I went out to several parties last night related to the AppNation conference that’s in town and spoke to a lot of developers and others about the revelation that Techcrunch editor Mike Arrington is investing in startups and his admission that it will affect his coverage.

The unanimous response was that this is not a good move by Mr. Arrington and that it will negatively affect how people view Techcrunch and its writers.

I was surprised at the passion with which people spoke on this issue. If Mr Arrington thinks his disclosure gives him carte blanche among his readers to engage in biased reporting, then he is very wrong.

The Techcrunch ethics policy is without precedent in journalism and in all other news organizations, where reporters are never allowed to invest in companies that they write about, or their industry.

Ben Metcalfe, a San Francisco based software developer, asked Mr. Arrington, “Do any other TechCrunch staff participate in investing or advising startups, and/or hold interests in startups?”

Mr. Arrington didn’t take the question seriously, and answered, “MG has a religious love of Apple and thinks they do no wrong, ever. Other than that, I don’t believe there is anything to disclose.”

It’s interesting that he doesn’t know. If he doesn’t know then no one knows what bias might be lurking with Techcrunch writers. I know many of them and I bet that they don’t have investments or a financial bias but what about now, now that the policy has changed?

Several people last night told me that they had suspected that Mr. Arrington was in the pay of some startups or VCs and that it doesn’t surprise them in the least that he is biased in his reporting. They didn’t trust him in the first place.

Suspicion is one thing but to now to have the facts is another thing altogether. I can’t see how this revelation helps Techcrunch build trust, or grow readership.

The simple act of disclosure is not enough to protect anyone from criticism but so far, I haven’t seen anything from the journalism community, Poynter, Romenesko, etc, on this important issue.

I will repeat some of my reasons why I believe that this is bad news for Techcrunch and a bad policy for its writers:

– 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.

-Techrunch reporters will become investors too. How will they deal with the conflicts of interests? Will they have the discipline, as Mr 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? This is 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 are some of the reasons media organizations have strict ethics rules that prohibit their reporters from investing in companies in the their beat.

And there is a clear financial gain in this policy: it builds trust with readers. Or has that changed in today’s new media world?

I don’t think so. Readers are highly suspicious of bias in news reporting anyway, but now they have proof, in the case of Techcrunch.

Mr. Arrington won’t find much public criticism in the Silicon Valley community because he has a thin skin and he keeps a list. However, around the water coolers of SIlicon Valley today, I guarantee that you will hear a lot about this Techcrunch bombshell.

[Cross-posted at Silicon Valley Watcher]