May 28, 2023

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Adobe is paying 2021 prices. is 2022.

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Wall Street hates it. Silicon Valley is thrilled.

In a year that has been dominated by absolutely zero high-profile tech IPOs and more headlines about massive layoffs than large funding rounds, Adobe’s $20 billion acquisition of Figma on Thursday some might call a narrative violation. There was no other bidder to increase the price, according to a person familiar with the matter, who asked not to be named as the details are confidential.

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Figma’s cloud-based designed software has been a growing headache for Adobe over the years. It’s cheap (there’s even a free tier), easy-to-use, collaborative and trendy, and is spreading like wildfire among designers at companies large and small. Annual recurring revenue is poised to more than double for the second straight year, surpassing $400 million in 2022.

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

That’s why Adobe is paying out nearly 50 times revenue this year after a stretch in which investors dumped stocks that were commanding sky-high multiples. For the top cloud companies in BVP Nasdaq Emerging Cloud IndexThe forward multiplier has fallen from around 25 to just 9 times revenue in February 2021.

Snowflake, Atlassian and Cloudflare, the three cloud stocks with the highest revenue multiples, have lost 41%, 33% and 51%, respectively, this year.

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Following the announcement on Thursday, Adobe’s shares fell more than 17%, their worst day since 2010. the company said slide presentation That deal is not expected to add to adjusted earnings until “the end of three years.”

Figma last raised private capital a $10 billion valuation In June 2021, the peak of the software frenzy. The company had benefited from the work-from-home movement during the pandemic, as more designers needed tools that could help them collaborate while they were apart from their colleagues.

But now, with more offices reopening, the hybrid trend has done nothing to shut down Figma, while other pandemic-friendly products like Zoom and DocuSign have slowed down dramatically.

Given the decline in cloud stocks, late-stage companies have cleared the IPO market — and in many cases private funding — to avoid getting a haircut on their high valuations. Tomasz Tunguz of Redpoint Ventures bought a . written in blog post Prior to the deal on Thursday, “US enterprise-backed software M&A was tracking its worst year since 2017.”

In such an environment, Figma’s ability to exit at twice its price 15 months ago is a coup for early investors.

The three venture firms that led Figma’s initial round — Index Ventures, Greylock Partners and Kleiner Perkins — all held double-digit percentages, people familiar with the matter said. This means they will each make a return of over $1 billion. Investors doubled their money in the 2021 round. These include Durable Capital Partners and Morgan Stanley’s Counterpoint.

While those types of numbers were regularly recorded during the record IPO years of 2020 and 2021, they are foreign this year, as investors reckon with rising inflation, rising interest rates and geopolitical unrest.

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too young to drink

Index Ventures partner and Figma board member Danny Rimmer said the company is in a position to IPO ready and is in no hurry to tap the capital markets, whether private or public.

“We had raised a lot of money at a very good valuation and we didn’t need to raise any more money,” Rimmer said. invested before In 2013 in Figma. “The company was IPO-enabled. It was really a question of what was the best way to achieve the company’s goal, which is to democratize equipment for design and manufacturing around the world.”

Rimmer said Figma has gone through quite a journey since he first met founder and CEO Dylan Field, who left college to start the company as part of the Thiel Fellowship Program, which saw tech billionaire Peter Thiel mentor promising entrepreneurs. was offered a $100,000 grant. When they met, Fields was only 19 years old.

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

For Adobe, Figma is the company’s biggest acquisition by a wide margin in its 40-year history. Its biggest prior deal was in 2018, when Adobe acquired marketing software vendor Marketo for $4.75 billion. Prior to this, the largest was Macromedia in 2005 for $3.4 billion.

Adobe CEO Shantanu Narain explained his company’s rationale on CNBC, as his company’s stock ticker was bright red on the screen.

“Figma is truly one of these rare companies to have achieved incredible escape velocity,” said Narayan, Adobe’s CEO since 2007. They have a great product that attracts millions, they have escape velocity as it relates to their financial performance and a profitable company, which is very rare, as you know, software-as-a- service companies.”

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Adobe needs growth and a new user base from Figma to maintain its dominant position in design. For investors, Narayan may just ask them to play the long game.

“It’s going to be a great value to their shareholders,” Narayan said of Figma, “as well as Adobe’s shareholders.”

, CNBC’s Jordan Novett

watch: CNBC interview with Adobe CEO Shantanu Narain