Monday, September 27, 2010

A Venture Capitalist's View on Pricing Fixing and Collusion

I ran across this article and thought it would be interesting to share. This is one area of pricing that we discuss in many different contexts, but this gives us an interesting perspective outside of the global pricing arena and into how pricing can and does affect small businesses and start-ups.

For background, you need to start here, with "AngelGate": "So a Blogger Walks into a Bar."

Synopsis: A successful small businessman walks into a room full of some of the most powerful angel investors in Silicon Valley - people he counts among his friends - only to find that the mood is less than friendly. After assessing the situation, he comes to the following conclusion:
"So what’s wrong with this?

"Collusion and price fixing, that’s what. 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. And that appears to be exactly what this group is doing."

Mark Suster, a highly successful two-time entrepreneur turned venture capitalist (who is also an active blogger who has followed the issue closely) provided an interesting commentary on this subject (in his blog "Both Sides of the Table") in which he looks at this issue from both sides and gives entrepreneurs advice on dealing with investor price fixing: "What Entrepreneurs Should do about Price Fixing"

He argues that A) the VC community (like AngelList) is small and B) yes, they talk because they are also interested in the same industries. One the other hand, investors are going to talk to other investors to help them make decisions on investments:
"My assertion was that information flows outside of their process. People call each other. People call their friends. They’re not in search of price fixing or collusion, they’re in search of diligence information about the company."

So from a pricing perspective, what is the absolute truth? Probably something in the middle - depending on which side you are coming from. As many in the pricing profession know, changes in American Pricing laws have challenged or effectively eliminated formerly convenient and narrow rules of thumb, resulting in a great deal of pricing freedom. But how far is too far? (If you are joining us in San Francisco next month for the Fall Pricing Conference, you should consider registering for a new workshop addressing this issue: "Making Pricing Flexibility Under the Law Work for You")

Any pricers out there that have been following this story and want to weigh in? I am interested to hear what others in the pricing community think of this unique pricing debate!

Want more? "AngelGate: The Sequel"

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1 comment:

Brian said...

My sense is that there is more bark than bite in this particular case. While a disproportionate number of angel investors may reside in Silicon Valley, a global economy means that there are more avenues than ever to pursue that kind of financing. Where, I ask, is the actual evidence of wrongdoing? And what types of market power would one expect to see from an abuse of privilege?

While the merest whisper of collusion seems to cause people to run for the exits, there are other sacred cows out there that need to be knocked down a peg or two. Two biggies are the exorbitant costs of arbitration, and the reckless use of debt-to-equity conversions as a first course of action.

Arbitration was promised to be a panacea to escalating litigation costs, but quickly became as costly without the transparency.

Likewise, other countries recognize that debt-to-equity has been used to unfairly squeeze out equity positions, but here in the United States it gets scant attention from the various regulatory bodies.