The ice-breaking IPO we’ve waited for might not come from the US after all

I would give a LEG to see ARM break the IPO logjam

British semiconductor giant Arm is heading back to the public markets after more than five years of private life. Even better, the company’s note announcing that it filed privately to go public — a draft F-1 listing, in other words — said that it may list in the United States.

Why get so excited about it? Well, the news means Arm could be the dam-breaking domestic IPO we’ve long been waiting for. The American tech IPO market is currently dead in the water and in need of a champion to brave the unknown, and if Arm’s offering performs well, it could encourage other companies to go public, too.

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We’ve covered this before, but to jog your memory: After a busy 2020 and 2021, American tech companies in 2022 suddenly found themselves in a changing market that generally preferred lower valuations for public tech stocks. That resulted in a nigh-complete halt of new IPOs in the U.S. from both domestic tech companies and international firms.

This perceived dearth of liquidity in the public markets is one reason why the value of startup exits in recent years has fallen so sharply. The lack of exits through IPOs, a historically critical avenue for founders, employees and investors to derive returns, means that a host of richly valued tech startups are stuck between a receding late-stage private capital market and an indifferent, if not downright hostile, public market.

Arm could change all that and do it in style. Recall that we anticipated that the Arm offering could raise as much as $8 billion. In terms of priming the pump, that’s a lot of primer.

What could Arm be worth in its listing? Reuters cites some sources who expect a valuation of above $50 billion, or a little more than two OpenAIs.

If that sounds high, keep in mind that last February, Nvidia called off a $40 billion attempt to purchase Arm. Sure, valuations were a bit higher in early 2022 than they are today, but does anyone think that semiconductor chips have become less important since then?

Arm saw net sales rise 27% to ¥288.95 billion ($2.13 billion at present currency values) in the nine-month period ended December 31, 2022, according to SoftBank (pg. 24). The company also generated “segment income” of ¥54.90 billion yen ($404 million at present currency values) in the same period. Naturally, we’ll need more recent results to dig into the company’s worth deeper, but those figures make for a decent starting point.

As nearly all smartphone chips use Arm “blueprints,” as the Financial Times put it, the world will be watching this IPO.

Why should startups care?

For startups, the Arm listing is good news not only because the company brings a huge transaction, but also because it has a great brand and puts potential liquidity in the hands of interesting parties.

Arm is very well known. After all, it was a public company before it was bought by SoftBank. And in light of the chip wars blazing today, it remains top of mind. I suppose a big, splashy IPO may get folks more interested in other IPOs, so the ripple effects of the Arm debut have the potential to be far reaching.

Then there’s liquidity. I don’t need to tell you that SoftBank likes to invest in startups. It loves to invest in startups. Recall that it ran through several Vision Funds and spent heavily on shares in Latin America as well. If the Arm debut goes well, not only will SoftBank raise a bunch of money, but it will also show investors that it retains some of its investing moxie.

The gambit with the Vision Funds yielded mixed results for SoftBank, including some high-profile wins (DoorDash at the time of its IPO) and some incredible flops (WeWork). Another win could help SoftBank build more confidence in its investing prowess, and it would give it more chips to play with. Perhaps some of those chips will wind up in startup bank accounts, like in the past.

If Arm’s IPO succeeds, it could play a pivotal role in getting some key unicorns off the bench and in the public markets. Your Instacarts and HR unicorns, for example, together represent tens of billions of dollars’ worth of accreted private-market value, and they’re an outlet for an even broader pool of invested capital that wants to show a return to its own backers and investors. If Arm shakes loose a few big IPOs through its own, a host of venture funds could find themselves with something to brag about to their LPs.

Capital recycling is a key aspect of how technology keeps funding itself. More liquidity will help stir the pot.

That said, none of this is certain. Arm could overshoot the correct valuation of its shares, shaking confidence further. Put another way, Arm could open the IPO window or glue it shut. A lot of companies, investment firms and founders are therefore praying that Arm’s IPO goes through soon and does well.

If not, the chip company will become everyone’s least favorite groundhog-proxy, announcing more months of exit winter and frozen capital.