TechCrunch founder admits conflict of interest with investments

Mike Arrington, editor and founder of TechCrunch, an AOL company, today disclosed his investments in some high profile startups.

He said he had refrained from making investments in startups since 2009 because of distracting accusations of conflicts of interest but that he had recently changed that policy (following the sale of Techcrunch to AOL).

Over the last several months I have begun investing actively again. We’ve noted these investments in Shawn Fanning’s new startup and in Kevin Rose’s new startup.

I have also become a limited partner in two venture funds, Benchmark Capital and SoftTech VC. I am considering investments in a few other venture funds and a couple of startups as well, but have nothing further to announce yet.

He says he is OK with having financial conflicts of interests in his reporting:

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.

It’s certainly a fresh approach to the issue of financial conflicts of interests: that as long as it’s disclosed, it is OK.

When I was at the Financial Times we were barred from investing in any companies in our beat sectors. Even a mutual fund with investments in our industry could spell trouble.

Kara Swisher, ex-Wall Street Journal and now editor of All Things Digital, a Techcrunch competitor, has a very strict ethics code. It is based on the Dow Jones ethics code, which does not allow any reporter to invest in companies in their industry beat, and this ban extends to members of their immediate family.

Here is a recent interview with Swisher at Two Bananas Marketing, “Influence, Reputation, and Ethics in the Social Arena,” in which she talks about the importance of ethics in her reporting, and even the importance of disclosing that her partner works at Google.

Does the simple act of disclosure make things right? Arrington believes that as long as everything is disclosed then readers can make up their own minds if he is influenced in his reporting by his financial interests.

But disclosure statements have to be found and read, they don’t accompany each story a journalist writes, or make it clear the many different ways that a financial conflict of interest might be present.

It’s best to have a blanket policy of no investments allowed. That way readers can read the news without having to do all the leg work to figure out if there is any bias.

Also, Arrington does not explain why his no investments policy was the right one in 2009, but now it’s wrong? What changed? The fact that he now has money to invest from his sale of TechCrunch?

Startups make a deliberate choice about who they will allow to invest. They want capital but that’s the least of it. They want investors that can aid them, through their business acumen, or their influence.

It’s understandable why a startup would want Arrington as an investor. As editor of the widely read Techcrunch, he can easily make or break a startup. And that’s also why a startup might be reluctant to refuse his money.

From his influential position, he can have the pick of the trendiest startups of the day, as he has already demonstrated with investments in Shawn Fanning’s venture, and that of Kevin Rose, formerly from Digg.

He could potentially make a lot of money selling his shares in secondary markets, which have made billions of dollars for some private investors. Today, there’s no need to wait five years until an IPO.

But wouldn’t his readers prefer that he weren’t using his role as TechCrunch editor to further his material interests?

I doubt that anyone would object if he were an independent investor blogging about his startups. That’s worked very well for Fred Wilson, a VC based in New York, and Dave McClure in Silicon Valley, and many others.

It’ll be interesting to see if there is a price to pay. Will All Things D, with its strict ethics policy, triumph over TechCrunch with its “like it or lump it” approach to allowing investments in companies it covers?

There are lots of ways Arrington’s investments could backfire for Techcrunch:

– Startups might grow to distrust TechCrunch reporters and hold back on key information because it could be fed to competitors in which they have a financial interest.

– Or they might be afraid to be written about in a bad light to boost startups financially favored by the reporters. Bad press can cause serious harm to a startup, especially in the VC community. They might decide that it’s too risky to approach Techcrunch.

-TechCrunch reporters will become investors too. How will they deal with the conflicts of interests? Will they have the discipline, as Arrington claims to have, to set aside their financial interests and write negative stories about their investments?

– Some TechCrunch reporters might think that they can please their boss and will thus skew their coverage to benefit his investments. And maybe even win a pay rise or promotion? It’s a good example of how the risk from biased reporting isn’t limited to the editor, but can spread throughout a newsroom.

– Readers might grow to mistrust TechCrunch and switch their allegiance. If that happens then the cost of its lax ethics policy will be a very expensive one.

These points are precisely the reason that media organisations have a strict code of ethics when it comes to reporters investing in companies. It’s about protecting a trusted relationship between reader and reporter, and equally important, reporter and source.

We know that readers pay close attention to conflicts of interests. They are easily spooked and suspicious of a lot of media coverage that often fits a fantasy rather than a reality.

Big media organizations work hard to build trust and eliminate any reason readers might have to question the veracity of their reporting. Because it matters to their bottom line.

And that’s what’s puzzling about Arrington’s change of policy. His disclosure does nothing to help build trust in TechCrunch. Eroding reader trust is not a good thing. And it’s certainly not good for all the Techcrunch reporters who will now be seen in a different light.

I wonder what AOL’s ethics policy is for its media properties? I’m sure it must have one even though Google has trouble finding it.

Arianna Huffington is Arrington’s boss and I’d be surprised if she would allow investments by AOL editors.

Or maybe Arrington is simply seeking an early exit from his job?