Adobe Could Be The Next $10 Billion Software Company

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

Rimer said Figma has gone through quite a journey since he first met founder and CEO Dylan Field, who had dropped out of college to start the company as part of the Thiel Fellowship program, in which the tech billionaire Peter Thiel offered promising entrepreneurs $100,000 grants. When they met, Field was only 19.

For Adobe, Figma marks the company's biggest acquisition in its 40-year history by a wide margin. Its largest prior deal came in 2018, when Adobe acquired marketing software vendor Marketo for $4.75 billion. Before that, the biggest was Macromedia for $3.4 billion in 2005.

"Figma is actually one of these 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 as it relates to their financial performance and a profitable company, which is very rare, as you know, in software-as-a-service companies."

The company issued mixed guidance for the fiscal fourth quarter. Adobe said revenue in the quarter will be $4.52 billion, compared with consensus estimates of $4.6 billion, according to StreetAccount. It expects to report earnings of $3.50 per share, adjusted, above a StreetAccount forecast of $3.47 per share.

In April, Dylan Field had his craziest day since he skipped out on Brown University to try his hand at startups nearly a decade ago. At the virtual conference of his design software company, Figma, popular with customers including Airbnb, BMW and Zoom, he announced just its second-ever product, a tool for online whiteboarding sessions punnily called FigJam. Hours later, he found out his wife, Elena, was pregnant with their first child.

In June, the company raised $200 million from investors, valuing Figma at $10 billion. Forbes estimates that Field and cofounder Evan Wallace, 31, each own about 10% of Figma, making them near-billionaires. (Forbes applies a 10% private-company discount.)

Figma is a fast-growing software company that offers collaborative design tools for businesses, directly competing with and taking market share from Adobe. A CNBC report revealed that tens of thousands of employees at Microsoft were heavily using Figma's cloud-based software platform, which tested its long-running relationship with Adobe.

Figma was founded in 2012 and was last valued at $10 billion in 2021. The company is expected to register more than $400 million in annual recurring revenue this year. Adobe will be funding its deal for Figma with a combination of both cash and stock.

Part of that could be due to Adobe's third-quarter results, which were also announced on Thursday. While the company beat adjusted EPS estimates, it gave fourth-quarter revenue guidance of $4.52 billion, which was short of consensus estimates for $4.59 billion.

Part of the decline could also be attributed to the uncertain macro environment, with elevated inflation leading to outsized interest rate hikes that often ding tech-oriented growth stocks such as Adobe. It could also be because, with such elevated interest rates, investors might think Adobe is overpaying for a software company that may not yet be profitable.

For perspective, while Figma's valuation has doubled from its last funding round of $10 billion to $20 billion today, nearly all other software companies, both public and private, have seen their valuations decimated due to investors' shifting focus to profits from growth.

The $20 billion figure is a substantial step up in valuation for Figma, which was valued at $10 billion in its last funding round in 2021. The company was founded in 2012, and Adobe said that it has since developed a dedicated following among developers. Figma offers a rich range of collaboration options for joint software development, as well as the popular FigJam collaborative whiteboarding environment.

Adobe reported its earnings last Thursday announcing $2.29 billion for the third quarter, which represented a 24 percent year over year increase and a new record for the company. While Adobe is well on its way to being a $10 billion company, the majority of its income continues to come from Creative Cloud, which includes Photoshop, InDesign and Illustrator, among other Adobe software stalwarts.

-Adobe Inc agreed on Thursday to acquire Figma, whose products are used by software developers to collaborate, for $20 billion, sparking investor concerns about the rich price tag that led to a drop of more than $30 billion in the market value of the Photoshop maker.

The cash-and-stock deal, the biggest ever buyout of a privately-owned software startup, will give Adobe ownership of a company whose online collaborative platform for designs and brainstorming is used by firms ranging from Zoom Video Communications to Airbnb Inc and Coinbase.

The deal is expected to close in 2023 and San Francisco-based Figma will continue to be led by co-founder and Chief Executive Dylan Field. Either company will have to pay a termination fee of $1 billion if they scrap the deal.

Although Figma has yet to establish itself as a clear competitor against design giant Adobe, the company is expected to add $200 million in net new APR in 2022. Figma is expected to gain a total market share of $16.5 billion by 2025.

