The $20 billion deal with Figma is a historic blow for startup investors in an otherwise miserable year

Adobe is paying 2021 prices. It’s 2022.

Wall Street hates him. Silicon Valley is thrilled.

In a year that has featured exactly no high-tech IPOs and far more headlines about mass layoffs than big funding rounds, Adobe’s acquisition of Figma for $20 billion on Thursday is what some might call a narrative violation. 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 designers at large and small companies. 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 matter.”

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 leading cloud companies in the BVP Nasdaq Emerging Cloud Index, forward multiples have fallen to just over 9 times earnings, from around 25 in February 2021.

Snowflake, Atlassian, and Cloudflare, the three cloud stocks with the highest revenue multiples, were down 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 slide presentation that the deal is not expected to boost adjusted earnings before “the end of the third year”.

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

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 on Thursday that prior to the deal, “US-funded 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. These include Durable Capital Partners and Morgan Stanley’s Counterpoint.

While these sorts of numbers were consistently recorded during the record IPO years of 2020 and 2021, they’re foreign this year as investors count on runaway inflation, rising interest rates and unrest. geopolitics.

Danny Rimer, a partner at Index Ventures and Figma board member, said the company was able to prepare for an IPO and was in no rush to tap into capital markets, private or public. .

“We had raised a lot of money at very good valuations and didn’t need to raise any more money,” said Rimer, whose company first invested in Figma in 2013. IPO. It was really more about what is the best way to achieve the company’s goal, which is to democratize design and creation tools across the world.”

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 prior deal came in 2018, when Adobe acquired 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