The Knives Are Out for Startup Acquisitions: Predictions on the Adobe-Figma Deal

Big Tech has grown in size and scope over the past decade through acquisitions of hundreds of smaller players in the market. Emerging tech startups with innovative products and business models were attractive targets in the eyes of Big Tech and technology investors.

US antitrust regulators have historically paid less attention to these tech deals, but now regret the limited antitrust scrutiny. With Lina Khan’s appointment as chair of the FTC in June 2021, major tech company takeovers of small businesses, otherwise known as “killer acquisitions,”  face heightened antitrust review. This new combative approach was further signaled with the FTC’s unexpected move to block Meta’s purchase of a VR gaming startup; a move generating great concern among Big Tech gatekeepers. Meta’s antitrust challenge serves as a preview of future FTC efforts, and all eyes now turn to Adobe’s acquisition of Figma.

What happened in FTC v. Meta?

Within was founded in 2014 and focuses on fitness-related virtual reality apps. Within’s most renowned product Supernatural, is an app offering various workout choreographies in virtual locations such as the Galapagos Islands, China’s Great Wall and the surface of Mars. Meta designs and sells VR headsets, hardware and software including its famous rhythm game Beat Saber. Meta’s potential acquisition of Within put the company and Mark Zuckerberg on the FTC’s radar. On July 27, 2022, the FTC filed a complaint in California alleging the acquisition of Within would substantially lessen competition and create a monopoly in two different markets.

This deal concerned the FTC, especially to Lina Khan, for several reasons. In the VR fitness app market, the FTC considers Meta as a potential entrant, and claims the deal will prevent entrance to the market because of Within’s status as an established incumbent. According to the FTC, Meta reduces innovation by buying what is already on the market rather than developing its own VR fitness app. Yet, ironically, Meta describes the FTC’s intervention as an “attack on innovation” with no legal grounds but “[ideological] speculations . . . sending a chilling message to anyone who wishes to innovate in V.R.”

The FTC also seeks to preserve the existing competitive dynamics in the VR fitness app market with their acquisition challenge, as Meta’s Beat Saber and Within’s Supernatural are regarded as “close competitors.” A relationship known to increase innovation and customer choice. Coincidentally enough Meta – previously known as Facebook – announced this acquisition just one day after changing its name to Meta, which prompted the FTC to perceive Meta’s rebranding as efforts to become a monopoly in the metaverse.

Should tech startups be concerned?

Today, most startups desire acquisition by a large company, a concept often termed the “exit strategy.” According to a PitchBook report published in April 2022, the total exit values for VC-backed startups in the US were calculated as $265.8 billion in 2019, $324.8 billion in 2020, and $776.4 billion in 2021. This dataset exemplifies the value of mergers and acquisitions and the reasons many startups proceed with an exit strategy in mind.

In the past, the FTC had prevented deals involving acquisitions of dominant competitors in the relevant market, but this is changing. The FTC’s recent efforts to stop startup acquisitions indicate the agency plans to expand the scope of traditional antitrust applications. In other words, the scope of premerger review is expanding to cover startup acquisitions considered to be potential entrants/competitors. Some argue the increased scope of review may lead to a decrease in startup takeovers, as Big Tech may be reluctant to go through the cumbersome and lengthy process of antitrust review. Some critics further argue that the agency’s new approach will hurt future startups by restricting possible acquisitions and may “have the unintended effect of helping Big Tech by disincentivizing entrepreneurs from launching startups.”

Will the FTC kill Adobe’s $20 billion deal?

“Our goal is to be Figma not Adobe” – A tweet created by Figma’s CEO Dylan Field on January 29, 2021. On September 15, 2022, Adobe officially announced in a press release that it will acquire Figma at a massive price of $20 billion. If successful, this will be the biggest acquisition for a VC-backed, privately owned startup in the last 20 years, according to Bloomberg.

Considering Meta’s ongoing antitrust litigation, this deal is large enough to draw the FTC’s attention. In contrast to the Meta case, where Within was not seen as a major competitor to Meta, and yet the FTC still filed a lawsuit, here, the software giant Adobe and the collaborative design platform, Figma, are direct competitors in the design software market; meaning the deal is likely to be seen by the FTC as a “killer acquisition.” Escaping regulatory antitrust attention in the current FTC environment will not be easy for Adobe’s acquisition. If they do, it would likely serve as a shift in FTC’s antitrust enforcement efforts.