Reflecting On Haystack’s Investment In Figma

I knew at some point I would write this post. I didn’t know exactly when, though recently with all the inside baseball chatter I’m privy to, I knew it would go this way, that Figma would not be acquired by Adobe. There are surely many reasons smart people feel the proposed merger was anti-competitive; and many reasons other smart people believed the deal had merit. I can’t get into that debate here, because I don’t fully understand the intricacies of the FTC and the forces that influence it. There’s also been significant technological (generative artificial intelligence) and financial (macroeconomic conditions, banking crises, and valuation multiple compression) shifts in the 15 months since the original merger was proposed in late September 2022. These shifts provide plausible motives for a deal to break, but I don’t think it will be productive to drift into conspiracies here.

I’ll talk about two things I do feel comfortable with as I’ve lived each. One, Haystack is proud to be an early Figma investor. We are extra fortunate in this case that the particular fund Figma is in has already performed extremely well in terms of realized distributions to our limited partners. We don’t expect any sympathy for ourselves, but we do feel for all shareholders, especially Figma employees. Two, in building Haystack over the last decade from an initial Fund I that was a total of $970,000, I was forced to intimately learn how risk capital moves through the startup ecosystem, and I think sharing that with you all today is more relevant than ever.

So with that, let’s start with that second point first, how money moves through this ecosystem. Large pools of capital — often endowments, foundations, pensions, sovereign wealth funds, asset managers, private families, hospital systems, and on and on — fund investors (like Haystack) to build portfolios of hopeful companies (like Figma was one day). Those large pools of capital understand the risks upfront: Most companies won’t make it (so take a portfolio approach), the winners will follow a power law (you need to catch a piece of the BIG winners to move the needle), and that the path to realizing those returns should be lucky enough to catch a BIG winner in your portfolio is via two main routes: That company goes public via IPO, or that company is acquired by a larger entity for a handsome price (think: Facebook buying WhatsApp for ~$20B). There are hospital systems that have been long-time investors in many of the early-stage investment firms that have exposure to Figma, and they’ll have to wait a bit longer to get liquidity for their shares.

My hypothesis moving forward is that when these large pools of capital (which are incredibly powerful and influential) make the next set of long-term commitments to early-stage capital (which directly affects innovation and the jet fuel for entrepreneurs), they will likely use an adjusted calculus that they need to refocus on two elements: 1/ moving their capital entry point to earlier-stage and lower valuations to control entry price, which allows for a smaller acquisition and liquidity for investors and shareholders; and 2/ making sure the bigger winners are on a path to a public offering, which will likely be valued at lower multiples then the previous eras.

My phone has been buzzing all morning from friends and journalists asking me about what I feel about this given Haystack’s position as a small but early investor in Figma. Now, I knew this new was coming from a few months ago, but I didn’t know when it would be sealed as fate. So, I’ve been preparing myself for it. For the Haystack vintages which hold Figma (across a few vehicles now), those funds are in good shape thankfully and aren’t in need of liquidity. But where my mind and my gut and my heart go to on a day like today is not about today’s news, I instead am transported back to those initial days when I would hang out with Dylan quite often, and I was trying desperately to cut into the world of venture capital, and Dylan was designing his dream mockup in his mind, what would eventually become Figma.

A decade ago, I was trying to get into venture capital. I started Haystack because I didn’t get the jobs I wanted, so friends convinced me to start a small fund as a mini track record to eventually convert into a real job with another firm. But the universe was sending me a message — I had to go it alone. In a similar way, I think that’s what the powers that be today are telling the Figmas and future Figmas of the world: You’ve also got to go it on your own. Deterrence of large M&A is a stated goal of the FTC, and this is a signature win for that initiative as surely other larger companies will think twice before floating the idea of a large-cap merger. If that road is closed off now with a “Warning – Danger” sign, companies that are scaling will have no choice but to go it alone, go through the regulatory work of preparing for IPO, and subjecting their business to at least 6-12 months of public pricing pressures to arrive at what regulators believe to be a fair price.

It may not be fair, but I do believe the universe is sending us messages all the time, whether we choose to hear them or not. The message here is loud and clear: Most of us have to go it alone. Plan accordingly.