Trying (hard) to eat (some of) Adobe’s lunch (or getting acquired tryin’)
From Canva, which we saw pre-launch in July 2012 (!), to our investments in companies like PlayPlay, Gravity Sketch, and Shapr3D, we at Point Nine have looked at and partnered with many companies building creative tools over the years.
Looking at Figma’s acquisition price ($20bn) or Canva’s latest valuation ($40bn at the last round), it has now become clear that one can build huge companies in creative software. I’ve wanted to write about Adobe and creative tools for some time now. Figma’s acquisition last week felt like a good occasion to (finish that damn draft) take a step back and share a few thoughts about our investment thesis on creative software in a longer blog post. It’s by no means an exhaustive review of Adobe’s business, but it hopefully brings an interesting perspective on the different disruptions we’ve observed in this space. The post starts with a brief review of Adobe’s history and business, continues with an overview of the Adobe creative suite and of various contenders we’ve seen in this market, and ends with a review of the challenges and opportunities for these startups.
Our hope is that this post could be the start of many interesting conversations about upcoming creative tools. If you’d like to chat, don’t hesitate to reach out here!
A brief history of Adobe
Adobe was started in 1982 to bring to market a new language called PostScript that was easing the transition from computer script to printed pages. The company found success quickly, partnered with Apple when the latter launched their first printer, and went public in 1986. Soon after, the company carried on in its mission to bring together the digital and the physical world, allowing creatives to start doing their work on a computer using applications like Illustrator, Photoshop, and PageMaker. These were the starting points for what would become Adobe Creative Suite (Adobe CS), which went on to become the reference for creative software.
Twenty years after its creation, in May 2012, the company embarked on a complex (but eventually very successful) transition from on-prem to cloud by launching Adobe Creative Cloud (Adobe CC). As described in this Harvard Business Review case, this transition is a case-in-point for anyone interested in the history of SaaS. A year after it had first launched its first cloud offering, the company had close to 700k subscribers on its SaaS platform and about $233M in recurring revenues. Some might argue that it was, first and foremost, a business model switch to a subscription model rather than a full transition to the cloud but we’ll keep this debate for another post ;)
Fast forward 10 years and the company has grown its ARR to close to $16Bn and has a combined market cap of ca. $150Bn. Without a doubt, Adobe has become one of the most impressive SaaS companies in the world. If you want to learn more about its business, here’s the link to its investor relations page.
Nowadays, the company breaks down its current business into 3 business lines:
- Adobe Creative Cloud, with an addressable market that lies around $40bn according to the company’s estimates,
- Adobe Document Services, which includes multiple services around the PDF or its electronic signing service (since its acquisition of Hellosign), and,
- Adobe Marketing Services, a suite of marketing tools.
Each of these business lines represents a great opportunity for startups, but in this post, I’ll focus primarily on the Creative Cloud opportunity. The slide below shows how Adobe slices it in its latest investment report.
Creative Tools 2.0, an overview of the categories
According to its latest presentation to investors, Adobe Creative Cloud now consists of over 20 creative tools. The number fluctuates year after year as the company launches new tools going after new opportunities — often pre-empting or reacting to an eventual disruption from a startup — and occasionally sunsets older products.
Adobe Creative Cloud, which increasingly looks like the OS for Creative software (more on that below)
A simplistic way of categorizing Adobe’s offering is to look at the output of the creative software (ie. photos, videos, UX/UI design, 3D designs, or podcasts).
The illustration below uses this categorization and shows a few startup contenders in each category. To be comprehensive, you’d probably need to map tens/hundreds of different startups in every category. You’ll also note that in (almost) every category below there’s a startup already valued in the hundreds of millions of dollars. Investors in these are also betting that they will get to $Bn+ valuation within the next 5–10 years. This speaks for the size of Adobe’s opportunity but also for the size of the overall creative tools market.x
(we could put hundreds of startups on the right column)
In the next parts, I’ll highlight a few of the opportunities we’ve identified by speaking and partnering with some of these startups.
Addressing new segments to increase the TAM
The first and the most obvious opportunity is that these markets are often much deeper than we would initially think. Adobe estimates that the market for creative tools is worth >$40bn split between creatives ($20bn) (ie. creative professionals), communicators ($15bn) (ie. professionals that are not creative themselves), and consumers ($6bn) (B2C users that are creatives but don’t make a living out of it). Beyond that, their estimate of the opportunity size grew by 30% YoY (!) from $30bn in 2021 to >$40bn in 2022. I think there are three underlying growth factors worth noting here:
- Everyone is a creator: it’s getting increasingly clear that once the right tools are available on the market, almost everyone has the desire to be creative, not only creative pros. There’s no better example of this democratization than Instagram in the photo editing space, but you can see such trends in each and every space highlighted above. Canva made graphic design available to anyone. Podcastle is making podcasting available to anyone. Usually, these startups abstract away some of the complexity of Adobe’s creative software for professionals by reducing the amount of flexibility, often by leveraging templates or reducing the number of features available. When Adobe could “only” target the few million creative professionals with its PhotoShop desktop app, companies like Instagram, Picsart, Canva and Podscastle went after the billions (!) that had this unmet desire of being creative on their computers and phones. The target user of these businesses typically has a lower willingness to pay than creative professionals, but the bet was and is that this is made up for by a rapidly expanding total addressable market (TAM). Given that we’re also just at the beginning of the creator economy, we can safely assume that this market will keep on growing nicely.
