• Howie Town
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  • The Adobe and Figma Breakup...The Unintended Consequences Pile Up as Do Opportunities

The Adobe and Figma Breakup...The Unintended Consequences Pile Up as Do Opportunities

Good morning.

In my world, the Adobe/Figma breakup is big news.

When Facebook acquired Kustomer a few years back (a portfolio company of ours) the $1.1 billion cash deal was held up by the FTC for over a year. That seemed crazy to me over a non core, relatively small deal for a mega cap. I can feel the Figma employee and shareholder pain.

In September of last year, Adobe acquired Figma, a company with sales of $400 million for $20 billion. Paying 50 times sales is always a huge premium, but this was after the bubble had already burst as interest rates rose.

Ben Thompson had the great breakdown on why he felt Adobe wanted /needed to do it:

The Figma OS

One of the most widespread responses to the news of this acquisition was to look back at Adobe’s 2005 acquisition of Macromedia in dismay. While the big prize in terms of Macromedia’s product suite was Flash (oops!), it was Fireworks, a combo bitmap and vector editor explicitly created for web design, that critics point to: the argument is that Adobe barely maintained Fireworks and let it quietly sunset in 2012 precisely because it was so much easier to use than Photoshop and Illustrator; the implication in the context of this acquisition is that Figma may suffer the same fate.

I am certain this is not the case, and not just because spending $20 billion to kill an app would be absurd. Rather, the reason why Adobe is both willing and has no choice but to spend so much is because of the point made above: Figma is set to be the “operating system for design”, which means that in the long run Adobe has to operate on Figma’s terms, not the other way around; to put it another way, Adobe is not only paying for long-run control of design but also its own independence. That alone is worth a whole bunch of money! What likely made the price even higher, though, is that in this view Figma has no need to sell; the company had pole position on the future of design, not because they were going to build a competitor to Photoshop or Illustrator, but because Figma was going to commoditize them.

Still, it’s a long ways from here to there: Figma may be taking in $400 million in revenue, but that means the purchase price was a 50x multiple — and that doesn’t include the $2 billion in Adobe stock options that are being offered to Figma’s employees (another sign that of course Adobe isn’t going to kill the product). It will be many years before Figma ever achieves that sort of valuation on its own — if ever (Spotify, for context, is a $19.3 billion company). Yes, Figma will gain some benefits from being a part of Adobe, including access to Adobe’s sales funnel and tighter integration with Adobe’s entire suite, but at the end of the day it seems to me that the biggest reason for Figma to sell was simply because Adobe made the number so big that it was all but impossible to say no.

The big question now is whether or not this deal will be challenged by antitrust regulators: on one hand, there is the precedent of Visa and Plaid, where the Justice Department sued to stop the acquisition of a startup that it argued presented a clear competitive threat; on the other hand, that was in the context of a major market (financial services) already crawling with regulators: creative tools are a relatively small market with no other regulatory restrictions.

Moreover, as I noted above, Figma isn’t competitive with Adobe’s core applications; it is competitive with XD, or rather was: nothing shows how badly Adobe dropped the ball in this space more than the fact that XD was built as a desktop application (because it was, after all, copying Sketch, not the as-yet-unreleased Figma). In other words, that isn’t a competition because Adobe already lost. At the same time, that doesn’t invalidate Figma’s threat to Adobe; rather, as I explained above, that threat is more about the overall value chain — the competition that is being eliminated here is the future Photoshop/Illustrator competitors that would have been built on Figma’s platform absent what I suspect will the clear favoring of Adobe’s tools.

What is interesting to consider is what happens if this deal is not allowed. Figma, as you would expect from the party with the negotiating advantage, comes out pretty well: the company gets a $1 billion breakup fee at an implied $20 billion valuation without having to actually raise money in a difficult fundraising environment. Still, it’s not all upside: it is human nature for Figma employees to already be buying their future yachts and biasing their product decisions to an Adobe future; if the deal doesn’t go through there could be both culture and product harm (particularly since I fully expect Adobe to fight this in court if necessary; that’s how strategically important Figma is to them). That, perhaps, means there is some upside for Adobe as well: $1 billion to sidetrack its would-be master is perhaps a better option than just being commoditized by a disruptor without a fight.

I won’t wade into the legal goop. Figma will be fine. Adobe will be fine. The stock has been climbing back to all-time highs since the merger was announced and did not budge yesterday.

What is important is that the FTC and EU are sending a clear message that the ‘mega’ we see today is ‘mega’ enough. Investors and founders must deal with the unintended consequences and of course opportunities that will now surface/persist.

If you were an LP in a venture fund that owned Figma…it stings:

If you were an employee at Figma, you have to delay some purchases.

As a seed investor this reinforces my belief that prices are too high throughout the private stack for the valuation compression at hand and the exit opportunities. It also means that founders need to focus on building sound businesses, not just features that will cause pain to incumbents.

Will at Slow Ventures agrees with me:

As I wrote yesterday, I am all for ‘speculative acquisitions, before companies are obviously great’. That is why I wrote my post yesterday - ‘Where Are All Corporate Development People’.

The surviving IPO’s from the 2020 and the ones inevitably now having to come to market (like Figma) are mostly on their own. They need to focus on organic growth, business development, profitability, unit economics, and corp dev. They will have to build and flex some muscle in areas they have ignored or neglected. You will not just be able to code your way out of this business landscape.

Ok…have a good day.

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