Figma investors score historic coup with Adobe deal in down year

Adobe pays 2021 prices. We are in 2022.

Wall Street hated this. Silicon Valley is thrilled.

In a year that featured exactly zero high-tech IPOs and many more mass headlines layoffs big funding rounds, Adobe’s acquisition of Figma for $20 billion on Thursday is what some might call a narrative breach. There were no other bidders there driving up the price, according to a person familiar with the matter who asked not to be named as the details are confidential.

Figma’s cloud-built 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 corporate designers. big and small. Annualized recurring revenue is expected to more than double for a second consecutive year, surpassing $400 million in 2022.

“It was a significant threat to Adobe,” Lo Toney, founding managing partner of Plexo Capital, which invests in start-ups and venture capital funds, told CNBC’s “TechCheck” on Thursday. “It was both a defensive move, but also an eye on this trend where design rules and design matters.”

That’s why Adobe is paying about 50 times its earnings after a period this year that saw investors dump stocks that were reaching sky-high multiples. For the best cloud companies in the BVP Nasdaq Emerging Cloud Indexforward multiples have fallen to just over 9 times earnings from around 25 in February 2021.

Watch CNBC's full interview with Plexo Capital's Lo Toney

Snowflake, Atlassian and Cloudythe three cloud stocks with the highest revenue multiples, are up 41%, 33% and 51% respectively this year.

After Thursday’s announcement, Adobe shares fell more than 17% and headed for their worst day since 2010. The company said in a slideshow that the deal is not expected to increase adjusted earnings until “the end of the third year”.

Figma last raised private capital at a $10 billion valuation in June 2021, the peak of software mania. The company had benefited of the work-from-home movement during the pandemic, as more and more designers needed tools that could help them collaborate while being separated from their colleagues.

But now, even with more offices reopening, the hybrid trend has done nothing to deflect Figma from its trajectory, while other pandemic-friendly products like Zoom and DocuSign have slowed considerably.

Given the fall in cloud stocks, development-stage companies have shunned the IPO market — and private funding in many cases — to avoid taking a haircut on their lofty valuations. Tomasz Tunguz of Redpoint Ventures wrote in a blog post Thursday that prior to the deal, “U.S. venture-backed software mergers and acquisitions were having their worst year since 2017.”

In such an environment, Figma’s ability to exit at double its price of 15 months ago is a blow to early investors.

The three venture capital firms that led Figma’s early rounds — Index Ventures, Greylock Partners and Kleiner Perkins — all hold double-digit percentage stakes, people familiar with the matter said. This means that they will each fetch over $1 billion. Investors in the 2021 cycle have doubled their money. They include Durable Capital Partners and by Morgan Stanley Counterpoint.

Although these types of numbers were regularly recorded during the record Years of IPO from 2020 and 2021, they are foreign this year as investors factor in soaring inflation, rising interest rates and geopolitical unrest.

Too young to drink

Dylan Field, co-founder and CEO of Figma Inc., in San Francisco, California, U.S., on Thursday, June 24, 2021.

David Paul Morris | Bloomberg | Getty Images

Rimer said Figma has come a long way since first meeting founder and CEO Dylan Field, who dropped out of college to start the company through the Thiel Fellowship program, in which tech billionaire Peter Thiel offered $100,000 grants to promising entrepreneurs. When they met, Field was only 19 years old.

“I took him to dinner and couldn’t buy him a drink,” Rimer said.

For Adobe, Figma marks by far the company’s biggest acquisition in its 40-year history. Its biggest previous deal was in 2018, when Adobe acquired the marketing software provider Marketo for $4.75 billion. Before that, the biggest was Macromedia for $3.4 billion in 2005.

Adobe CEO Shantanu Narayen explained his company’s purpose on CNBC, as his company’s stock symbol on screen flashed bright red.

“Figma is actually one of those rare companies that has achieved incredible leak velocity,” said Narayen, CEO of Adobe since 2007. “They have a fabulous product that millions of people love, they have a trailing speed when it comes to their financial performance and a profitable business, which is very rare, as you know, in software as a service companies.”

Adobe needs Figma’s growth and new user base to maintain its dominant position in design. For investors, Narayen can only ask them to play the long game.

“It will be great value for their shareholders,” Narayen said of Figma, “as well as Adobe shareholders.”

CNBC’s Jordan Novet contributed to this report

LOOK: CNBC interview with Adobe CEO Shantanu Narayen

Watch CNBC's interview with Adobe CEO Shantanu Narayen

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