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Implications of the failure of the Adobe-Figma deal.
Adobe and Figma have mutually agreed to terminate their previously announced $20 billion merger agreement due to anticipated difficulties in receiving necessary regulatory approvals from the European Commission and the UK Competition and Markets Authority. The decision ends the potential acquisition of Figma by Adobe, announced in September 2022. Both companies will continue to operate independently, and as part of the termination agreement, Adobe will pay Figma the previously agreed-upon termination fee of $1 billion.
The writing has been on the wall for sometime — the regulators on both sides of the Atlantic have been hemming and hawing about not only this specific transaction, but also about any “mergers” or “acquisitions” in the technology sector.
Elsewhere, Federal Trade Commission’s actions have led to the unwinding of Illumina’s $7.1 billion acquisition of Grail. The San Diego, Calif.-based biotech company is going to divest cancer test maker Grail it acquired in 2021. The decision came after a court ruling, which many viewed as a test of Federal Trade Commission’s ability to stop large companies from buying startups. (Related: New York Magazine: FTC Chief Lina Khan’s Rough Year.)
Whether it is Adobe or Illumina, regulators, especially in Europe and the U.K., are making it difficult not only “Big Tech” companies to acquire startups, but also for hampering the plans of the next layer of startups. What happens when it starts to regulate technology companies that want to get to the size of an Adobe or Salesforce?
To be clear, I am not against the idea of regulations. But the fact is that the regulatory system we have today is almost a century old. It has been finessed for the industrial economy. And we are living in a networked economy, where the scale and speed of change is anything we have experienced. And it is about to change. Instead of focusing on the fundamental issues and creating regulatory frameworks, we end up on what cricket players commonly refer to as a “sticky wicket.”
The implications of the failure of the Adobe-Figma deal are pretty clear for the startup ecosystem. If “big tech” and the next layer of technology companies (such as Adobe) can’t buy “startups,” the liquidity environment is going to change for the startup founders, and of course, the venture investors. Deals, especially mid-sized deals, are part of the equation. The innovation ecosystem depends on sustained outcomes — a positive outcome of even one in a hundred startups keeps the innovation engine chugging along.
Large technology companies will be forced to do what they can with their resources — get bigger. By using their mountains of cash, they can enter new markets, and even if they can’t make an impact — they can muddy the waters. Of course, they can do what Microsoft has done with OpenAI — own 49 percent of OpenAI, and get all the benefits without the regulatory headaches.
What about the startups? Well, if the outcomes are going to become scarce, then investor dollars are going to be focused on likely winners — ones that can probably go public. And even that isn’t easy — a minuscule few make it to the “opening bell.” And those that do, most of them find themselves plumbing the depths of the market.
The reality of stock markets is very different from the startup valuation dreamland. Investors, who pump up the private market valuations, eventually have to deal with that as well — you don’t have to look far. Just look at the shifting fortunes of the always ebullient Tiger Global or Softbank’s Vision Fund.
For Figma, which is said to have $190 million in revenues in 2022, is to regroup, streamline its operations, and eventually go public. It will have a billion dollars in breakup fees to help get back on track. The fact that Adobe was willing to pay 250 times revenue for the company tells you that they saw long-term value in Figma and its future. And when that public offering happens, it does not ensure a smooth ride or a good outcome for the founders and their backers — but at least it has that option. Others might not be that fortunate.
With that said, I have a firm belief in the entrepreneurial ethos — figure out a way to overcome the odds, no matter the odds.
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Wait – do you think it’s a bad thing, for innovation and the business, that the leading players can’t just buy their way out of competing?
I saw this deal as Facebook buying Instagram all over again – and I’m pleasantly surprised that it got stopped. Or would you say the Instagram deal was good for healthy competition in the social media eco-system? Because it promotes VC to fund startups with the goal of one day be bought by a giant?
(Like your blog, and hope you have a great day! I just really think I disagree with you here. ☺️ -Erlend)
I think you are missing the point here – startups have to have a liquidity event to reward the founders, employees and their backers. More it happens, more money flows into startups and more experiments and this more new ideas. Now with no liquidity events or negligible liquidity events fewer ideas get the money and bulk goes into what’s working. I think in the end that is not a good thing.
If they are serious about actually stopping from big getting bigger write the regulations that prevent airlines from buying smaller airlines, or luxury conglomerates buying smaller brands. They are being selective in rules here.
Also, the real thing to do is define what is allowed and what is not allowed.
I have wondered for a long time if we’ve become overly dependent on liquidity events for economic incentives of startups, and if that’s part of the reason we have so many unsustainable business models disrupting the economy in ways we end up not really liking down the road. Obviously liquidity events are not inherently bad, but the finite number of outcomes you mention (IPO, purchase, … failure?) is both very accurate and pretty limiting. I’m sure it happens more among small companies and outside of the media spotlight, but I’d love to see more investors getting involved for things like revenue sharing, etc. where they are investing in a business versus investing in someone else eventually buying said business.