- Communicators are creatives without technical skills but significant content production needs and a high willingness to pay: at the opposite end of the spectrum when it comes to their willingness to pay for creative pieces are communication professionals. These are marketers, internal communication, financial communication, and also increasingly HR professionals. These people are used to paying creative agencies (tens of) thousands of euros/dollars to produce high-quality creative pieces (videos, podcasts or graphics). The opportunity here is to empower these communicators with very easy-to-use software in order to produce content themselves at a fraction of the cost they typically pay agencies while maintaining the level of quality they need. An interesting aspect of this segment is that just a fraction of the cost of an agency can sometimes represent a very large revenue opportunity. We see such dynamics at play working with P9 portfolio company PlayPlay in the video production market. The quality of PlayPlay videos is amazing and their entry price is $500/seat. 10x cheaper than an agency but five times the price of a Salesforce license! Another (very) fast-growing company that leverages this opportunity is Jasper.ai, which enables marketers to write content marketing pieces at a fraction of the cost they’re used to leveraging GPT-3. More on that in the next section.
This slide from Adobe’s financial report is a good summary of the size of the target audiences/market and their different challenges
Every company wants to be a design-centric, software company
Speaking of TAM expansion at a macro level, another driver of growth is linked to the fact that any company, not only the software-first ones, now wants/needs to become design-centric and build software. Danny Rimmer, who led Figma’s seed round at Index, summarizes it well here:
There are a few big trends that Figma has both contributed to and benefitted from. The first is the generational significance of design-thinking. In the 19th century, the most significant marker of authority was spoken eloquence: your skills in oratory were how you found an audience. In the 20th century, as literacy rates increased, arguably that power migrated to the written word. Now, in the 21st century, as we dwell in an increasingly digital realm, the best proxy for public credibility is intuitive, responsive design. Thanks to the app-ification of everyday life, we’ve developed an extraordinary civilizational sophistication in appreciating good design — and a marked intolerance for the bad.
Ten years ago, you could have thought that the audience for UI/UX design software like Figma would be only design-centric, software-first companies. If that were the case, the TAM would be small. But now that most companies are becoming design-centric and building software, the TAM looks much bigger. Another way to look at it is this: if all companies are becoming design-centric software companies, couldn’t we argue that creative software (which does not only target the designer but every person with the desire to be creative in organizations) is actually a horizontal category like HR software? This speaks for the size of the opportunity, again.
Bringing collaboration to creative software
Until very recently, most of Adobe’s creative suite was single-player, and collaboration possibilities were very limited. This made sense when designers/audio/video/3D creatives were the only ones to work on creative pieces.
But as more and more people inside an organization have started being involved in the creative process, the opportunity to create creative software with native collaboration features has become much clearer. The best example is Figma, which brought together business users (product managers, marketers) and technical people (engineers) to design software, but this also works in other categories. Gravity Sketch brings together physical product designers, engineers, and marketers in their 3D design platform, often to collaborate on new product designs directly in VR or on tablets or screens for those that aren’t yet ready for VR. Thanks to the advent of collaborative creative software, collaboration on both sides of the designer (left toward developers and right toward business) has improved radically in recent years. Collaboration levels increased left (from the business person to the designer) and right (from the designer to the engineer). I read somewhere that only 1 out 5 licences in Figma are designers. Beyond the increase in productivity to have everyone collaborate on the same platforms, this creates a great opportunity to expand the TAM by selling additional seats.
The thread published below explains well why it’s hard for incumbents to build truly collaborative software
Going after new platforms
As described in the first part, the possibilities of the cloud ushered in a new era for Adobe. But this is not the only technological paradigm shift creating new opportunities to disrupt the creative software market. Mobile is another one. PhotoRoom in Paris is building a mobile-first photo editing tool that, down the line, could disrupt Adobe Lightroom. Istvan at Shapr3D is building a 3D design software for the iPad, starting from the assumption that using a stylet and a touchpad is a much more intuitive interface to create and collaborate on 3D designs. Seyi at Gravity Sketch is helping industrial designers from some of the best ‘physical’ product design companies like Ford or Rebook to create 3D designs from scratch in AR/VR. “Think in 3D, create in 3D” is their slogan. Doesn’t it make sense that it should be the case if we start having platforms (AR/VR headsets) that enable that?
Adding Machine learning capabilities to augment OR disrupt creatives
Another technological paradigm shift that will very likely reshape the creative software category — and that we’re very excited about — is machine learning. It’s already happening in several ways.
On the one hand, it can empower creatives without technical skills to make some adjustments on a medium (audio, photo, or video) that would have required tens of hours of editing by a professional before. Thanks to machine learning-based features, in less than 10 seconds, you can do the mastering of your podcast, and remove silence or “hm” noises on Podcastle for example. Machine learning bridges the “skills gap” between non-professional creators and professional creatives.
