(this article was initially written but not published before Michael Arrington's resignation, as a result of MG Siegler's post suggesting Michael was pushed I've decided to publish it anyway. It was written prior to the announcement of CrunchFund, but the issues discussed apply to it as well as his other investments)
The History
Earlier this year Michael Arrington (editor of TechCrunch) announced a change to his investment policy, previously (since 2009) he hadn't made any angel investments due to the conflict-of-interest with his editorial role, but as of the start of this year he began angel investing again:
When these investments are complete, in a few months, there’s a very good chance that I’ll be a direct or indirect investor in a lot of the new startups in Silicon Valley, and that will mean that there will be financial conflicts of interests in a lot of my stories. Either because I write about those companies, or write about a competitor, or don’t write about a competitor.
...
The easiest way for me to handle this is to be up front about all of these investments and disclose it in posts, which I’ve done and will continue to do.
The Problems
Unfortunately there are a number of fundamental problem with this:
- Techcrunch has run articles on startups without disclaiming Arrington's investment.
- Arrington has invested is stealth startups and can't disclose their identities.
- Full disclosure isn't done when TC makes an editioral decision not to cover a startup competing with one of Arrington's investments.
- Full disclosure itself would result in giving an advantage to startups Arrington invests in.
Missing Disclaimers
In practice inserting disclaimers into coverage isn't happening. For example this post announcing Zaarly's launch which happened two months after Arrington invested in them (according to his Crunchbase profile), not only did it not disclose Arrington's investment, but it also listed the other seed investors while missing out Arrington's name. Furthermore of all the articles covering Zaarly's competitors such as TaskRabbit not a single one contains a disclaimer covering Arrington's investment in a competitor.
While I don't think this was done on purpose, I think it clearly shows that even in clear-cut cases it's hard to get disclosure right. But in complex cases it's probably close to impossible.
And unfortunately since Arrington became an a limited partner in SV Angels he's now likely to be an investor in all future Y-Combinator companies.
Techcrunch have recently been covering a large number of YC companies as they launch before demo day and not a single one of these posts has had a disclaimer about the conflict of interest. TC has regularly given favourable coverage to YC launches for a number of years, so again I don't think TC is giving YC favourable coverage as a result of that investment, but there's a huge difference between giving an incubator positive coverage purely because you like them and when you have an investment (indirectly in this case) in them.
Stealth Startups
There are likely to be cases where Arrington isn't legally able to disclose an investment. Many YC companies operate in stealth mode, meaning that investors can't disclose their existence. The obligation to keep the investment secret directly contradicts the principle of full disclosure.
Techcrunch Editorial
The nature of Techcrunch also creates difficulty. TC doesn't on the whole run op-ed articles (with a few notable exceptions) on startups, but rather focuses it's editorial judgement on choosing which startups to cover and give publicity to. Hence to follow the principles of full disclosure they would need to not only disclose investments in articles, but also make disclosures in cases where they decide not to write articles. Again this is something that doesn't happen in practice.
The Inherent Problem of Full Disclosure
Imagine the scenario: Techcrunch runs a negative story about a competitor to one of Arrington's companies, because of full disclosure Arrington inserts a disclaimer about his investment. The disclaimer would essentially be a free advert for the company he invested in running against an article slating it's competitor. The principle of full disclosure would mean that his companies would get favourable coverage by getting mentioned whenever their competitors got coverage.
The Result
These four problems mean that it would be very difficult for Arrington to stay on in his position as Editor of Techcrunch without violating journalistic ethics of full disclosure and the stated editorial policy of both Techcrunch and their parent company AOL.