The startup industry has been in high spirits ever since the British chip designer ARM submitted its IPO paperwork to the SEC last month. Many are eagerly anticipating this offering to set the stage for numerous other companies to go public. However, Heidi Roizen, a former operator, entrepreneur, and seasoned VC, suggests that the impact of this “blockbuster IPO” on the industry may be less significant than expected.
In our recent conversation with Roizen, who has spent the last decade with Theshold Ventures, we discussed the IPO and other ongoing developments in the market. Below are edited excerpts from the conversation:
TechCrunch (TC): You’ve launched a new podcast and recently delved into the topic of down rounds, which has been prominent this year. Can you offer unconventional advice for founders? Some VCs suggest accepting a lower valuation rather than certain terms to maintain an inflated valuation.
Heidi Roizen (HR): Certainly, venture capitalists often advise founders to opt for a lower valuation, emphasizing the importance of terms. However, it’s crucial for entrepreneurs to run the numbers and understand that when they provide downside protection to VCs, it might come at their own expense. On my podcast, I aim to provide real-world examples.
One term that emerged this year, “participating preferred,” was not widely known before. What are some other aspects that founders may not have encountered previously and are now grappling with?
HR: There’s a lot happening in the entrepreneurial landscape that founders need to be aware of. Financing is just one aspect; compensation is another area where founders must carefully consider and adjust. I’m also working on a future episode about secondaries.
Secondaries have evolved from being a somewhat taboo topic to an acceptable practice, allowing founders to sell shares at times when their company’s valuation is high while simultaneously raising primary capital from investors.
TC: Regarding secondaries, what are your thoughts on Tiger Global reportedly selling part of its stake in AI company Cohere? Does this impact Cohere’s perception in the market?
HR: I believe this move by Tiger Global is more indicative of their situation than it is a reflection of Cohere’s value. They are managing their portfolio and likely view this sale as an opportunity to return LPs’ money without significant impact. It can be challenging to sell underperforming assets.
TC: Salesforce recently led a significant round in AI startup Hugging Face. Do you think strategic investor relationships are more crucial for AI startups than for other types?
HR: Strategic investors play a substantial role in the entrepreneurial financial ecosystem, with approximately 20% of deals involving them. However, it’s important to note that when a strategic investor participates, they benefit not only from the startup’s success but also from their own stock performance. The high price Salesforce paid, around 100 times revenue, is noteworthy. Unless they plan to sell that stock in the future, it’s quite aggressive. A strategic investor’s investment can pay off if they have a coinciding business development deal that leverages the startup’s capabilities into their customer base, technology, and new market segments.
TC: Many anticipate that ARM’s IPO will be a game-changer, potentially valuing the chip design company between $40 billion and $80 billion and opening the IPO window. What’s your take?
HR: Every IPO is unique, and I’ve never quite grasped the idea that a single large IPO can magically open the market for others. Personally, I don’t believe it will trigger a rush of 50 IPOs between now and December.
