The startup industry has been whistling a happy tune ever since the British chip designer ARM filed paperwork with the SEC late last month for an initial public offering. The growing expectation is that the hotly anticipated offering will force open the IPO window for many other offerings, too. But while ARM’s beleaguered owner, SoftBank, is likely to wring out a substantial return from ARM once it’s rolled out on the Nasdaq, one “blockbuster IPO” may have far less impact on the rest of the industry than many anticipate, says former operator, entrepreneur, and longtime VC Heidi Roizen.
We recently talked with Roizen — who has spent the last decade with Theshold Ventures — about the offering and what else is happening in the market right now. You can listen to that longer conversation here or read excerpts from it, edited for length, below.
TC: You have a new podcast and recently covered down rounds — a big topic this year. Is there any non-conventional wisdom for founders you can offer? VCs I’ve talked with throughout the year say it’s better to take a lower valuation than accept certain terms, or “structure,” in order to maintain an inflated valuation.
HR: Sure, venture capitalists will say, ‘Just take the lower valuation.’ But I think it’s one thing to tell people, ‘Terms are more important than valuation.’ It’s another thing to show someone, ‘Hey, you’re gonna walk away with 24% if you do this, but you’re gonna walk away with 48% if you do that.’ Entrepreneurs should run the math and make sure [they] understand that when [they’re] giving downside protection [to VCs], that’s probably going to come out of their own pocket. On the podcast, what I’ve tried to do is give them real examples.
“Participating preferred” is a term that no one heard for many years and which resurfaced this year. What else were many founders not exposed to previously and so are struggling with?
There’s a lot going on right now that entrepreneurs need to be aware of. The financing world is just one component. Compensation is another place where [founders] really have to look and say, ‘We need to right size.’ I’m also working on a future episode about secondaries.
Secondaries are interesting in that they were once seen as something shameful that you didn’t discuss, then it was fine to discuss them — you were actually smart taking money off the table. Then things really went haywire, with founders allowed to sell a lot of shares in their company — sometimes at sky-high prices — at the same time they were raising primary capital from investors.
It became Netflix documentary material.
Exactly! What did you make of a recent report that Tiger Global is nearing a sale of part of its stake in a very buzzy AI company called Cohere. According to The Information, it’s selling 2.1% of its stake and keeping 5%. Basically, it’s just pulling out the money that it put into the company and taking it off the table. Tiger is reportedly having liquidity issues, but doesn’t that kind of secondary sale also impact how the market sees Cohere?
I think it’s more of an indicator about Tiger than Cohere. It’s a very small percent [that it’s selling]. Tiger is purportedly in a cash crunch, and they’re portfolio managers. They look around at their holdings and they say, ‘Gee, we have a bunch that if we were to try to sell in a secondary, we’d have to take a loss. Meanwhile, we have Cohere where it’s even money, so we can book that and it doesn’t hit our books that bad. We return the money of the LPs and it’s kind of a wash.’ Part of those are psychological decisions. It’s very hard to sell your losers.
In separate AI news, Salesforce just led a big round in the AI startup Hugging Face, which is just the latest bet for Salesforce, which also has stakes in Cohere and Anthropic. As someone on an AI committee at Stanford, do you think relationships with strategic investors are any more important for today’s AI startups than other types of startups? It’s nice to have the muscle of a Salesforce or an Oracle behind you, but there are downsides as well.
Strategic investors are a huge part of the financial ecosystem for entrepreneurs. Something like 20% of all deals have a strategic investor in them. But as I once said to an entrepreneur, ‘When when I invest in you, I only make money if your stock goes up. But when a strategic invests in you, they also make money when their stock goes up.’ To me, that summarizes something really important. I understand Salesforce paid like 100 times revenue and to the best of my knowledge, there is no public company trading at 100 times revenue. Unless you’re planning to sell that stock sometime in the future, that’s a pretty aggressive price.
If you are also doing some sort of coincident biz dev deal that is going to allow you to leverage what [a startup has] into your customer base and into your technology and into your new market segments, that makes your stock go up. So we’re going to have to wait and see, but I would imagine that that’s how [Salesforce] justified paying a price like that.
In the meantime, everyone is waiting on this ARM IPO. The widespread thinking seems to be that this chip design company is going to worth anywhere from $40 billion to $80 billion and blow open the IPO window. Do you think so, too?
Every company that goes public is different. I’ve never understood this concept of, ‘Well, the market is closed, but you take one super big company, and you put it out there, and all of a sudden everybody gets to go public again.’ I personally don’t understand that. So, no, I don’t think it’s gonna blow the market open and that a whole line is going to march out there and we’re going to have 50 IPOs between now and December.