TechCrunch and CrunchFund: The Conflict-of-Interest Controversy

9/6/11Follow @wroush

Is TechCrunch coming apart at the seams, or is it simply going through a leadership transition? Are we witnessing the breakdown of an ill-conceived marriage, or do the events of the last few days amount to publicity ploy—a Britney Spears-style public meltdown, cynically designed to keep the media spotlight fixed in the company’s direction ahead of its big Disrupt conference next week?

All of these interpretations, and many more, are on offer around the Web as debate continues over last week’s news that Michael Arrington, the contentious and controversial founder of the San Francisco-based tech news outlet, is starting a venture capital fund. Very little about this story is clear, starting with where Arrington actually works now. The latest word from AOL, which acquired TechCrunch last fall, seems to be that Arrington no longer has an editorial role at the publication he founded in 2005, and that he’s now employed by AOL’s venture capital division. But even that much seems uncertain, as there are reports that Arrington will still write for TechCrunch (where writers are allowed to post with no oversight from editors), and Arrington himself continues to insist, in comments to the New York Times, that “I am TechCrunch and TechCrunch is me.” Today Arrington wrote that “my employment relationship with TechCrunch and AOL is not the core issue” and called on AOL to either grant TechCrunch “complete editorial independence” or sell the company back to its original shareholders.

This isn’t some minor Silicon Valley squabble—it’s a bona fide media brawl that has pulled in big names from the New York Times, Dow Jones, Fortune, and other major publications. But in case you didn’t spend your whole Labor Day weekend following the saga, I thought I’d try to distill it into a few concise links, in more or less chronological order:

—Back in March 2009, Arrington, a longtime angel investor, declared that he would sell off his technology investments. Despite his efforts at disclosure and transparency, Arrington said, the fact that he invested in technology companies was “a weak point that competitors and disgruntled entrepreneurs use to attack our credibility.” (Note: for some reason, Arrington’s 2009 post on this decision is currently attributed to TechCrunch writer Peter Ha.)

—This April, Arrington updated his investment policy, saying that he was getting back into the game. He acknowledged that he had invested in Shawn Fanning’s latest startup, Supyo, and Kevin Rose’s new startup, Milk, and said he had become a limited partner at Benchmark Capital and Jeff Clavier’s Softtech VC.

—Last Thursday, Fortune’s Dan Primack was one of the first to report that Arrington and Patrick Gallagher of VantagePoint Venture Partners were assembling a $20 million venture fund, to be called CrunchFund, with AOL as the main limited partner. Primack said the fund had raised smaller investments from Sequioa Capital, Greylock Partners, and Kleiner Perkins Caufield & Byers.

—Reporters at AOL media sites—including the Huffington Post, which oversees TechCrunch—are prohibited from investing in the companies they cover. But in an interview Thursday, AOL CEO Tim Armstrong told Claire Cain Miller of the New York Times that the company had made an exception for Arrington. ”TechCrunch is a different property and they have different standards,” Armstrong said. ”We have a traditional understanding of journalism with the exception of TechCrunch, which is different but is transparent about it.” Armstrong confirmed in the Times article that AOL had put about $10 million into CrunchFund, which he said would operate separately from the firm’s existing venture operation, AOL Ventures. And the article made it clear that CrunchFund’s pitch to its own investors was that Arrington’s TechCrunch credentials would give him access to choice “deal flow,” Silicon Valley jargon for the stream of business plans submitted by entrepreneurs seeking funding. “His value is with his Rolodex,” ubiquitous angel investor Ron Conway told Miller.

—That’s roughly when all heck broke loose, as media heavyweights went on record with their scorn for Arrington’s move and AOL’s decision to support it. Kara Swisher of AllThingsD, which is owned by Dow Jones, praised Arrington as a “talented writer” with a “unique voice,” but she called the CrunchFund arrangement “hopelessly corrupt” since it could give TechCrunch additional leverage over startups in need of coverage. In a key passage, Swisher quoted from an interview with Greylock’s Reid Hoffman, who seemed to think that TechCrunch and CrunchFund were effectively interchangeable: “Techcrunch will get some real deal flow from entrepreneurs that we would otherwise not see, because they have established a prominent position as the SV/Tech industry information feed,” Hoffman told Swisher. “As many tech entrepreneurs read it—both within Silicon Valley and globally—and view the information news feed to be their target for announcing themselves to the world, Crunchfund will have access to deal flow to these diverse and early stage companies.”

—In a column published Sunday, New York Times media critic David Carr said he’d talked off the record with companies and venture investors who worry that the TechCrunch-CrunchFund connection will create an atmosphere of fear and exclusion around Silicon Valley. “At best, competitors are up against a fund that has a cozy relationship with the leading technology news site and a list of investors—Sequoia Capital and Greylock Partners, among others—made up of Silicon Valley royalty,” Carr wrote. “Think of it as a less-than-virtuous circle: TechCrunch holds events for start-ups, CrunchFund could get first dibs, and then when TechCrunch wants an update on a particular company they can call their old boss Mike to get the last word.”

—Meanwhile, there was almost comical confusion inside and outside AOL about whether Arrington was still employed there, and whether Armstrong meant what he said about TechCrunch’s exceptionalism. BusinessInsider covered this part of the story thoroughly. Reporting on conversations with various AOL spokespeople, BI first said Arrington was giving up editorial control at TechCrunch (though TechCrunch writer MG Siegler later insisted on his personal blog that Arrington never had much control in the first place). Then Arianna Huffington told BI that Arrington was out altogether at TechCrunch, and AOL said that he was “not employed by AOL.” Then AOL took it back, saying Arrington now worked for AOL Ventures. Arrington told Miller at the Times that he was as confused as everyone else: “I have no idea what AOL’s final position on this will be,” he said. In a final statement, AOL spokesperson Maureen Sullivan seemed to take issue with CrunchFund’s main pitch to investors, telling BI that “AOL is not comfortable with TechCrunch being used as an access point for deal flow.”

—TechCrunch’s own writers were far from silent about the unfolding drama. Paul Carr wrote Friday that Armstrong had been wrong to imply that TechCrunch operates according to a different set of ethics from other technology news publications. “To be absolutely clear about this: the CrunchFund is Mike and Tim’s baby,” Carr (no relation to the Times‘ David Carr) wrote. “It has nothing to do with anyone else at TechCrunch.” Carr argued passionately that whether or not a startup had accepted money from CrunchFund would have no bearing on TechCrunch’s coverage. In an ardent post today, MG Siegler criticized AOL for moving to replace Arrington as TechCrunch’s editor, saying it amounted to “slaughter[ing] the lamb everyone can see to gain puffery amongst the old media peers.”

—Last link: Swisher went on TV for Bloomberg West Saturday and laid a lot of the blame for the mess at Armstrong’s door, saying he’d impugned the good reporters at TechCrunch. “These are some really good writers,” she said, “and this just creates a taint on the whole of tech journalism.”

And that’s where things stand. Of course, there are more important stories going on this week inside and outside Silicon Valley, such as the firing of Carol Bartz at Yahoo, just covered by Siegler in TechCrunch’s own inimitable way. But with the blood, sweat, tears, and dollars of so many entrepreneurs and investors riding on the kind of exposure their companies get in TechCrunch, you can bet that the fracas over CrunchFund won’t quiet down anytime soon.

Wade Roush is Chief Correspondent and Editor At Large at Xconomy. You can subscribe to his Google Group or e-mail him at wroush@xconomy.com. Follow @wroush

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