But this also applies to professionals. Professional photographers can earn tens of hours in their culling processes using Narrative’s Select product. The product auto selects photos, detects the images with the right focus, and/or autocrops them.
In the examples above, machine learning is augmenting people. It can now also completely replace them. With Synthesia, corporates can create videos just by writing text and selecting an avatar in an interface that will then automatically turn the text into a video and put the text into the avatar’s mouth. No need for a videographer and/or an actor to record a video anymore!
Using OpenAI’s DALL·E 2 or surging open source alternatives like Stable Diffusion, anyone can create original, realistic images and art from a text description (have a look at the demos here).
Building a community and providing ideas to augment people’s own creativity
Regardless of how quickly AIs are becoming creative forces of their own, the desire for humans to be inspired by other humans isn’t going anywhere. A community of engaged creatives is often a key success factor behind some of the most successful creative software companies. Behance (which Adobe also acquired for $150M in 2012) enables designers to showcase their portfolio to others and counts over 25M members. At a more reasonable scale (big things start small), Gravity Sketch’s Instagram account is full of amazing 3D designs made by (most often) free users of their software. Have a look here, it’s pretty mind-blowing.
Danny Rimer from Index relates how important the community around Figma has been since its early days:
Dylan has always been convinced that the community should be the main driver of Figma’s adoption. As he told me in a recent chat: ‘The first place is your home, the second place is work, and the third place hopefully is the community of interest — a global, online community of interest around design and creativity. Long-term that’s what we want to do with Figma.’
These communities often fuel the growth of these businesses that gain more and more mindshare and acquire users in an organic way.
Opportunity for strong organic / viral growth
Speaking of organic growth, creative content pieces created using these tools are often exposed to many people (on social media or elsewhere) that are not yet users of the software and wonder how such pieces have been created (often by people with very little creative skills). The growth teams of these companies often rely on watermarks to create a powerful exposure mechanism for the software and to acquire new users. This “exposed audience” of people often ends up trialing the software, and some eventually become users. If you’re curious about this, I wrote about how powerful viral growth in SaaS can be some time ago here. Another argument is that it’s easier for a startup to increase the viral potential of its software by leveraging a generous free version. Adobe struggles to do because public market analysts are scrutinizing any initiatives like a (more) generous free version that would end up eating part of their $9bn of yearly free cash flow.
While very optimistic about the future of creative tools, only a few will build such success stories as Figma or Canva. Below are a few risks we’ve identified, which we keep thinking about and try to help founders navigate.
Adobe’s (incredible) distribution and bundling power
Beyond its mindshare and its very large software development resources built across the years, Adobe benefits from an incredible distribution power with (hundreds of) millions of users using at least one tool of their whole creative suite for years. If you try to buy any of Adobe’s products, you’ll get to download Adobe Creative Cloud, which exposes every software solution of the broad suite. See below
Beyond that, they discount the software by selling it in bundles, making their offering even more attractive. These pieces of software are also often very well integrated with one another, increasing again the attractiveness of bundling.
The speed at which Microsoft Teams managed to catch up on Slack (which, btw, also got acquired) might have been another reason why it made sense for Figma to team up with Adobe early on. It’s hard to compete against Microsoft and Adobe’s distribution and bundling power. Adobe does not yet have the same distribution/bundling power as Microsoft but a few are already arguing that Adobe Creative Cloud is becoming the creative software OS like Microsoft’s suite is the productivity OS. David Sacks is making that argument in the latest All-in podcast here.
The power of habits
Figma managed to make product designers switch to its product, but it took years to reach feature parity with the existing solutions on the market before it happened. When it comes to selling to professional creatives, it can sometimes be very hard to break the power of habits and make demanding professionals churn from pieces of software they took years to learn to use. Who will disrupt FinalCut, for example? The jury is still out.
Low willingness to pay / high churn
Now speaking of the non-professional users, they have a strong desire to create nice content pieces, but it’s often not their full-time occupation. Because of that, many creative tools will remain in the “nice-to-have” vs. “must-have” camp for such audiences. This could lead to high churn and/or lower ARPAs/willingness to pay. My first reaction when I met Thibaut at PlayPlay was to say that the “bucket will be leaky” and that we’ll most likely never invest in video production software. Never say never ;)
Adobe is an incredible company that keeps on innovating and making bold moves. Figma’s acquisition is another example of that. But it remains a large organization that will (keep on) overlooking certain paradigm shifts in technology (eg. machine learning), certain new mediums on the rise (eg. podcasting is growing very fast), and/or certain new audiences interested in becoming creative (eg. the creator economy).
If you believe that you’ve found the right combination of an (underserved, fast-growing) niche to go after and/or a new technological paradigm shift to build the next generation of creative software, reach out to me/us. I/We’d love to partner 👊!
BIG thanks to my colleagues
for reviewing earlier versions of this post. Merci also to
for adding new great perspectives to it.