Why Adobe Wanted Figma and Why Some Investors Are Worried

Tools to edit and manipulate photos and videos are in hot demand, with people creating visual content like never before. Since the onset of the pandemic, designers increasingly are collaborating remotely, relying on digital tools to make that happen. That has fueled demand for new applications, giving rise to startups such as Figma and Australia-based Canva.

Adobe, the biggest competitor in the design software market by sales, has struggled to tap into that enthusiasm and is starting to feel the impact. The company on Thursday announced quarterly results that showed a continued deceleration of revenue growth and issued guidance that came in below Wall Street’s expectations. New annual subscriptions sales connected to the Creative Cloud service that includes functions such as its well-known Photoshop suite was slightly shy of the company’s earlier projection.

Adobe products such as Photoshop and Illustrator are almost essential tools for people who design marketing materials and magazines. But some users have complained on social media and elsewhere that the products are difficult to use and lack the collaboration features available with Figma and elsewhere.

“Figma is fast, small and lean,” said Daniel Vinci, who runs an independent firm that designs websites, saying he and his clients embraced the startup’s tools for the ease of working together collectively on digital projects. “Anybody can pick it up and start working. No Adobe product works like that,” he said.

Adobe said it constantly modernizes its products and has introduced collaboration features in recent years.

Figma’s appeal for users like Mr. Vinci helps explain why Adobe was willing to pay 50 times the smaller company’s expected annual recurring revenue for 2022, and twice the valuation it received in a funding round last year.

“The purchase is at such a nosebleed level that it raises concerns about what’s happening under the covers with the core business,” said Brian Schwartz, a senior analyst at investment firm Oppenheimer & Co.

Adobe shares retreated nearly 17% Thursday following the announcement and a further 3.12% on Friday. The stock is down about 47% this year, underperforming the wider market.

Adobe Chief Executive

Shantanu Narayen

has defended the acquisition as “transformative,” adding on an analysts call that large deals are often viewed with skepticism.

The current weak economic backdrop, he said, presented the right moment for the company to act.

“Stronger companies are actually the companies that should be making the moves to position themselves to serve customers for decades,” Mr. Narayen said in an interview. “We really believe that the opportunity for us is to usher in this new world of collaborative creativity.”

Mr. Narayen’s ability to buy Figma at that price in large parts rests on the success he had transforming Adobe a decade ago. Mr. Narayen took over the company in 2007 when it sold its software to users, typically on disks. But the software business was morphing as the growing field of cloud-computing gave rise to selling such products online, as a service and on a subscription basis.

In 2011, Mr. Narayen embraced the shift, setting Adobe up as the then-rare incumbent software provider to adapt to the emerging sales model that has now become ubiquitous. The company at the time had around $4.2 billion in annual sales. It now generates more than that in a quarter. Adobe grew into a software giant with a market value at $320 billion at its peak last year and its stock had advanced 10-fold over the past decade prior to the Figma deal being announced.

During Adobe’s shift to the cloud, there were naysayers, too, questioning the company’s strategy, Mr. Narayen said. “Everybody points to the few people who have questions whenever change happens, but the believers are the ones that you really want to prove right,” he said.

Other software powerhouses were slower to adapt.

Oracle Corp.

, the large provider of database software, for years played down the importance of cloud computing and now is spending heavily to expand those activities.

International Business Machines Corp.

similarly was slow to transition to the cloud and then spent around $34 billion in 2019 to acquire Red Hat Inc. to bolster its presence in the market.

Adobe executives say buying Figma will spark a new era of growth. “This is about positioning the company to define new categories and drive growth for decades to come,” Chief Financial Officer

Daniel Durn

said.

Figma, Adobe said, would also help it tap a new user base. The company says that in addition to the designer community that already uses its tools, Figma would add developers and others that typically haven’t been its customers.

To prove skeptics wrong, Mr. Narayen said, the company would focus also on demonstrating strength in its core business.

The deal, which still has to pass regulatory scrutiny and otherwise is set to close next year, would add collaboration features to Adobe products the company has struggled to build itself. In 2016, Adobe launched a collaborative design tool, but it didn’t gain traction in the market, said

Scott Belsky,

Adobe’s chief product officer, and the effort has been largely wound down. Now, he said, Adobe plans to start making more of its design tools available inside Figma, such as image-editing capabilities from Photoshop, to ease collaboration.

Figma users, though, are worried about the combination. Mr. Vinci, the independent web designer that loved the startup’s product, said he’s currently looking at alternatives like Dutch design software company Sketch BV.

Write to Aaron Tilley at [email protected]