When Adobe met Figma: inside the creation of a subscription superpower
Update by Aspire Team
Wednesday, 20th December 2023Adobe’s ability to continue to act on early signals is still one of its superpowers, which has helped it continue to outpace the competition.
In the last 18 months, the company introduced Firefly, a suite of generative AI-powered tools designed to boost creativity and streamline workflow. Additionally, Adobe announced its plan to acquire Figma, a move designed to align with the booming trend of no-code/low-code tools that are revolutionising design and expanding into new customer segments.
However, after scrutiny from the regulators in the EU and UK, Adobe announced that they will no longer be moving ahead with the Figma acquisition. Despite this setback, the due diligence process has likely provided valuable insights for the business, and with Firefly pushing the boundaries of AI in design, Adobe seems set to continue to outpace the competition for the foreseeable future.
This blog was originally published on 6th December 2022
In September, Adobe announced that it was acquiring design software firm Figma for a whopping $20 billion in cash and stock – one of the most significant merger and acquisition deals over the past 20 years.
In this article, we look at the foresight and decisions made by Adobe in the late 2000s and early 2010s that have allowed the company to take out one of its biggest rivals in digital design.
Designing success
Adobe is often cited as one of the most successful business transformation stories. Founded in 1982 by Dr John Warnock and Dr Charles Geschke, Adobe develops software design tools for the creation and publication of a wide range of content, including print, graphics, illustration, animation and photography, across multiple industries.
Shantanu Narayen, CEO, Adobe
In 2007, the company appointed Shantanu Narayen as the new CEO. Under Narayen’s leadership, Adobe has consistently outpaced its competition and redefined its industry. The acquisition of Figma shows how Narayen and his leadership team continue to apply the playbook that successfully moved the business into the cloud, in order to stay ahead of the market, open up new customer segments and create new markets, such as the democratisation of design.
Adobe continues to outpace its competition by doing three key things:
Conducting the right analysis.
Allocating capital correctly to build the right portfolio.
Creating critical capacity by building the capability and culture to out-execute the market.
The right analysis
In 2008, Adobe discovered that its creative business was not growing fast enough to encompass the new and different ways people were starting to create. New Adobe product features were being developed all the time, but innovators had to wait up to 12 to 24 months (Adobe’s launch cycle) to release them. This led to peaks and troughs in revenue.
At that time, the market was seeing rapid advances in technology and associated business models, such as the growth of cloud computing, the emergence of software-as-a-service (SaaS) models and the launch of the iPhone. The new business model was moving from one-off annual licence fees into digital-first, monthly subscriptions.
Narayen and his team saw that these changes presented both a challenge and an opportunity for Adobe’s core business. The influx of venture capital into cloud computing, SaaS and mobile meant that the window of opportunity for Adobe to respond before any new entrant obtained the traction and scale to compete was short.
In 2012, Adobe launched Creative Cloud (CC), its SaaS-based subscription service, which would go on to replace the CD ROM of Adobe’s Creative Suite. The early shift into this new model meant that Adobe had the ability to launch rapid experiments, test new features and get instant insights, and also provided a rich source of data around user behaviour and demographics.
After launching Creative Cloud, Adobe saw its average transaction value fall from $93 to $40 in a year, reflecting the lower-priced offering. However, by May 2013 CC had attracted almost 700,000 paid subscribers and replaced Photoshop as Adobe’s most highly rated software in terms of customer satisfaction, exceeding the company’s expectations. Within a year of launch, customers had grown 244%, resulting in a 50% growth in revenue. Adobe Creative Cloud has come to dominate the subscription economy, and as of 2021, CC was worth $9.55billion.
Fast forward to today and while the SaaS/subscription model has become ubiquitous, Narayen and his team have been tracking the emergence and continuing rise of tools that democratise professions via technology eg, accountancy software, low-code/no-code software, and most importantly for Adobe, design tools.
The rapid rise of startups such as Canva, Lucidchart and Figma opened up professional design and creator tools to new markets. This showed Adobe that its biggest opportunity for substantial growth was not in continuing to serve its existing customer base – the professional design community (which it had done successfully with Adobe XD) – but to expand its customer base and serve the much larger market of non-design professionals who wanted to create professional design-level materials.
