Adobe is paying prices for 2021. It’s 2022.

Wall Street hates it. Silicon Valley is excited.

In a year that featured exactly zero high-profile tech IPOs and far more headlines for massive layoffs than big funding rounds, Adobe’s $20 billion acquisition of Figma on Thursday was what some might call a narrative breach. There was no other bidder to increase the price, according to a person familiar with the matter, who spoke on condition of anonymity because the details are confidential.

Figma’s cloud-based software has been a growing headache for Adobe over the past few years. It’s cheaper (it even has a free tier), easier to use, collaborative, and modern, and it’s spreading like wildfire among designers at companies large and small. Annual recurring revenue is poised to double for the second consecutive year, surpassing $400 million in 2022.

“It was a serious threat to Adobe,” Lo Tawney, founder and managing partner of Plexo Capital, which invests in startups and venture funds, told CNBC’s “TechCheck” on Thursday. “It was very much both a defensive move and a look at this trend where design rules and design matter.”

That’s why Adobe is paying roughly 50 times earnings after a period this year in which investors dumped stocks that commanded sky-high multiples. For the best cloud companies in BVP Nasdaq Emerging Cloud Indexforward odds have fallen to just over 9 times earnings from around 25 in February 2021.

Watch the full CNBC interview with Plexo Capital's Lo Toney

Snowflake, Atlassian and Cloudflare, the three cloud stocks with the highest earnings multiples, have tumbled 41%, 33% and 51%, respectively, this year.

After Thursday’s announcement, Adobe shares sank more than 17% and were headed for their worst day since 2010. The company said in slide presentation that the deal is not expected to add to adjusted earnings until “the end of the third year.”

Figma most recently raised private equity at a A $10 billion valuation in June 2021, the peak of software mania. The company benefited from the work-from-home movement during the pandemic, as more designers needed tools that could help them collaborate while separated from their colleagues.

But now, even with more offices reopening, the hybrid trend has done nothing to derail Figma, while other pandemic-friendly products like Zoom and DocuSign have slowed dramatically.

Given the decline in cloud stocks, late-stage companies have backed away from the IPO market — and private financing in many cases — to avoid having their lofty valuations cut. Tomas Tunguz of Redpoint Ventures writes in a blog post on Thursday that before that deal, “US VC-backed software M&A was on pace for its worst year since 2017.”

In such an environment, Figma’s ability to come out at double the price of 15 months ago is a coup for early investors.

The three venture firms that led Figma’s earliest rounds — Index Ventures, Greylock Partners and Kleiner Perkins — all have percentage stakes in the double digits, people familiar with the matter said. That means each will return over $1 billion. Investors in the 2021 round doubled their money. These include Morgan Stanley’s Durable Capital Partners and Counterpoint.

While these kinds of numbers were routinely recorded during the record IPO years of 2020 and 2021, they are foreign this year as investors reckon with rising inflation, rising interest rates and geopolitical unrest.

Too young to drink

Dylan Field, co-founder and CEO of Figma Inc., in San Francisco, California, US, on Thursday, June 24, 2021.

David Paul Morris | Bloomberg | Getty Images

Reimer said Figma has come a long way since he first met founder and CEO Dylan Field, who dropped out of college to start the company as part of the Thiel Fellowship program, in which tech billionaire Peter Thiel offers to promising entrepreneurs grants of $100,000. When they met, Field was only 19.

“I took him to dinner and I couldn’t buy him a drink,” Reimer said.

For Adobe, Figma marks the company’s largest acquisition in its 40-year history by a wide margin. Its biggest previous deal came in 2018, when Adobe acquired marketing software provider Marketo for $4.75 billion. The previous largest was Macromedia at $3.4 billion in 2005.

Adobe CEO Shantanu Narayen explained his company’s rationale to CNBC as his company’s stock ticker flashed bright red on the screen.

“Figma is actually one of those rare companies that has achieved incredible exit velocity,” said Narayen, Adobe’s CEO since 2007. “They have an amazing product that appeals to millions of people, they have download speed as it relates to their financial results and a profitable company, which is very rare, as you know, in software-as-a-service companies.”

Adobe needs growth and a new user base from Figma to maintain its dominant position in design. For investors, Narayen can only ask them to play the long game.

“It’s going to be great value for their shareholders,” Narayen said of Figma, “as well as for Adobe shareholders.”

CNBC’s Jordan Novette contributed to this report

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