Already a Bloomberg.com user?
Sign in with the same account.
Goldman Sachs Group Inc/The
One day in January 2009, the technology blogger Michael Arrington was leaving a business conference in Munich when a stranger walked up and spat in his face. In a later blog post he professed shock and outrage, and described the spitter as “some unhappy European entrepreneur we didn’t write about,” but the incident couldn’t have been all that surprising to Arrington. It’s hard to think of anyone in the technology world who has been insulted more often in public settings.
The founder and most prominent voice on TechCrunch, a website chronicling Silicon Valley, Arrington created an affiliated, lucrative conference business before selling both to AOL (AOL) in September 2010 for roughly $25 million. A year later he set off a firestorm over potential conflicts of interest when he announced that he was starting the CrunchFund, a $20 million-plus micro-venture capital fund specializing in seed and early-stage investments in Internet companies, with $8 million of AOL’s money. Even before the CrunchFund outcry, Arrington was a frequent target of abuse. On stage at a May 2010 conference, former Yahoo! (YHOO) Chief Executive Officer Carol Bartz told him to “f— off.” Technology critic Leo Laporte once said to him, during a live webcast, “Screw you, Mike, you are such a troll.” Rival blogger Kara Swisher of the Wall Street Journal’s AllThingsD said that “being lectured on journalism ethics by Michael Arrington is like getting parenting tips from Britney Spears.”
His wars are even more colorful online, where he wields his keyboard like a bludgeon, rewarding and punishing friends and enemies, inspiring fear and also respect for speaking his mind and deflating hype. In a recent Internet video, Taiwanese animators depicted Arrington feuding with his former corporate overseers at AOL, with Arianna Huffington, president of the AOL Huffington Post Media Group, shown pummeling Arrington’s face. TechCrunch was both the wellspring of Arrington’s growing wealth and influence and the source of his jaw-grinding lifestyle, his moody disposition, his erratic sleep schedule, his weight gain, death threats, and, apparently, saliva-fueled rage from strangers on the street.
Arrington’s path from writer to investor is not entirely new; several former journalists, including Michael Moritz and Stewart Alsop, have reinvented themselves as successful venture capitalists. Still, what Arrington is trying to pull off seems like more of a challenge, for reasons of both personality and timing. While blogging rewards speed, critical insight, self-promotion, and head-knocking (all Arrington strong points), funding startups requires a different set of skills. The ability to massage the frayed egos of company founders and patiently advise them as they try to build their companies into the next Facebook—the business version of nurturing—can be critical to success. In the coming months many young entrepreneurs will get to decide whether they think Arrington’s bag of hammers is likely to work as well at building long-term value for their fledgling companies as it was at securing page views on behalf of his own. (Arrington declined to be interviewed for this article.)
“Mike is a force of nature,” says Keith Teare, who co-founded a company called Edgeio with Arrington in 2005. “If you are not able to have an adult relationship that includes dissent and anger as well as joy and excitement—and deal with each as it happens—then you’re going to find it hard to deal with any strong personality, Mike included.”
The bubble that has consumed venture investing, with far too much money chasing too few startups, is another matter. “Right now there’s an incredible amount of capital,” Douglas Leone, a partner with the venture capital firm Sequoia Capital, told Arrington recently on a conference stage. “Why you want to join the capital side is beyond me.”
“The fantasy as an entrepreneur is to be the next Google,” says Chris Dixon, co-founder of Hunch and head of the Founder Collective, a $40 million VC fund. “The next best thing is to be the person who believed in the next Google.” He doesn’t need to add that being the first to blog about the next Google (GOOG), while compelling, lacks the same cachet—and doesn’t pay nearly as well. “The reality is that, in terms of where the economics lie, it’s a lot more lucrative to invest in companies and build them than to write about them,” says Ron Palmeri, the founder of Prism Skylabs, one of the first startups to receive CrunchFund backing. “There’s a hierarchical structure in the Valley.”
Entrepreneurs looking for their first capital traditionally pitched either “angel investors”—wealthy individuals who fund startups in exchange for a chunk of the equity—or venture capitalists, who make cash-for-equity deals out of large, professionally managed pools of investor money. Recently, however, as VC funds have become larger and the cost of launching an Internet company has shrunk to almost nothing, a third way has emerged: micro-VC funds, also called “seed funds,” which are often led by charismatic former startup founders known as “super angels.” Whereas traditional VCs tend to invest early in a startup’s life cycle and then in the larger follow-up rounds as the company grows, micro-VC funds invest only at the beginning. The super angels raise tens of millions of dollars (as opposed to hundreds of millions at the big VCs) and then make a series of small investments in a wide range of startup companies, planting bulbs all over a vast garden, hoping one will grow into a tulip.