Clearly, it’s unreasonable/bad for startups to ask the investment world to turn on a dime with something like this, but I think it’d be a healthier ecosystem if there was less of a stigma around anything other than the small number of acceptable outcomes we have now, even for bigger investment/name companies.
That is a separate conversation and I have been thinking about this since my own startup shutdown. However, in order for that to work, one has to think purely in terms of what is the model, what is growth and what is the scale of the business. And basically depending on that the business becomes either a “venture” backed business or a different funding model.
VC dollars are all about outsized outcomes — for normal sized outcomes LPs are almost always better off investing in non_VC vehicles such as “markets” or PE firms.
No, I didn’t miss the point – I just fundamentally disagree. You’re talking about a world, where making a business which becomes a good business isn’t a good (enough) thing. And that the only two end goals are either being bought (major payout) or going under. Do you really think the world of creative software would be a better place if Adobe owned Figma? As opposed to Figma making Adobe having to try harder? And if Adobe wanted to buy Serif (that makes Affinity) as well?
I agree that it might lead to less VC shenanigans, but I think that would be a net positive (but not only positive – I agree with some of what you’re saying).
Now, I also agree that better laws, and more consistency is needed. There’s too much consolidation in other sectors as well, absolutely! The current anti-trust laws, at least in the US, fundamentally don’t understand vertical integration, and is too focused on pricing.
Like, this stands out, as so much else gets through (I think Microsoft getting to buy Activision Blizzard is a catastrophe) – but to me this is the correct outcome, so to me, the answer to “why stop this when all of those were allowed??” is that it was the other outcomes that were wrong.
Nowhere in the article I make those assertions. The article clearly and pointedly says that if you are in the venture backed startup ecosystem, liquidity options have decreased and that is an overhang and will depress funding options, and compress valuations companies can afford. The point is that if you going to go and raise money for growth, scale and faster outcomes by taking venture money, this is not a good development.
There are multiple ways to start and build a business. People can bootstrap their way forward and that is their chosen path to build their dream. There are people who take bank loans to expand. If Figma wanted to go for it alone, it could have eschewed the VC funds and grown at an organic pace. It would have taken it lot longer to get to $200 million+ in revenues and thus Adobe probably won’t care. They cared for a new fast growing market leader.
It is sad that we don’t have clarity from the FTC and other regulators as to what are the rules of engagement. I agree with you — Microsoft-Activision shouldn’t have been allowed. But it was.
I should’ve been more clear: I don’t disagree with the analysis you present here – I even think it’s an astute one! (Which is a compliment I should’ve given you in one of my comments.) Where I disagree is on it being a bad thing, hehe.
If VC funding drying up a bit is a consequence of better anti-trust regulation, I think it has to happen. And my point was that we have to make sure there’s still good outcomes apart from being bought (like being part of a great and profitable business, which I’d hope could lead to something in the middle of crazy VC funding today and raw bootstrapping). So I agree this will lead to less VC funding – but I think it’s still for the better.
Re: FTC and Microsoft-Activision:
To be fair, the FTC tried to stop it, and so did the UK counterpart. The problem is that the laws aren’t updated, and the American system kinda struggles with getting new laws passed. 😛 I think Lina Kahn has the right ideas (even though the Microsoft-Activision case was argued pretty poorly IMO), but it’s hard when you can’t pass any new laws…
Thanks for thoughtful and respectful answers in this disagreement, btw!
This is a patently wrong take. We need a lot more antitrust action against conglomerates like Adobe. Adobe has far too much power in their field and they’ve used that power to gouge their customers and keep competition down.
It doesn’t make logical sense to allow Adobe to buy their biggest competitor. That’s bad for consumers because it limits their options. I’m very glad the US is finally taking some tiny actions in this space to make life better for regular people
Great article, Om.
I think that too many people do not have skin in the game here – as startup operators or employees, much less as investors – to think carefully and appreciate the consequences of the FTC’s interference.
Building startups is very, very hard. Destroying VC exits will destroy VC funding. Bootstrapping a startup is either (1) near impossible in many domains, like new marketplaces (usually takes $ to overcome cold start problems) or deep tech like cold fusion or (2) effectively a way to ensure that only the already-rich-and-successful can play the innovation game.
Another commenter shared above:
“And my point was that we have to make sure there’s still good outcomes apart from being bought (like being part of a great and profitable business, which I’d hope could lead to something in the middle of crazy VC funding today and raw bootstrapping). So I agree this will lead to less VC funding – but I think it’s still for the better.”
A world of less VC funding is a more boring and poorer world with less moonshot companies and more bootstrapping of safer, slower and less ambitious companies. This is in fact the status quo in most of the world! There is a reason the rest of the world wants to come here to build.
There is nothing wrong with those other companies, of course! I’m working on building one myself, after spending some time in a venture-backed startup. There are more comfortable ways to make a life and career. We should want to make it as enticing as possible for smart people to ride the dragon in the US.
Unfortunately, our regulators and FTC lawyers are thinking about how good blocking Adobe-Figma will look on their resume. They don’t want to provide clarity, because their power lies in discretion, and the costs of that uncertainty are legion.