This seasoned venture capitalist isn’t convinced that ARM’s IPO will live up to the hype

The startup world has been buzzing with excitement ever since ARM, the British chip designer, filed its IPO paperwork with the SEC late last month. There’s a growing belief that this much-anticipated IPO will pave the way for many other companies to go public. However, Heidi Roizen, a former operator, entrepreneur, and longtime VC, suggests that this “blockbuster IPO” might not have the seismic impact on the industry that many are hoping for, despite the potential for SoftBank, ARM’s struggling owner, to reap substantial returns from the Nasdaq listing.

We recently had a conversation with Roizen, who has spent the past decade at Threshold Ventures, discussing the IPO and current market dynamics. Below are edited excerpts from the interview:

TC: You have a new podcast where you’ve been covering down rounds, which is a significant topic this year. Do you have any unconventional advice for founders? Many VCs have been saying that it’s better to accept a lower valuation than unfavorable terms to maintain an inflated valuation.

HR: Venture capitalists often advise founders to prioritize favorable terms over valuation. However, it’s crucial for entrepreneurs to understand the math behind these decisions. When founders offer downside protection to VCs, it often comes at their own expense. In my podcast, I provide real-world examples to help founders navigate these situations.

TC: “Participating preferred” is a term that has reemerged this year. What are some other concepts that founders might not be familiar with but need to grapple with in the current landscape?

HR: There’s a lot happening in the startup world right now, and founders need to stay informed. Financing is just one aspect; they should also carefully consider compensation and, in a future episode, secondaries.

Secondaries were once seen as taboo but then became an accepted practice, allowing founders to sell shares at high prices while raising primary capital. It’s a fascinating topic and even fodder for documentaries.

TC: Speaking of secondaries, there’s news that Tiger Global is reportedly selling a portion of its stake in AI company Cohere. Does this move impact how the market views Cohere?

HR: I believe it’s more of an indicator of Tiger Global’s situation than Cohere’s. Tiger is reportedly facing liquidity issues, and portfolio managers assess their holdings. They may choose to sell shares in companies where they can break even to return LPs’ money, avoiding significant losses. It’s often a psychological decision, as selling underperforming assets can be challenging.

TC: Salesforce recently led a substantial funding round in the AI startup Hugging Face. As someone involved with an AI committee at Stanford, do you think relationships with strategic investors are more critical for AI startups than other types of startups?

HR: Strategic investors play a significant role in the entrepreneurial ecosystem, with about 20% of all deals involving them. However, it’s essential to remember that when strategic investors participate, they benefit not only from the startup’s success but also from their own stock performance. This can lead to higher valuations, as we saw with Salesforce’s investment in Hugging Face. Whether this justifies the price paid remains to be seen, especially if there are concurrent business development deals that can leverage the startup’s technology and expand market reach.

TC: Finally, everyone is eagerly anticipating the ARM IPO, which is expected to value the chip design company between $40 billion and $80 billion. Do you think it will truly open the IPO floodgates?

HR: Each IPO is unique, and the idea that one massive IPO can suddenly open the floodgates for others is a bit puzzling to me. I don’t foresee ARM’s IPO single-handedly triggering a wave of IPOs before the year ends.