As Twitter-loving VC investors have become brand names themselves (Fred Wilson, Marc Andreessen, Chris Sacca), what one might call the auteur theory of venture capitalism has emerged—the idea that startup companies bear the unique creative signature of those who invested in them. To study a venture capitalist’s portfolio is to study his oeuvre.
The pace of life as a financial backer is certainly appealing. “Generally, being an investor is a pretty nice lifestyle,” says Dixon. “You don’t have the pressure you have when you’re running a startup, managing tons of employees. If you disappear for a week, the world doesn’t end. … Being a full-time entrepreneur can be really brutal.”
“I missed a lot of social things,” Arrington told Inc. magazine in 2010. “I was a mess. I actually gained 50 pounds in the five years since I started TechCrunch.” Arrington would be trading the ruthless, stroke-inducing schedule of a full-time blogger running his own company to one of lunch meetings and parties, where he would play the man with the checkbook whom everyone was trying to impress. The only trouble is, angel investing itself may be in the midst of a bubble.
“Four years ago, there were only a couple of us,” says Jeff Clavier of SoftTech VC, a seed fund firm. “Now I don’t even know how many micro-VC funds there are. There’s been a real flurry.”
In November 2010, Union Square Ventures’ Fred Wilson warned that the market for startup investing was becoming “overheated.” In December, Chris Sacca, the head of a micro fund called Lowercase Capital, told the New York Times, a “lot of the valuations there don’t make a lot of sense.” From 2009 to 2010 venture capital investment in the seed stage of IT companies grew from $351 million to $509 million, while early-stage investment grew from $2.1 billion to $2.7 billion, according to the National Venture Capital Assn. The momentum has continued in 2011. Angel and seed-VC deal activity was up 172 percent from January through September of 2010, according to CB Insights.
Nevertheless, arrivistes like Arrington keep coming. In an overcrowded field, it’s people like him, Arrington’s supporters believe, who are best suited to profit. His network of industry contacts, granular understanding of Internet businesses, and firsthand experience of starting and selling a company will set him apart from other investors, they say. The more overgrown the path, goes the argument, the more valuable becomes the guy with the machete.
“He’s heard every spin conceivable,” says Palmeri. “I think especially now that PR and the ability to play to the Twitter audience is seen as almost more important than building companies, Mike sees through that stuff. Mike just keeps drilling and pushing until he gets to the actual picture.”
Arrington was born in 1970 in the balmy surf city of Huntington Beach, Calif. He attended college at Claremont McKenna, a private liberal arts school east of Los Angeles, where he studied economics. Burke Hansen, a lawyer in San Francisco who knew Arrington at the time, remembers his classmate as a socially abrasive guy with a knack for finding business opportunities, no matter how small. One year they were neighbors in a dorm where the residents produced a steady supply of empty beer cans and bottles, which were recycled for money by a local Mexican family. It didn’t last. According to Hansen, Arrington moved in and cornered the recycling market for himself. “He would just jump in there and beat them to the punch,” says Hansen. “He’s sort of an opportunist by nature.”
Arrington earned a law degree from Stanford University in 1995 and later joined the powerhouse Silicon Valley firm Wilson Sonsini Goodrich & Rosati as the Internet boom was taking hold. In 1999 he abandoned his legal career to participate in the gold rush. The riches never materialized, despite stints at two promising Internet companies, RealNames and Achex. After the bubble burst, Arrington found himself adrift. In 2005 he reconnected with Teare, his former mentor at RealNames, and started Edgeio, a classified advertising platform business. On the side, Arrington began blogging about the technology industry.
To meet entrepreneurs, Arrington hosted parties at the house he rented in Atherton, Calif., listening to countless pitches from people hoping to get covered on TechCrunch. On the side, he dabbled in angel investing, occasionally writing checks to those he thought had the most enticing ideas. He invested in Dogster, a social network for canines; Seesmic, a video aggregation site; and DanceJam, a social network for dancing fans started by MC Hammer. (All three are still around, though none has achieved explosive success.) He also teamed up with blogger Jason Calacanis to launch the tech conference business. Over time, TechCrunch’s popularity soared. By 2007, Arrington had hired several writers and a full-time CEO, and had been profiled in Wired as the kingmaker of the born-again startup scene.
As his power grew, his prose became more menacing. He accused PR firms of being “out of control,” and threatened that TechCrunch would “break every embargo we agree to.” After Facebook hired away one of his employees, Arrington warned: “Anyone else, and I declare war.”
