the shadow markets “these prices don't affect the prices his firm pays in its transactions.” Later is the article he’s quoted as saying “his firm is in competition with the bidders in the secondary markets for equity in private companies. His firm has acquired stakes in Twitter and other start-ups by buying shares being sold by employees or early investors.” How dumb does he think JOURNAL readers are? He’s in competition with them, yet the price he pays isn’t affected. Get real!‬ Maybe the journalist is naive enough to let that slide, but the VC should be embarrassed to have pulled it off. He’s probably a decent guy, but he really does himself a disservice.

You’d think the journalist would pick up on the fact that his source was talking out of both sides of his mouth. If he did, he’d realize “potential conflicts of interest” extend to sources as well as market makers. If he took it a step further, he could have written an interesting analytical piece about what’s happening in the startup sector. He could base it just on JOURNAL coverage. A week or so ago they had a piece about the shifting balance of bargaining power between entrepreneurs and VCs. Then there was the article discussing angel networks that was cited in the last posting. Now a series of quotes that reflect a VC’s sour grapes attitude toward second or shadow markets for startups. It’s pretty clear that as more alternative sources of capital become available to entrepreneurs, VCs are experiencing some discomfort. If the author went back a few months to the JOURNAL’s coverage of VC’s increasing reliance on private equity and corporate buyouts, he’d complete the loop.

Anyone who has followed the discussions of angel investing referenced in the last posting, Investing PART 12: Angel Investing, may have detected that The Hedged Economist isn’t an advocate of using the second market. In fact, I’m of the opinion its development isn’t very beneficial, but that has more to do with how mark-to-market accounting is misinterpreted and abused than anything else.

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