Over the past year, venture capital investors have faced an unprecedented string of deals that have gone up in smoke. Theranos, Zenefits, and countless other startups with valuations in the billions of dollars fell like dominos, leaving some of the biggest names in Silicon Valley without much to show for their efforts except a lot of egg on their faces and empty pockets.
Adobe’s $20 billion purchase of Figma on Thursday is what some could call a narrative violation in a year that has seen exactly zero high-profile tech IPOs and far more news stories about major layoffs than big fundraising rounds. According to a person familiar with the situation who wanted to remain anonymous because the information is private, there was no other bidder out there driving up the price.
Over the past few years, Adobe has been increasingly troubled by the cloud-based software built by Figma. It has been catching on like wildfire among designers at businesses large and small since it is less expensive (there is even a free tier), simpler to use, collaborative, and cutting edge. For the second year in a row, annualised recurring revenue is expected to more than double and approach $400 million in 2022.
Lo Toney, founding managing partner of Plexo Capital, which invests in start-ups and venture funds, stated on Thursday’s “TechCheck” on CNBC that “this was a serious challenge to Adobe.” This was very much a defensive action with an eye on the current trend where design counts.
Because of this, Adobe is paying around 50 times sales after a period this year in which investors sold stocks that were fetching exorbitant multiples. The forward multiples for the top cloud companies in the BVP Nasdaq Emerging Cloud Index have decreased from over 25 times revenue in February 2021 to just over 9 times revenue now.
The three cloud equities with the greatest revenue multiples, Snowflake, Atlassian, and Cloudflare, have fallen 41%, 33%, and 51%, respectively, this year.
Adobe shares experienced their worst day since 2010 on Thursday after the announcement, falling more than 17%. The transaction isn’t anticipated to boost adjusted profitability until “the end of year three,” the business stated in a slide presentation.
Due to the collapse in cloud stocks, late-stage companies have kept out of the IPO market and, in many cases, private financings to protect their inflated valuations. In a blog post on Thursday, Tomasz Tunguz of Redpoint Ventures stated that before this deal, “U.S. venture-backed software M&A was headed to its worst year since 2017.”
For early investors, Figma’s ability to leave at a price that is double that of 15 months ago represents a victory in such a situation.
According to persons familiar with the situation, Index Ventures, Greylock Partners, and Kleiner Perkins, the three venture capital firms that oversaw Figma’s initial funding rounds, all have double-digit percentage holdings in the company. They will therefore each receive more than $1 billion. The 2021 round’s investors quadrupled their investment. They consist of Morgan Stanley’s Counterpoint and Durable Capital Partners.
These kinds of figures were frequently reported during the record-breaking IPO years of 2020 and 2021, but this year, as investors prepare for soaring inflation, increasing interest rates, and global turmoil, they are unheard of.
Danny Rimer, a partner at Index Ventures and a member of the Figma board, claimed that the firm was prepared for an IPO and that it had no immediate plans to access the financial markets, either private or public.
Rimer, whose company made the initial investment in Figma in 2013, said, “We had raised a lot of money at very attractive prices and didn’t need to raise any more money.” “The business was IPO-ready. What was actually at issue here was the appropriate strategy for achieving the company’s objective of democratising design and creation tools worldwide.
Since Rimer initially met Figma’s creator and CEO Dylan Field, who had dropped out of college to create the firm as part of the Thiel Fellowship programme, which granted bright entrepreneurs $100,000 awards, the company has travelled quite a distance, according to Rimer. Field was only 19 when they first met.
Rimer claimed, “I went him to dinner and couldn’t buy him a drink.
With Figma, Adobe has made its most significant acquisition in its 40-year history. Its largest previous transaction occurred in 2018, when Adobe paid $4.75 billion to acquire marketing software provider Marketo. Prior to it, Macromedia’s $3.4 billion purchase in 2005 was the largest.
Shantanu Narayen, CEO of Adobe, gave an explanation of his company’s reasoning on CNBC as his stock ticker on the screen flashed bright red.
Narayen, the CEO of Adobe since 2007, stated that “Figma is actually one of these unusual firms that has attained extraordinary escape velocity.” They have a fantastic product that appeals to millions of people, escape velocity in terms of their financial performance, and a successful firm, which is really uncommon in software-as-a-service businesses, as you are probably aware.
For Adobe to continue to hold the top spot in design, Figma’s expansion and new user base are essential. Narayen can only advise investors to take the long view.