I think that the leading figures of VC-istan would deny funding to settle a political score, yes. It happens in big companies, and VC-istan is the first postmodern corporation, and just a new form of the same old thing.
People stop good ideas and back bad ones for political reasons all the time, and VCs are known for the same behavior (probably no more than big-company high officers, but neither no less). People care more about their individual careers and status than about the bottom line of some organization that might kick out a bonus, and that's a big part of why companies don't "act rationally". The people in them are out for themselves because, honestly, who wouldn't be? Selflessness leads nowhere.
You argue that VC collusion would be "an amazing organizational feat considering how many there are and how much some of them dislike others", but there is, in fact, a lot of co-funding, social-proof-oriented decision making, and collusion. Think of how 90+ percent of funding decisions are based on who else is funding the round, or who made the introduction. It's a "who you know", good-ole-boy network, business in the extreme and you're delusional if you think it's still the meritocracy it might have been 15 years ago. The fact that some VCs dislike each other doesn't prevent that collusive culture from existing, just as high-ranking executives in a more traditional company can dislike each other intensely but that doesn't stop the firm from operating.
[ETA 1.5h: also, if you want to prove me wrong and show that you don't answer to VC-istan, you have the option of removing the slowban and rankban.]
This is a conspiracy theory. As it confronts evidence that might contradict it, it mutates, steadily choosing paths that are less falsifiable. It essentially posits the existence of a "Venture Capital Illuminati" in which organizations that compete with each other and are united solely by a shared general business model have teamed up, among other reasons to oppress (no exaggeration) Michael O. Church, because his ideas are too dangerous to them.
I agree though that Michael is taking it a little too far. What's true now, has been, and always will be is that money is king -- all other things, all connections, all politics come second. If YC has a startup in its class that they legitimately think is the next Google, they will fight like animals to get in on it.
People stop good ideas and back bad ones for political reasons all the time, and VCs are known for the same behavior (probably no more than big-company high officers, but neither no less). People care more about their individual careers and status than about the bottom line of some organization that might kick out a bonus, and that's a big part of why companies don't "act rationally". The people in them are out for themselves because, honestly, who wouldn't be? Selflessness leads nowhere.
You argue that VC collusion would be "an amazing organizational feat considering how many there are and how much some of them dislike others", but there is, in fact, a lot of co-funding, social-proof-oriented decision making, and collusion. Think of how 90+ percent of funding decisions are based on who else is funding the round, or who made the introduction. It's a "who you know", good-ole-boy network, business in the extreme and you're delusional if you think it's still the meritocracy it might have been 15 years ago. The fact that some VCs dislike each other doesn't prevent that collusive culture from existing, just as high-ranking executives in a more traditional company can dislike each other intensely but that doesn't stop the firm from operating.
[ETA 1.5h: also, if you want to prove me wrong and show that you don't answer to VC-istan, you have the option of removing the slowban and rankban.]