Wall Street hates it. Silicon Valley is excited. In a year that saw exactly zero high-profile tech IPOs and far more headlines for mass layoffs than big funding rounds, Adobe’s $20 billion acquisition of Figma on Thursday is what some might call a narrative breach. There was no other bidder out there raising the price, 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 in recent years. It’s cheaper (there’s even a free tier), easier to use, collaborative and modern, and it’s spreading like wildfire among designers at companies big and small. Annual recurring revenue is expected to more than double for the second consecutive year, surpassing $400 million in 2022. “This was a significant threat to Adobe,” Lo Toney, founding partner of Plexo Capital, which invests in startups and venture capital, told CNBC’s “TechCheck” on Thursday. “This was very much a defensive move but also a look at this trend where design rules and design matter.” That’s why Adobe is paying around 50 times earnings following a trend this year that has seen investors shun stocks that had high multiples. For the top cloud companies in the BVP Nasdaq Emerging Cloud Index, forward multiples have fallen to just 9 times revenue from around 25 in February 2021. Snowflake, Atlassian and Cloudflare, the three cloud stocks with the highest revenue multiples, have fallen 41%, 33% and 51% this year, respectively. After the announcement on Thursday, Adobe shares sank more than 17% and were headed 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 the third year ». Figma last raised private capital at a $10 billion valuation in June 2021, the height of the software frenzy. The company had benefited from the shift to work from home during the pandemic, as more designers needed tools that could help them collaborate while separated from their colleagues. But now, even with more offices reopening, the hybrid trend has done nothing to dislodge Figma, while other pandemic-friendly products like Zoom and DocuSign have slowed dramatically. Given the plunge in cloud stocks, late-stage companies have shied away from the IPO market — and from private equity in many cases — to avoid taking a haircut on their lofty valuations. Tomasz Tunguz of Redpoint Ventures wrote in a blog post Thursday that before this deal, “US-backed software M&A was tracking its worst year since 2017.” In such an environment, Figma’s ability to come out at twice the price of 15 months ago is a coup for early investors. The three venture firms that led Figma’s early rounds — Index Ventures, Greylock Partners and Kleiner Perkins — all hold double-digit stakes, 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 these kinds of numbers were routinely recorded during the record IPO years of 2020 and 2021, they are out of the question this year as investors factor in rising inflation, rising interest rates and geopolitical turmoil.
Too young to drink
Danny Rimer, a partner at Index Ventures and a member of Figma’s board of directors, said the company has been able to prepare for an IPO and is in no rush to tap capital markets, whether private or public. “We had raised a lot of money at very good valuations, and we didn’t need to raise any more money,” said Rimer, whose company first invested in Figma in 2013. “The company was able to IPO. on what’s the best way to achieve the company’s goal of democratizing design and creation tools around the world.” Dylan Field, co-founder and CEO of Figma Inc., in San Francisco, California, USA, on 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 had dropped out of college to found the company as part of the Thiel Fellowship program, in which the tech billionaire Peter Thiel offered promising entrepreneurs $100,000 grants. When they met, Field was just 19 years old. “I took him to dinner and I couldn’t buy him a drink,” Riemer said. For Adobe, Figma marks the company’s largest acquisition in its 40-year history by a wide margin. Its biggest previous deal came in 2018, when Adobe acquired marketing software vendor Marketo for $4.75 billion. Before that, the largest was Macromedia for $3.4 billion in 2005. Adobe CEO Shantanu Narayen explained his company’s reasoning to CNBC as his company’s stock indicator flashed bright red on the screen. “Figma is actually one of those rare companies that has achieved incredible escape velocity,” said Narayen, Adobe’s CEO since 2007. “They have a great product that appeals to millions of people, they have escape velocity as it relates to their financial performance and a profitable company, which is very rare, as you know, in software-as-a-service companies.” Adobe needs the growth and new user base from Figma to maintain its dominance in design. For investors, Narayen can only ask them to play the big game. “It will be a great value for their shareholders,” Narayen said of Figma, “as well as Adobe shareholders.” — CNBC’s Jordan Novet contributed to this report WATCH: CNBC interview with Adobe CEO Shantanu Narayen
