Adobe will pay 2021 prices. It’s 2022.
Wall Street hates it. Silicon Valley is excited.
In a year with 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 would call a narrative breach. According to a person familiar with the matter, who asked not to be named because the details are confidential, there were no other bidders pushing up the price.
Figma’s cloud-based 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 has spread like wildfire among designers in companies big and small. Annualized recurring revenue is projected to more than double for the second year in a row to surpass $400 million in 2022.
“This was a significant threat to Adobe,” Lo Toney, founding chief executive of Plexo Capital, which invests in startups and venture funds, told CNBC’s TechCheck on Thursday. “This was both a defensive move and a look at this trend where design rules and design matter.”
That’s why Adobe is paying about 50 times revenue after a period this year when investors dumped stocks at 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.
Following Thursday’s announcement, Adobe shares fell more than 17%, heading for their worst day since 2010. The company said in a slide presentation that the deal is not expected to contribute to adjusted earnings until “the end of year three.”
Figma last raised private capital in June 2021, at the height of the software mania, with a valuation of $10 billion. The company had benefited from the work-from-home movement during the pandemic, as more designers needed tools to help them collaborate when away from their colleagues.
But now, even with more offices reopening, the hybrid trend has done nothing to throw Figma off course, while other pandemic-friendly products like Zoom and DocuSign have slowed dramatically.
With cloud stocks plummeting, late-stage companies have stayed away from the IPO market — and in many cases private funding — to avoid a discount to their lofty valuations. Redpoint Ventures’ Tomasz Tunguz wrote in a blog post Thursday that prior to the deal, “US venture-backed software M&A was headed for its worst year since 2017.”
In such an environment, Figma’s ability to exit at double its price 15 months ago is a coup for early investors.
The three venture firms that led Figma’s earliest rounds — Index Ventures, Greylock Partners and Kleiner Perkins — all own double-digit percentages, people familiar with the matter said. That means they’ll each give back over $1 billion. Investors in the 2021 round doubled their money. These include Durable Capital Partners and Morgan Stanley’s Counterpoint.
While such figures were routinely recorded in the record-breaking years of 2020 and 2021, they are from abroad 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 a Figma board member, said the company is poised to prepare for an IPO and is in no rush to tap the private or public capital markets.
“We had raised a lot of money with very good reviews and didn’t need to raise any more money,” said Rimer, whose company first invested in Figma in 2013. “The company was listed. It was really more of a question of what is the best way to achieve the company’s goal, which is to democratize tools for design and creation around the world.”
Dylan Field, Co-Founder and Chief Executive Officer of Figma Inc., in San Francisco, California, on Thursday, June 24, 2021.
David Paul Morris | Bloomberg | Getty Images
Rimer said Figma has had 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, in which tech billionaire Peter Thiel offered $100,000 in grants to promising entrepreneurs. When they met, Field was only 19 years old.
“I took him out to dinner and I couldn’t get him a drink,” Rimer said.
For Adobe, Figma is by far the largest acquisition in the company’s 40-year history. Its biggest deal to date came in 2018 when Adobe acquired marketing software provider Marketo for $4.75 billion. Before that, Macromedia was the largest at $3.4 billion in 2005.
Adobe CEO Shantanu Narayen was explaining his company’s motivations to CNBC as his company’s stock ticker 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 fabulous product that appeals to millions of people, they have escape velocity in terms of their financial performance and… a profitable business, which, as you know, is very rare in software-as-a-service companies.”
Adobe needs Figma’s growth and new user base to maintain its dominant position in the design space. Narayen can only ask investors to play the long game.
“It will be of great value to their shareholders,” Narayen said of Figma, “as well as Adobe’s shareholders.”
— CNBC’s Jordan Novet contributed to this report
CLOCK: CNBC interview with Adobe CEO Shantanu Narayen