By Dan Primack
September 8, 2011

Venture capital is rife with conflicts of interest, and it goes far deeper than blogger relationships.

I recently had a conversation with a Boston-area journalist who couldn’t understand how some of his Silicon Valley peers – and I emphasize some – were comfortable with the proposed conflicts of interest inherent in Michael Arrington’s CrunchFund. The answer, I suggested, was more about venture capital than it was about media.

Here’s what I mean: A large number of venture capital funds raise capital from active tech industry executives. These aren’t typically a fund’s larger commitments – those come from institutional investors – but many C-level folks have personal stakes in the outcome of venture portfolios. At the same time, these executives negotiate acquisitions of companies backed by the VC funds in which they are invested.

“It’s more common than anyone thinks, or at least anyone admits,” one VC tells me. “Even if it’s not specifically about the potential return, it’s about getting the win for their fund.”

I would like to think that companies would ask employees to disclose positions in VC funds, and to recuse themselves if conflicts arise. But no one I’ve spoken with thinks the former request is terribly common, and the latter is virtually unheard of. Remember, there is no public record of these positions. If the firm keeps its LP list private and the exec doesn’t divulge, no one ever has to know.

But this is no big secret in Silicon Valley. It simply doesn’t get discussed much because most folks “in the know” don’t think it’s terribly unethical (payola=networking?). Or they think it’s unethical, but long ago accepted that this is just how some business gets done.

When conflicts of interest are so ingrained in a business, how can anyone be surprised when a new conflict — particularly a transparent one — gets brushed off as irrelevant?

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