productmusings written by Jiri De Jagere

Adobe takes out its biggest rival in Digital Design

September 16, 2022
9 minutes

Adobe announced they are acquiring Figma for a whopping $20B, taking out their biggest rival in digital design. The acquisition triggers lots of emotions and raises many questions. Figma users are left wondering what will happen to their beloved design tool. Meanwhile the rest of the tech industry is curious to understand if the deal makes sense and if Adobe can make it work.

I’m not a UX / UI designer. I’m not a Figma (or Adobe) user. But as a Product Manager, I do work with designers and this news is definitely the talk of the town. So I dediced to take a look, with my Product Manager glasses on. 🤓

The news of the acquisition left Figma users in shock. Their beloved design tool, the one which had given many an escape from Adobe’s ecosystem, has been snapped up by the arch enemy. But why is this such a shock? To understand user sentiment, we first need to dig into why they flocked to Figma. Many were experienced, invested Adobe users before, so what made them switch? Some quick research shows two important reasons: Figma built a loyal community around a strong product vision AND they deliver value faster!

Figma built a loyal community around a strong product vision

From the very start Figma invested heavily into building a community of loyal users. They took their time building an MVP and focused on solving those challenges that others did not.

Figma understands that designers spend their entire working day in their tool. But they also understand that designers do not work in a void.
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They understand that designers spend their entire working days in their design tools. But they also understand that designers do not work in a void. They practice a team sport and collaboration is crucial. Figma’s product has been carefully crafted to support designers’ everyday activities better than any other tool does. Where other products focus on output, Figma focuses on the process.

A big fear in the community is that Figma will now get assimilated into the larger Creative Cloud suite. A suite of products that, perhaps unjustified, is perceived as clunky and complex.

 

Figma delivers value faster

When Figma entered the market, designers had already invested heavily in to their toolset. As a new kid on the block, Figma understood they had to make switching to their product worthwhile. You do not only have to create a better product, but you need to incent users to switch.

You do not only have to create a better product, but you need to incent users to switch.
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In Product Management we often talk about switching cost. Switching cost is expressed both in time and money: the cost of licenses and the time needed to become proficient with a new tool. It is also important to take into account that many in the digital design industry are freelancers. They have to pay for their own software and training.

To lower the switching cost, Figma:

  1. offers a free forever tier. You can sign up and use it for personal or educational purposes for free, forever. You’re not bound to a 7-day trial, but instead you can take all the time you need, in between work and side projects.
  2. invested heavily in understanding how their users work and support them the best possible way through their software.
  3. makes the tool easy to learn with great tutorials, an engaged user community and kick-ass support.
  4. make a clear separation between designers and collaborators. You only pay for designers and an unlimited number of people can collaborate.

On top of that, the paid plans have awesome collaboration features that are worth paying for. Figma positioned themselves as a cost-effective and high quality alternative to the 10.000 pound gorilla of the industry - Adobe. Figma was so successful in doing so, that many users - somewhat romantically - considered Figma to be an ally against the ‘Dark Side’. You can imagine their disappointment, seeing Figma being turned by the Dark Side.

 

Adobe built its brand and reputation upon its digital design products and it was hurting because of Figma. Understandably, Adobe needed to respond. But does the acquisition make sense?

Does the acquisition make sense for Figma?

Adobe paid a whopping $20B for Figma. That’s roughly 4 times the size of their previous largest deal - the 2018 acquisition of Marketo for $4.75B. So it is clear that this is a big bet, even for an industry behemoth like Adobe.

Figma had great momentum and was growing rapidly. So you could ask: “Why sell?” Still, the deal is a no-brainer for Figma and its investors. This tweet summarizes some of their key financial metrics.

Figma would close 2022 at $400M in ARR, which represents a year over year growth of roughly 100%. They are running at a gross margin of more than 90% and have positive operating cash flow. This does not mean they were making a profit, but it illustrates that it is a healthy business.

So again, does it make sense to sell? Yes it does!

$2B equals 50 times this year’s recurring revenue. They would need to do 2022 over 50 times to generate as much revenue, and revenue does not equal profit! Even if they keep growing rapidly, it would take years to generate that much shareholder value.

It is not unusual for SaaS business to exit at large multiples. When you acquire the business your are paying for the revenues that would be generated in the future. It’s no exact science, but things like recurring revenue, customer churn and customer lifetime value wheigh heavily on the valuation. According to recent research, the median mutiple is around 10x ARR.

A quick search on Crunchbase tells us that Figma raised $332.9M in funding over different rounds. The tweet below illustrates how much return on investment different investors from different rounds realized with this deal.

Both co-founders still owned 10% of the equity each. Both make $2B on this deal, which is great for them! It seems they did ISOs which is great for the employees too! Adobe also wrote down $2B in RSUs to help with retaining Figma employees after the acquisition. So it is safe to say that most at Figma will be happy with this deal.

How is Figma worth $20B to Adobe?

So why is Adobe paying that much? They can’t expect to get a decent return on a 50x multiple? The answer is they don’t. This isn’t just about Figma, but about Adobe’s future.

Figma demonstrated that they understand the future of the digital design industry, with ease of use and collaboration front and center in their product vision - things the Adobe design products simply aren’t as good at. Figma built a very solid business and is rapidly gaining market share, attracting new users and - even more important - converting Adobe users.

When you know where the future of your industry is headed, but you are weak in that area and your competitor has the momentum, the only question is: “How much is their business worth to you?” Obviously, when you’re discussing deal terms on this basis the one selling is negotiating from a position of power.

Now, if I’ve given you the impression that I think Figma is the winner and Adobe is the loser in this case, that impression is utterly wrong. You have to give Adobe credit for being in the position to make such a deal to protect their future. Adobe was founded in the 80s, shipping design software on floppy disks for a - hefty - one time fee. They have successfully expanded their business into document management and marketing. They have successfully converted their source of income from one-time software fees to a SaaS business with predictable, recurring revenues. That is no small feat! And it put them in the position where they can do deals like this.

How will Adobe make this work?

Adobe is facing some serious challenges in the coming months and years. It’s not just about being able to write a big check. Integrating acquisitions successfully is an art. You’d think the game plan is all figured out up front, but it isn’t. Integrating acquisitions successfully is challenging. But, Adobe have a lot of experience and are good at it.

The first and most obvious question is: “What will happen with Adobe XD and Figma?” Again, I’m not a designer and I don’t work at Adobe so I have little insight. But I imagine that, even though they are very similar, both tools have their strengths and weaknesses. I’m curious about how Adobe will attack this problem. I imagine their strategy will play to the strengths of both products.

Can Adobe nuture Figma's loyal flock of enthousiast users? Time will tell.
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Another question touches on Adobe Creative Suite, and its expensive subscription model. Many users found a way out of Creative Suite’s grip through Figma. I suspect those days are over and Figma will be integrated into Creative Suite’s subscription plan. It will likely raise the total cost of ownership for Figma users, but as Adobe have somewhat of a monopoly now it is their prerogative. Figma has built a strong, loyal community and Adobe can use that to their advantage and find the sweet spot between increasing prices and losing customers.

The main challenge will be to retain Figma customers. It is only a matter of time before something new pops up (or something old makes a comeback). Can Adobe nuture Figma’s loyal flock of enthousiast users? Time will tell. They definitely have started a bit of a charm offensive, having founders chime in in public about their experiences at Adobe after being acquired.

Who knows? They might just make it work? I think they will …

  acquisitions