From: allin
The proposed $20 billion cash and stock merger between Adobe and Figma, which was agreed upon in September 2022, has been called off after a 15-month review process [00:36:10]. This cancellation has significant implications for shareholders, employees, the startup ecosystem, and limited partners who had anticipated substantial financial gains from the acquisition [00:36:25].
Details of the Cancellation
The deal’s termination was largely due to regulatory scrutiny, particularly from the European Union, which indicated it would block the acquisition [00:40:32]. Adobe paid a $1 billion breakup fee to Figma as a result of the termination [00:40:59]. This fee was a crucial negotiation point for Figma, serving as insurance against regulatory disapproval [00:41:00]. Adobe’s stock price reportedly increased after the deal was called off, suggesting that investors viewed the termination as a financially better outcome for Adobe [00:44:17].
At the time of the agreement, the deal was valued at 30 billion, offering a significant potential exit for Figma’s investors and employees [00:45:12]. Figma is reportedly doing about 8 billion to $10 billion at a 12 to 15 times revenue multiple [00:45:50].
Broader Implications for M&A
The cancellation of the Adobe-Figma merger, alongside other major deals like Signa and Human (a multi-decabillion-dollar merger called off due to anticipated FTC resistance) and Illumina and Grail (forced to unwind their merger), highlights a significant shift in the M&A landscape [00:37:05]. This trend suggests that there is “no viable M&A path for early-stage venture capital businesses” with high-value mergers [00:38:01].
Historically, large tech acquisitions like Salesforce acquiring Slack (2020), Amazon acquiring Whole Foods, or Walt Disney acquiring 21st Century Fox were more common [00:44:38]. Chamath Palihapitiya points out that a deal like Meta (Facebook) buying WhatsApp for $17 billion, which was one of the biggest venture returns ever, “could never happen” today [00:45:04].
Role of Regulators
The prolonged regulatory review process (15 months) for Adobe-Figma, culminating in a likely rejection, is expected to have a “chilling effect on M&A” in Silicon Valley [00:40:32]. Acquirers and targets will be less inclined to pursue deals if they face such protracted delays and uncertainty [00:40:50].
The increasing assertiveness of antitrust regulators, not just in the US but also in the EU and the UK, adds complexity. The UK, despite being a smaller market, is particularly aggressive in antitrust enforcement post-Brexit [00:42:01]. This means companies now need to contend with potentially three regulatory bodies instead of one [00:42:20].
Impact on Startup Liquidity
With M&A becoming a less reliable exit path, the primary route to liquidity for startups is now through Initial Public Offerings (IPOs) [00:38:21]. However, the current capital markets in the United States are not well-equipped to support a large influx of IPOs [00:38:30]. Reasons include:
- Banks being unwilling to underwrite [00:38:39].
- A lack of research analysts to cover new public companies [00:38:41].
- Constraints on how banks generate revenue from such activities [00:49:26].
This situation could lead to companies remaining private for 15 to 20 years, a phenomenon that has a “chilling effect” on investors due to the extended illiquidity [00:39:06]. While direct listings and SPACs were seen as alternative paths, the market has not fully embraced them as the “gold standard” for IPOs [00:39:49].
The shift in market dynamics emphasizes building strong, stable, cash-flowing businesses [00:40:10]. Companies like Airbnb and Uber are now focused on profitability [00:40:19]. This potentially positive outcome means “stronger companies that aren’t that are more Capital efficient then companies can go public earlier” [00:46:06], unlike the recent trend of companies going public after more than a decade [00:46:18].
The Future of Venture Capital and Startups
The changing environment is pushing venture capital towards more capital-efficient models, reminiscent of earlier startup eras.
Emphasis on Profitability and Efficiency
Founders are now modeling how to reach profitability quickly and retain maximum ownership of their companies [01:04:18]. There’s a strong bias towards profitability across businesses, with investments shifting towards opportunities that can generate real revenue and profit in the near term, keeping costs low [00:55:09]. Many startups are raising smaller rounds (e.g., 1.5 million instead of 10 million in 2020) and focusing on reaching break-even with that initial funding [01:02:40].
Impact of AI
The proliferation of AI FOMO frenzy and generative AI investment is a major disruptor, potentially making companies “massively deflationary” in terms of operational costs [01:06:09]. This means the break-even threshold for founders will significantly decrease [01:06:32]. For example, a $2 million seed round can now fund a smaller, more efficient team, potentially leveraging AI tools like Co-pilot for 2-3x leverage, leading to a much longer runway [01:03:41]. This could enable founders to own a larger percentage of a smaller, yet highly successful, company [01:04:05].
The shift towards greater capital efficiency implies that venture funds themselves might need to shrink in size, moving “back to the 1990 style” or 2012 era of smaller funds, which historically have performed better than mega funds [01:08:18].
Challenges for Venture Capital
Despite the opportunities presented by AI, the lack of clear liquidity paths means “risk capital flow into the United States” will be less motivated, leading to smaller investment amounts and a reduced allocation to innovation [00:50:00]. This also means entrepreneurs may need to consider alternative capitalization strategies, such as friends and family rounds, and focus on building “slow and steady profitable from day one” businesses [00:50:50].