Beginning in the summer of 2008 he received death threats at his home. He went to the police, and spent time in Hawaii. No matter what he did, though, it was difficult for Arrington to escape the invective. In January 2009, after the spitting incident in Germany, Arrington vented: “On any given day, when I care to look, dozens of highly negative comments are made about me, TechCrunch, or one of our employees in our comments, on Twitter, or on blogs or other sites. Some of these are appropriately critical comments on things we can be doing better. But the majority of comments are among the more horrible things I can imagine a human being saying.”
Two months later, Arrington announced that he would no longer invest in startups because “competitors and disgruntled entrepreneurs” were using conflict-of-interest accusations “to attack our credibility.”
From there, Arrington’s life got increasingly litigious. In the summer of 2009, Sam Sethi, a former writer for Arrington who had left TechCrunch and started a blogging business of his own, filed a libel suit against Arrington in the U.K., where Sethi lived. Sethi’s lawyers accused Arrington of mounting “a serious, malicious, and sustained campaign of character assassination against our client.” Arrington disputed the charges, and when he failed to show up for hearings the U.K. court awarded a default ruling in Sethi’s favor. Arrington vowed not to visit the country anytime soon.
That December, Arrington filed a suit of his own, alleging unfair business practices on the part of his former partners at Fusion Garage. Arrington had been working with the company to develop an electronic tablet called the CrunchPad. Arrington accused Fusion Garage executives of cutting him out of the business. Fusion Garage denies the allegations; the suit is ongoing, according to court documents filed in California in October.
In May 2010, Arrington left Silicon Valley for Seattle. “He was emotionally hurt by the negative stuff that came his way,” says Teare. “Self-preservation became an issue.”
That September, Tim Armstrong, the CEO of AOL, announced that the company had acquired TechCrunch for an undisclosed price, which Bloomberg News reported to be approximately $25 million. “I fully intend to stay with AOL for a very, very long time,” Arrington wrote. “And the entire team has big incentives to stay on board for at least three years.”
Making a fortune from AOL did little to temper Arrington’s gall. In January 2011 he lobbed a series of public criticisms at the editors of Engadget, a consumer electronics blog also owned by AOL. Joshua Topolsky, Engadget’s editor at the time, responded to Arrington on Tumblr: “Our position is that you are an unstable person, possibly a liar, and we are trying our best to do our jobs while you are trying your best to hurt us for some unclear reason,” he wrote.
Flush with cash, Arrington resumed investing, and in the summer of 2011 decided to start his own fund. He and a college friend, venture capitalist Patrick Gallagher, raised money for CrunchFund. In late September, at a Goldman Sachs (GS) conference in New York, Armstrong compared CrunchFund to AOL’s existing micro-VC fund, saying: “This is probably like AOL Ventures on steroids.”
News of CrunchFund immediately touched off concerns about potential conflicts of interest and unfair, performance-enhancing activities between AOL’s startup-backing CrunchFund and AOL’s startup-chronicling TechCrunch. The New York Times’ media critic, David Carr, described it as “almost comically over the line,” and AllThingsD’s Swisher described it as “a giant, greedy, Silicon Valley pig pile.” Huffington told the Times that Arrington was no longer an editorial employee of AOL but was welcome to stay on as an unpaid blogger. Arrington responded with a TechCrunch post demanding that AOL respect the site’s independence. He illustrated the item with an image of a phalanx of soldiers preparing for battle. After a week of negative media coverage, Arrington announced that he was walking away from AOL and TechCrunch, although his fund would keep AOL’s $8 million investment.
The Founder Collective’s Dixon says it’s too soon to tell whether the new breed of startup investors can deliver on their promises. “Seed funds haven’t been around long enough to know,” he says. He did invest with Arrington’s CrunchFund, though, despite his warning earlier this year that the market was overcrowded. He adds that, while there is more capital flowing around than a few years ago, there are also more quality startups to invest in.
Ultimately, like every auteur, Arrington will be judged on the artistry of his portfolio. “He will be a good investor,” says Ron Conway, the doyen of Silicon Valley’s super angels and a CrunchFund backer. “A lot of entrepreneurs will share their deal flow with him first because of his pedigree. That will be a big asset to his fund.”
“If Mike Arrington finds the next Facebook, it doesn’t matter how ridiculous of a blowhard he is,” says Swisher.
When Sequoia’s Leone asked, at TechCrunch’s Disrupt conference in September, why startup investing appealed to him, Arrington didn’t hesitate: “I just like the idea of investing money that isn’t my own and making money doing that. I think that’s a pretty good business model.”