This experienced venture capitalist doesn't believe that ARM's initial public offering (IPO) will have the significant impact that everyone is anticipating.
The startup sector has been humming a cheerful melody since the UK-based chip designer, ARM, submitted its IPO paperwork to the SEC last month. The prevailing sentiment is that this eagerly awaited offering will pave the way for numerous other companies to go public. However, despite the likelihood of ARM's troubled owner, SoftBank, making a significant profit once ARM is listed on the Nasdaq, one "blockbuster IPO" might not have as much influence on the industry as many predict, according to former operator, entrepreneur, and veteran VC Heidi Roizen.
We recently had a conversation with Roizen, who has been with Threshold Ventures for the past ten years, about the offering and other current market trends. You can listen to the full discussion here or read the edited excerpts below.
TC: You've launched a new podcast and recently discussed down rounds, a major topic this year. Do you have any unconventional advice for founders? VCs I've spoken to this year suggest it's better to accept a lower valuation than agree to certain terms, or "structure," to keep an inflated valuation.
HR: Of course, venture capitalists will advise, 'Just accept the lower valuation.' However, telling people, 'Terms are more important than valuation,' is different from showing them, 'Look, you'll end up with 24% if you do this, but you'll end up with 48% if you do that.' Entrepreneurs should do the calculations and understand that when they offer downside protection to VCs, it's likely to come out of their own pocket. In my podcast, I've tried to provide real-life examples.
The term "Participating preferred" has re-emerged this year after being unheard of for many years. What other issues are founders grappling with that they haven't encountered before?
There are many things happening right now that entrepreneurs need to be aware of. Financing is just one aspect. Compensation is another area where founders need to reassess and 'right size.' I'm also planning a future episode about secondaries.
Secondaries were once considered taboo and not discussed, then it became acceptable to talk about them - it was actually seen as smart to take money off the table. Then things got out of hand, with founders being allowed to sell a significant portion of their company shares - sometimes at astronomical prices - while simultaneously raising primary capital from investors.
It turned into material for a Netflix documentary.
Exactly! What's your take on the recent news that Tiger Global is close to selling a portion of its stake in the highly-touted AI company, Cohere? According to The Information, it's selling 2.1% of its stake and retaining 5%. Essentially, it's just withdrawing the money it invested in the company. Tiger is reportedly facing liquidity issues, but wouldn't such a secondary sale also affect the market's perception of Cohere?
I believe it says more about Tiger than Cohere. It's a very small percentage that it's selling. Tiger is reportedly facing a cash crunch, and they're portfolio managers. They look at their holdings and think, 'We have a lot that if we tried to sell in a secondary, we'd have to take a loss. On the other hand, we have Cohere where it's break-even, so we can record that and it doesn't impact our books too much. We return the LPs' money and it's essentially a wash.' Some of these are psychological decisions. It's very difficult to sell your losers.
In other AI news, Salesforce recently led a significant funding round in the AI startup Hugging Face, which is just the latest investment for Salesforce, which also has stakes in Cohere and Anthropic. As someone on an AI commit...