Arm IPO: Implications for Venture Capital and Softbank Founder Masa Son 9/14/23

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For today's tech check. Let's circle back to the ARM IPO and the implications for the VC space. Our next guest has led investments in several chip companies and sees a range of benefits that could arise from a successful AAM offering today, including increased capital for private semi names. Joining us this morning looks Capital General Partner Shaheen Farshi. Shaheen, great to have you back. What is riding on this open and say things go well. What would you be looking for next?

So a successful IPO Carl will certainly create investor interest in new chip companies while increasing the flow of capital into existing privately held chip companies. Naturally, ARM's strong stock performance post IPO could further embolden early stage investors who can use AAM as a comparable when underwriting new investments in small companies.

Would those be looking to enter the same spaces as AAM now has its own sights set upon a data center and so forth.

That's right. So chip companies cover a wide variety of functions ranging from basic processors to accelerators to mix signal for analog to digital conversion and managing analog signals all the way to wireless and infrastructure communications. So it's a very, very broad space, but certainly ARM's success in this market will embolden investors to continue investing in this space.

Shaheen is the, you know, sort of the perceived barrier to entry any higher than it has been in the past? It just seems that there's so much capital that's already been flowing into this area. Very well defined winners in different categories. I just wonder if the, the landscape is a bit different. In fact, even the, the basis for the potential appeal of arms IPO is this defensible position in the over the long term in, in a certain part of the business.

Mike Absolutely. The barriers are far higher for a number of reasons. One reason is that the energy, the nonrecurring engineering or the cost associated with developing and manufacturing a semiconductor has probably gone up by an order of magnitude over the past 10 years. In addition to that, building hardware alone is not sufficient. You have to build a very, very large software stack so your customers, whether they're developers, other chip companies, hardware companies like Apple can make use of your products. And then in addition to that you have this very, very stiff competition. So the barriers have absolutely gone up. But we at Lux remain optimistic that there are great companies out there that will be the arms of the future.

So given that, what was your, what are people saying about the valuation of the implied valuation of today's, today's offer.

Value is always derived from expectations driver of which can be everything ranging from fundamentals to great storytelling. If I can convince the market with a great story that indeed will capture the demand for compute with very attractive economics, kind of like Nvidia did, you can expect huge demand and hence great growth for the stock from here.

And finally, you know, we haven't, in our coverage this morning we've touched on China, but we haven't dwelled on the notion that, that they would perhaps turn inward or that there would be some kind of so called silicone wall go up regarding technologies and that the west would, would be cut out. Is that, would you say, would you argue that's a material component of today's discussion?

Well, as it relates to arm, that certainly is a significant risk or uncertainty moving forward. ARM's business in China is, is large. I think it accounts for probably a low double digit percentage of its revenue of its business. And as you know, a lot of China's domestic semiconductor manufacturing capabilities have been demonstrated to be very, very meaningful and strong. And so one must keep in mind that there's a lot of technology that AAM has built that's fundamental to a lot of what everybody does globally that will make it very relevant regardless of whether China chooses to raise this wall. But we should expect moving forward that China is going to become more and more independent as it builds a lot of this technology in house.

AAM going public today and having a pretty successful debut. The stock pricing at 51. Last night it opened around 56 and right now we're trading at 58. It's a big win for Softbank's Masa son and he kind of needed it. Let's bring in Deirdre Bosa for today's tech Check the market cap though Deirdre still in the neighborh of what he paid when he took full control last month.

Yeah, and so that's why I don't think we can call it a win just yet. I mean, maybe It's a successful IPO because it's up more than 10%. It's a healthy pop, I guess you could call it, but a lot more than this. And you could say that SoftBank and Matthew, she's on left money on the table as you mentioned, Kelly, it is below that $64 billion that SoftBank just paid to get a piece of it from the Saudis not too long ago. So still have to see but you are right in the Matthew, she really does need a win. Right? He has really hung his entire legacy on him being central in this shift to artificial intelligence. He's been talking about it for many, many years. Not just when it became really hot and buzzy this year, but there's been some missteps along the way. I mean he's talked about Nvidia and yes, if he was able to sell ARM to Nvidia a few years ago, that would have been a huge win. Much bigger than what we're seeing today. Undisputable. However, remember that he did buy some Nvidia back in 2017 and he sold it about a he made $3 billion, but he could have made tens of billion dollars. So I guess it leaves us sort of with a question that many ask about Masa San's legacy these days. Is he a great investor or is he just lucky? Remember going back to the turn of the century, he invested in Alibaba for $20 million. At one point it was worth more than $100 billion. He needs another win of that scale to keep that legacy going.

Is he kind of in the same sense? I mean you follow this much more astutely and acutely than I do. Venture capital companies that put money to work, they may invest in 10 in 10 startups in 10 embryos and seven of them fail. But if they get right, they they and really right, they they're set for the next decade. Is he that kind of investor?

He is that investor on steroids. There's a phrase that we use called spray and pray. So maybe a decade ago, investors would VCs would look at 10 companies and get one when he looks at 100 and hopes for one win. So this is in a different league. This is akin to a different era, the baseball era, when, you know, steroids changed the whole idea of what it means to get a home run. So this is different. But yes, it's that idea on steroids.

All right, well put. Got it. Thanks D.

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