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There’s been much talk about the Silicon Valley venture capital model being broken given the scarcity of successful exits over the past few years. But the standard VC playbook can still sometimes work as written, as shown by the blockbuster flotation of Figma on the New York Stock Exchange last week from which the design software company’s market value surged to more than $60bn on its opening day.
The VC playbook goes as follows:
Stage one: find a brilliant computer science student with an instinctive entrepreneurial drive and a neat business idea.
Stage two: award said student a Thiel fellowship to drop out of university, co-found a start-up with a geeky friend and lure them both to California.
Stage three: inject VC money into the start-up to develop a compelling product and to scale up the business fast.
Stage four: take the company public, generating spectacular returns for the original investors.
Figma’s story has not been quite as simple as that but it certainly rhymes.
Dylan Field, Figma’s co-founder and chief executive, was a student at Brown University when he won a $100,000 Thiel award. Alongside fellow student Evan Wallace, he co-founded Figma in 2012 and wrote browser-based design software that won an enthusiastic following among developers — and sucked in hundreds of millions of VC dollars.
Now 33, the multi-billionaire Field is excited by the market’s response to Figma’s flotation and the opportunities created as a public company. “Now it’s time to write the next chapter for Figma,” he tells me.
Investment bankers on Wall Street are already salivating at the prospect of bringing more start-ups to market. Several other late-stage, VC-backed tech companies, including Canva, Databricks, Midjourney, SpaceX, Klarna, Revolut and Stripe, have grown big on the back of easy private market funding and have delayed going public. But Field suspects that more start-ups may now take the plunge. “I can definitely see that conversation starting. I think it’s good for people to see that it’s possible,” he says.
Several leading VC firms, including Index Ventures, Greylock Partners, Kleiner Perkins and Sequoia Capital, have made stellar returns on their investments in Figma and are looking to cash out elsewhere, too.
Figma’s biggest VC backer was Index, which invested a total of $86.5mn and still retains a stake in the public company worth more than $6bn. The VC firm has also done well at two other portfolio companies: the data annotation start-up Scale AI, in which Meta has bought a 49 per cent stake at a valuation of $29bn; and the Israeli cyber security company Wiz, currently subject to a $32bn takeover offer from Alphabet. On paper, seven investment partners at Index have generated more than $11bn for their firm from these three deals, highlighting the outsized gains that can be made from successfully applying the VC playbook.
Danny Rimer, a partner at Index who first met Field when he was an 18-year-old intern, says that start-ups can nowadays grow bigger and faster than before because of their ability to leverage artificial intelligence. That could eventually lead to a long line of high-quality IPOs. “Great companies can go public in any market,” he tells me. “That being said, there is undoubtedly a lot of appetite by Wall Street for new issues.”
Institutional investors in some other over-extended VC funds are desperate for them to return more money. They will certainly be clamouring for exits while other public market investors are keen to increase their exposure to tradeable tech stocks.
“My message here to all venture capitalists is: now is the time. Please take your companies public,” Miles Dieffenbach, investment director at Carnegie Mellon University’s endowment, recently told the 20VC podcast.
However, some institutional investors will remain wary of rushing into new listings given the poor performance of many of the start-ups that floated in 2021. Back then, some VCs rushed to take advantage of the frothy market by “pumping and dumping” rickety companies on unsuspecting investors, most notably via special purpose acquisition companies. Fund managers are likely to be more discriminating this time.
Moreover, investors will question whether the increasing use of AI that accelerates the growth of start-ups may also incinerate their business models one day given how fast the technology is evolving. Figma — like all software start-ups emerging today — has yet to prove it can be the beneficiary of the AI transformation, rather than its victim.
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