This will be the largest bid that Adobe has made to acquire an existing company. The second largest acquisition was Marketo, worth $4.75 billion in 2018. But why pay $20 billion for a company only valued at $10 billion?

This week I got time with Adobe CEO Shantanu Narayen for a Fortt Knox 1:1. We talked about tech\u2019s challenges navigating the pandemic, his personal journey, and his rise at Adobe. I\u2019d wanted to talk to his about how Adobe managed to be the first major packaged software company to transition to a cloud subscription model:

The day after Microsoft earnings, LinkedIn CEO Ryan Roslansky joined me on TechCheck to talk about the $10 billion in revenue LinkedIn contributed to Microsoft\u2019s fiscal 2021, and what\u2019s next:

Adobe also announced its latest quarterly results. The company reported earnings of $3.40 per share, beating estimates of $3.33 per share. Adobe posted $4.43 billion in revenue for the quarter, but issued mixed guidance for the next three months, predicting revenue to reach $4.52 billion.

The early success of Jira, Confluence, and the Cenqua products encouraged the team and proved their freemium distribution model could work. They realized that by building a suite of products developers needed, they could become indispensable to customers and retain them long-term. Given the success of the first acquisition, the company decided the best path forward was to become exceptional at acquisition and folding useful pre-existing products into the Atlassian suite.

It evolved into a major rival of Adobe and is now valued at $10 billion. Some of the largest tech firms, like Dropbox, Twitter, and Slack, use the software. Adobe said it planned to acquired it in September 2022 for $20 billion.

Field has a net worth of $1 billion and has made Forbes' 30 under 30 list. He posted on Twitter earlier this month celebrating Figma's 10-year anniversary and thanking the company's "Figmates," a nickname for employees.

The deal announced by Adobe, which is a mix of half cash and half stock, confirms an earlier Bloomberg report and would mark the biggest ever takeover of a private software company, according to data compiled by Bloomberg. Adobe shares fell 13% as the market opened in New York, the biggest decline in more than two years.

Privately-held Figma does not report its financials. However, according to PitchBook Data, Figma in June 2021 raised $200 million from investors, giving it a valuation of $10 billion, meaning that Adobe plans to acquire the company for double its valuation of just a year ago. Figma generated about $75 million in revenue in 2020, and was slated to double that in 2021, according to Forbes.

Adobe is a multi-billion-dollar leader in innovative creativity and digital experience. The company offers products and services in three categories. Its Creativity Cloud provides apps, web services and other resources for designing and publishing projects, including such applications as Photoshop, Illustrator, and Acrobat Pro. The Adobe Experience Cloud provides a suite of products and services to manage customer experience with real-time data, scalable personalization, and more. The Adobe Document Cloud lets customers scan, edit, share, and sign documents from anywhere at any time.

Those in software and tech, however, seem more bullish. Figma is an exceptionally well-regarded company, as seen (to name just one example) in this post from 2020 titled \u201CWhy Figma Wins\u201D. This Twitter thread details the qualitative case well:

But since then, private market prices for software companies should have followed those of public markets. ADBE itself is down by nearly half since Figma\u2019s 2021 raise was announced. And, indeed, the other \u2018hot\u2019 design startup in the space, Canva, has seen its private market value fall 54%. An investor could argue that, in the context of the sector, Figma\u2019s current value should be closer to $6 billion (or worse?) than to $20 billion.

That said, the extent of the overpay might not be as large as broader market comparisons suggest. Again, SNOW is at 27x this year\u2019s multiple. That company no doubt has a larger total addressable market \u2014 Adobe said on the Q3 call that Figma\u2019s TAM was just $16.5 billion at 2025 \u2014 but its gross margins also are sharply below Figma\u2019s ~90%.

One common response to the Figma deal seems to be, \u201Cif Adobe is such a great company, why didn\u2019t they just spend $10B in-house and run these two startups out of business?\u201D But as Dorai explains, that\u2019s not how it works. Between the very nature of a file, and the backwards compatibility problem (to older versions of the software), a legacy developer like Adobe builds up so-called \u201Ctechnical debt\u201D. 2b1af7f3a8