Weekly Update: SaaS Market Down...Figma: "Hold My Beer"
A few highlights from the week of 9/12
It was a tough week for public SaaS equities as the WCLD cloud index sagged 7% to end at $ 28.59.
A higher-than-expected inflation reading shook the public markets. Fed watchers now expect a 75 bp hike in September. Concerns about an upcoming recession continue to percolate.
Yet many public & private software businesses continue to generate spectacular results. For example, Zscaler posted strong earnings and has a remarkable rule of 40 score of 93.
Or Figma, which according to Adobe’s acquisition announcement, has a rule of 40 score of over 100!
It’s hard to overpay for a SaaS business with such strong, efficient growth & tight product-market-fit. While Adobe is paying $20b, or ~60x ARR, there is a clear consensus that they had to do it. It’s hard to disagree with consensus on this one.
A few thoughts on the deal:
Adobe knows what it’s doing: it’s arguably the most successful software acquirer in history, having bought 56 companies over its 40 year history, including Photoshop back in 1995.1
Figma is growing from 200m to 400m in ARR this year, cash flow positive & with net revenue retention over 150%. Wow!
What are the chances the deal gets shot down over antitrust concerns? Both the US and the EU are showing aggressive postures towards large M&A. This deal has similarities to Visa/Plaid, which the US DOJ stopped. Last week, the EU blocked Illumina from buying Grail - this deal must clear EU scrutiny as well.2 While the dramatic success of startups like Figma & Canva seems to puncture the logic that Adobe has anything approaching a monopoly, it’s unclear that logic is a significant criteria in today’s antitrust environment.3
Podcast recommendation of the week:
Founders Podcast has a wonderful review of a biography of Thomas Edison, the great inventor. Edison was self-taught, endured a tough childhood, and was working 14 hour days by the time he was 12 (in 1859 - this was common for the time). Despite the challenging upbringing, he effected one of the most profound transformations of American life: the transition from darkness to illumination at night. As the review notes, he is someone who truly made a dent in the universe.
I recently read about a technique that’s very effective at improve one’s mood - simply imagine yourself in a much worse circumstance, then remember that you are here, today, in a relatively cozy environ. Maybe this explains why I find it so satisfying to listen to Founders Podcast. The stories of the brutal conditions that many of history’s greatest entrepreneurs had to overcome is a reminder that I am so tremendously fortunate to live at this place & time.
Blog post recommendation from this week:
I loved the write-up of the Adobe/Figma by Byrne Hobart at The Diff. It’s behind a paywall, but here’s a taste:
Every strategic acquisition of a rapidly-growing competitor is best understood as a short squeeze. Adobe has a business liability in the form of higher churn and fewer new customers, and as Figma grows, so does that liability. In the early stages of the squeeze, a company can grow around this problem—if Figma makes inroads in small startups, Adobe can shift more of its sales efforts to big enterprises. But eventually, the presence of a competitor shrinks the available addressable market. It also limits the company's operational flexibility: when they're losing deals, the temptation is to match their competition feature-for-feature, but that means delaying feature launches that existing customers care about in order to prioritize the ones prospective customers care about. It's also economically inefficient to essentially have two companies building Figma instead of one.
Expensive strategic acquisitions are essentially a buyer enduring & covering a short-squeeze - ie paying through the nose for being short an asset (a competitor) for too long. Wonderful framing!
It paid $34.5m for the rights to Photoshop to its creator, Thomas Knoll, in 1995.
A deal that arguably defied strategic logic for Illumina - but made even less sense for regulators to stop.
Take every tech-basher’s favorite punching bag, Meta/Facebook, which is drawing antitrust scrutiny for supposedly having monopolistic powers. Meta has a market cap of 393b. Tik-Tok, its most recent & arguably most formidable competitor, is rapidly taking share and has a 300b valuation. This seems to make Meta the world’s most incompetent or most friendly monopolist.