The question was how.
Allocation of capital and building the right portfolio
It’s great to be able to spot emerging trends early and understand the impact these shifts in the market can have on your business. However, to realise the opportunity requires a suitable level of capital, ring-fenced proportional to the size of the opportunity and allocated to the right vehicles, ones that will build the key elements of the new service and enable the new business model to be developed.
For what would become Creative Cloud, Adobe allocated $200 million (approximately 10% of its revenue in 2009) to pursue the high-growth opportunities that shifting to a cloud-based offering provided.
The $200 million enabled Adobe to test and validate key assumptions of different approaches, learning from the data and seeing which of the new ideas or ventures were gaining traction. Initially, much of this testing and validation was done using internal talent, however, as the shape of this new offering evolved, Adobe moved into acquisition mode.
Between 2009 and 2012, Adobe acquired several companies, including: Omniture (online marketing and web analytics); Typekit (now Adobe Fonts); and Behance (LinkedIn for artists). Through the Omniture and Typekit acquisitions Adobe secured new key capabilities, such as analytics and fonts, which would be critical for the Creative Cloud proposition, while Behance brought channels to market through its platform’s one million creatives and artists.
These well-placed acquisitions accelerated Creative Cloud’s time to market, and secured not just technical capability but new talent that would be key to scaling Creative Cloud to the position it’s in today.
The Figma acquisition of $20 billion clearly dwarfs the $200 million allocated to develop what become Creative Cloud, but in terms of allocation capital as a percentage of market cap, it’s very similar:
2009: Market cap of $14.86bn vs capital allocation of $200m = 13%
2022: Market cap of $185bn vs capital allocation of $20bn = 11%
Additionally, the Figma investment should be viewed in terms of other factors: the time and cost it would take to develop a competitive proposition in the same market and the speed at which the market is moving. Rather than trying to build, Adobe allocated funds for the acquisition of Figma, allowing it to consolidate its position as a market leader. While the initial stock price fell, early indicators suggest that, in terms of the new markets and growth opportunities this acquisition offers, it’s going to be Adobe’s equivalent of Instagram’s acquisition by Facebook.
Creating critical capacity
The right strategy and the right amount of allocated capital is only part of the equation; the final part that brings it all together is the ability to build the capability and culture required to execute.
At the start of the shift in strategy to the cloud, Narayen and the leadership team recognised that being a cloud-based, digital-first business required new capability and new culture to make the idea a reality and unlock the next stage of growth for the business.
When looking at how they needed to transform their business to meet the needs of the market. Adobe took a two-pronged approach: first, it proactively reduced its workforce headcount by 15%, removing roles directly linked to the legacy business; second, recognising the new capability it required, Adobe recruited for talent with digital, cloud-development and product-marketing skills. This investment in recruiting the profile of talent needed to build and scale Creative Cloud meant that, despite making a 15% workforce reduction through redundancy, Adobe’s overall headcount grew by a net of 35% between 2009 and 2021.
However, while recruiting the appropriate talent is important, ensuring the right leadership capability to direct this talent is also key. Through the acquisitions of Typekit, Omniture and Behance, Adobe introduced new leadership capability, like Scott Belsky (co-creator of Behance), into the company, helping to not just shape the strategy, but also build a culture and capability that could execute at the speed and quality required to drive the transformation and deliver the expected growth.
Takeaways
Act on early signals to outpace the competition
Capturing early signals, such as where venture capitalists are investing or startups are emerging, allows you to spot trends and identify opportunity spaces where you have a competitive advantage. Then you can create a dedicated strategy to uncover the right business model to capture that fast-growing piece of the market.
Allocate the right level of capital to go after the opportunity space
Making a strategic bet on where future transformative growth will come from requires an appropriate level of funding to be ring-fenced for testing, learning about, and validating the right business models. You can then invest in the right vehicles for growth, including internal development, partnerships with startups and strategic mergers and acquisitions, to enable you to get to market quickly.
Recruit the right talent at all levels to allow movement at speed
To build transformative business models that redefine the company and to move at the speed required demands a shift in the type of talent and culture you need. Be clear on which roles will no longer be relevant, remove legacy roles quickly, and invest in building new capability at all levels – especially in key leadership roles where the tone for the new culture is set.