By now you must have heard that Adobe has acquired Figma for $20 billion. We also covered it last week in d.MBA’s emergency pod.

However, Adobe’s stock is down 20% since the news broke! Looks like investors don’t like this deal. One reason for that could be that they think that Adobe paid too much for Figma.

But what is too much? What is enough? And how do we estimate the value of companies? Let’s have a look.

Photo by Markus Spiske.

How are companies valued?

Well, it depends on various factors. At what stage is a company? Is it already public? In what industry is it? Is it selling a product or a service? How profitable is that product or service on average? And so on.

There are dozens of ways to estimate a company’s worth. We’ll have a look at a few most commonly used valuations for industries and types of companies that designers work in.

1. Market cap

If a company is public, we can simply multiply the total number of stocks issued by the price per stock. Let’s take Apple Inc as an example. It has roughly 16.2 billion issued shares and each share is worth $154.5 (as of September 20th). Multiplying these two numbers gives us Apple’s company valuation (or market cap) of $2.5 trillion.

2. EBITDA multiple

The most commonly used way to evaluate private companies is with “multiples”. So, we look at a certain financial indicator, such as EBITDA, and we multiply it with, well, a multiple. Each industry warrants a different number, which is calculated by business analysts. Here you can see average multiples across industries. For example, the average EBITDA multiple for SaaS companies is roughly 13. So, if the EBITDA of your SaaS company is $1 million, it is worth somewhere around $13 million. Not too bad…

3. Revenue multiple

But what do we do with companies like Figma, which are still growing and don’t have stable earnings? Well, it does not seem right to value them based on earnings so what if we look at their revenue? In the case of Figma, we talk about annual recurring revenue (ARR) because the company sells subscriptions.

So, now we just need to find an average ARR multiple for Figma. Quick research shows that the average revenue multiple for SaaS companies is hovering just below 10x.

When announcing the acquisition, Adobe stated that Figma is expected to bring in $400 million in ARR in 2022, which means that Adobe paid the 50x ARR multiple. Is that too much?

4. Strategic reasons

A company can also be valued based on other reasons. Such as the threat it poses to an incumbent like Adobe, which is a publicly-traded company. So, investors closely monitor its performance and scout the landscape for potentially dangerous competitors.

So, when investors see an up-and-coming company like Figma that Adobe can not compete against (Adobe XD 👀), they may need to lower Adobe’s valuation. In practical terms that may mean selling Adobe’s stock. So, Adobe executives were not simply looking at ARR multiples. They were probably calculating how much value could their shares lose and how harshly would Adobe’s market cap be hit if Figma continues growing.

What is the right way to value Figma?

There is no right or wrong here. The valuation depends on the investor. In the case of Adobe, they were not buying just a company. They were also de-risking their business. So, we could say that Figma was worth much more to Adobe than anyone else. Hence, they paid a high price.

You may still remember when Facebook acquired Instagram for a staggering $1 billion. At the time, reactions were very similar to the Figma acquisition. The media reported it was too expensive and users hated it. But Instagram ended up being a phenomenal acquisition for Facebook. Looking back, we could even argue it was cheap.

Now you see how the perception of acquisition can change. Ultimately, only time will tell if Adobe made the right move or not. And only time will tell if Adobe will leave Figma independent as they claim or if they will start bundling it with the rest of their creative cloud.

But one thing is for sure. When you pay $20 billion the stakes are high. I would not be surprised to see some integration between Figma and Adobe in the next two years. Especially if Figma’s growth starts slowing down.

How is this relevant for designers?

You can figure out your company’s worth. If you work for a large public company, that’s easy. Just google <company’s name + market cap>. And compare it to a few other well-known companies to get a feeling for the size. And if you work for a private company, find out your EBITDA or revenue and look up the multiple for your industry. Is it more or less than you expected?