Adobe will pay 2021 prices. It is 2022.
Wall Street hates it. Silicon Valley is excited.
In a year that has featured exactly zero high-profile tech IPOs and far more headlines about mass layoffs than big funding rounds, Adobe’s $20 billion acquisition of Figma on Thursday is what some might call a narrative affront. There were no other bidders out there driving the price up, according to a person familiar with the matter who asked not to be named because the details are confidential.
Figma’s cloud-based design software has been a growing headache for Adobe over the past few years. It’s cheaper (there’s even a free tier), easier to use, collaborative and modern, and has spread like wildfire among designers at companies large and small. Annual recurring revenue is poised to more than double for the second consecutive year, surpassing $400 million by 2022.
“This was a significant threat to Adobe,” Lo Toney, founding managing partner of Plexo Capital, which invests in start-ups and venture funds, told CNBC’s “TechCheck” on Thursday. “This was very much both a defensive move, but also an eye against this trend where design rules and design matter.”
That’s why Adobe is paying about 50 times revenue after a stretch this year when investors dumped stocks that had sky-high multiples. For the top cloud companies in the BVP Nasdaq Emerging Cloud Index, forward multiples have fallen to just over 9 times revenue from around 25 in February 2021.
Snowflake, Atlassian and Cloudflare, the three cloud stocks with the highest revenue multiples, are down 41%, 33% and 51% respectively this year.
After Thursday’s announcement, Adobe shares sank more than 17%, heading for their worst day since 2010. The company said in a slide presentation that the deal is not expected to add to adjusted earnings until “the end of year three.”
Figma last raised private capital at a $10 billion valuation in June 2021, the peak of software mania. The company had benefited from the work-at-home movement during the pandemic, as more designers needed tools to help them collaborate while separated from their colleagues.
But now, even with more offices reopening, the hybrid trend has done nothing to derail Figma, while other pandemic-friendly products like Zoom and DocuSign have declined dramatically.
In light of the plunge in cloud stocks, late-stage companies have been fleeing the IPO market — and private funding in many cases — to avoid clipping their lofty valuations. Tomasz Tunguz of Redpoint Ventures wrote in a blog post Thursday that ahead of this deal, “US venture-backed software M&A was on track for the worst year since 2017.”
In such an environment, Figma’s ability to exit at double the price of 15 months ago is a bargain for early investors.
The three venture firms that led Figma’s earliest rounds — Index Ventures, Greylock Partners and Kleiner Perkins — all have stakes in the double digits, people familiar with the matter said. That means they will each return over $1 billion. Investors in the 2021 round doubled their money. They include Durable Capital Partners and Morgan Stanley’s Counterpoint.
While those kinds of numbers were routinely recorded in the record IPO years of 2020 and 2021, they are foreign this year as investors anticipate rising inflation, rising interest rates and geopolitical turmoil.
Too young to drink
Danny Rimer, a partner at Index Ventures and Figma board member, said the company was able to get ready for an IPO and was in no rush to tap the capital markets, private or public.
“We had raised a lot of money at very good valuations and didn’t need to raise more money,” said Rimer, whose firm first invested in Figma in 2013. “The company was able to go public. This was really more a matter of what is the best way to achieve the company’s goal of democratizing tools for design and creation across the globe.”
Dylan Field, co-founder and CEO of Figma Inc., in San Francisco, California, USA, Thursday, June 24, 2021.
David Paul Morris | Bloomberg | Getty Images
Rimer said Figma has been on quite a journey since he first met founder and CEO Dylan Field, who dropped out of college to start the company as part of the Thiel Fellowship program, where tech billionaire Peter Thiel offered promising entrepreneurs $100,000 grant. When they met, Field was only 19.
“I took him to dinner and couldn’t buy him a drink,” Rimer said.
For Adobe, Figma marks by a large margin the company’s biggest acquisition in its 40-year history. Its biggest previous deal came in 2018, when Adobe bought marketing software vendor Marketo for $4.75 billion. Before that, the largest was Macromedia at $3.4 billion in 2005.
Adobe CEO Shantanu Narayen explained his company’s reasoning on CNBC as his company’s stock price on the screen flashed bright red.
“Figma is actually one of those rare companies that has achieved incredible escape velocity,” said Narayen, Adobe’s CEO since 2007. “They have a fabulous product that appeals to millions of people, they have escape velocity relative to their financial results and a profitable business, which is known to be very rare in software-as-a-service companies.”
Adobe needs the growth and new user base from Figma to maintain its dominant position in design. For investors, Narayen can only ask them to play the long game.
“It will be a great value for their shareholders,” Narayen said of Figma, “as well as Adobe’s shareholders.”
— CNBC’s Jordan Novet contributed to this report
WATCH: CNBC’s interview with Adobe CEO Shantanu Narayen