Figma’s blockbuster IPO turned out to be a design success story. It’s now also a case study of Wall Street severely underestimating the pent-up demand for new tech IPOs.
The design software darling shattered expectations Thursday when its stock opened at $85 — more than double its $33 IPO price — and closed with a 250% gain, marking the biggest first-day pop for a U.S. IPO of its size in over three decades.
Experts told BI that Figma’s stock surge isn’t surprising, given its high profit margins, solid revenue growth, and strong foothold in the design market. But the enormity of the pop reveals that Figma’s record-breaking IPO day isn’t really about the business itself, some experts told BI. Instead, it’s a reflection of market frenzy for new tech IPOs, a demand that Figma’s underwriters appear to have severely underestimated.
Tanay Jaipuria, a partner at Wing Venture Capital, said Figma’s lead underwriters — Morgan Stanley, joined by Goldman Sachs, Allen & Co, and JP Morgan — seemingly misjudged the market’s appetite for Figma’s IPO, inadvertently cutting retail investors out of a significant portion of the stock’s gain. “Retail feels very strongly when you see these big pops that the system’s a little bit rigged,” he said.
But Jaipuria argued that, as Figma trades at a multiple far above the normal range for enterprise software publics, the stock wasn’t necessarily priced incorrectly based on the company’s financials. It’s the market’s voracious appetite for tech listings like Figma driving up its price far beyond the norm.
“From a fundamentals perspective, should Figma be at $60 billion? Probably not, right? But then you look at how CoreWeave and these other companies are trading, it’s clear that there is just a lot of demand from retail and institutional investors for high-quality companies to go public,” Jaipuria said.
Other critics say the banks behind the deal left billions on the table for Figma’s investors and employees.
Benchmark general partner Bill Gurley wrote in an X post on Thursday that the IPO’s pricing prevented Figma’s selling shareholders from cashing out billions of dollars in additional profits.
“It’s very simple. They REFUSE to match supply/demand (that happened today). They brag about the mismatch — ’30X oversubscribed.’ The outcome is expected & fully intentional,” Gurley said in the post.
Figma, Goldman Sachs, and JP Morgan declined to comment for this story. Morgan Stanley and Allen & Company didn’t respond to a request for comment.
Filling a void
There’s been a dearth of tech public listings for the past three years. This year, the IPO window appears to have cracked open, with several VC-backed multibillion-dollar companies from Chime to Hinge Health testing the IPO waters, to mixed receptions.
A few standout listings suggested retail investors were ready to send prices soaring in hot areas, however. Gil Luria, head of technology research at DA Davidson, pointed to crypto company Circle and AI cloud-computing player CoreWeave‘s IPOs earlier this year. Both saw explosive stock surges after their debuts, despite, in his assessment, posting far weaker business fundamentals than Figma.
“This behavior tells us more about the market than it does about Figma,” Luria said of Figma’s IPO pop. “What we learned from CoreWeave and Circle was that there’s such an appetite for new issuances that investors are willing to look past the quality of the business being issued. Figma is benefiting from that. The difference between Figma, CoreWeave, and Circle is that Figma is a real company.”
David Erickson, an adjunct professor at Columbia Business School and a former investment banker at Barclays and Lehman Brothers, noted that Figma’s underwriters set the company’s IPO valuation at close to 20 times its sales. That’s already far above the typical multiple for public software companies, which traded at a median of six times their sales in July, per Aventis Advisors.
Figma’s underwriters also raised its IPO pricing multiple times after confronting surging demand during the company’s roadshow. They almost certainly expected a pop at its IPO, but “they clearly didn’t think it was going to trade at $85,” Erickson said.
“You have people looking to play the next hot IPO, and that was Figma,” he said.
Gurley and other critics argued that the initial pricing hurt Figma investors and employees who sold shares in the IPO. And it’s true that they could’ve made more money had Figma’s underwriters better approximated the opening share price.
Most of Figma’s significant investors didn’t sell large amounts of shares at its IPO relative to their total holdings, though. Figma’s biggest shareholder, Index Ventures, sold about 3.3 million shares in the IPO, netting them $108 million, which could’ve been $280 million at the $85-a-share opening price. But Index Ventures’ remaining stake in Figma, at Thursday’s closing price, was worth $7.2 billion.
Figma itself sold about 12.5 million shares in the IPO, roughly half of the number of shares sold by its existing investors, and has $1.5 billion in cash and securities on its balance sheet. Missing out on those top-dollar returns shouldn’t put much of a dent in its operational plans.
Figma’s pop, and the lofty revenue multiple underlying it, could also encourage other high-growth tech startups that have been waiting on the sidelines to make the jump to the public markets, Luria said.
“Any private company that’s doing well and was paying attention today will likely have a conversation about whether this is a good time to go public, even if previously they weren’t considering doing so,” Luria said.
Some early reactions from tech founders suggest those conversations may already be underway.
“How will the Figma IPO impact valuation for high-growth, late-stage SaaS companies in the private markets? Asking for a friend,” wrote Parker Conrad, CEO and cofounder of hot HR startup Ripple, in an X post Thursday evening.
Still, despite the widespread praise for Figma’s business, some experts said the stock could come back down to earth after its six-month lockup period ends, which could see early Figma investors cashing out at a much higher price and send the stock tumbling.
And policy uncertainties continue to rattle the markets; the S&P 500 declined about 1.8% by midday Friday after the White House announced a new global trade policy Thursday evening that would subject nearly every nation to a 10% tariff on imported goods.
Figma’s stock has remained volatile on day two. On Friday, it opened at nearly $135 a share and then dropped within minutes below $111 a share. By midday Friday, the stock traded closer to $115 a share.
“Who’s going to be left holding the bag is whoever bought at $85 and up,” Erickson said. “Over the short term, you can see aberrations like this. Over the long term, valuation tends to win out.”