Hey, have a great Monday!
If there is one word that could title the week just passed, it is the merge.
The Ethereum Merge
After years of work, Ethereum’s long-awaited transition to proof-of-stake has been completed. According to the Ethereum Foundation, this transition will reduce energy consumption by 99.95 percent because the new consensus mechanism, compared to the previous proof-of-work, requires significantly less computational effort. This is an event that anticipates energy savings – estimated to be equivalent to the annual consumption of Finland – but more importantly, the beginning of the work that will take the coin into the future.
The Merge is just the first of four milestones in Etherium’s roadmap:
↳ I have described them-for the non-technical-in the dedicated mirror.
Read now
Figma + Adobe Merge
One piece of news that has spread at lightning speed in the design community is that of Adobe’s decision to acquire Figma for $20 BILLION. It is not only the stratospheric valuation that makes the news a case study but also the sentiment – negative – with which it was received.
Figma’s independence was a demonstration that it is possible to do design without Adobe, and perhaps better. A gesture of rebellion against a less-than-optimized interface and laptop fans perpetually at full speed.
But product management is an art. And if you can’t build it, you can certainly buy it.
Many might think that Adobe has decided only to eliminate a competitor instead it has decided to buy the operating modes of a rapidly expanding Product-Led company.
While Adobe’s “official” (and public) strategy behind the acquisition of Figma is available here-I decided to elaborate on it in the following paragraphs:
↳ the strategic reasons – with real examples – why giant companies buy small ones
Read now
↳ the effects of the acquisition on the profession of designers
Read now
↳ The most important KPI behind evaluation and how to calculate it for your company
Read now
The Patagonia + Earth Merge
There are those who instead of getting acquired or making an IPO decide to change the rules of the game to pursue their own purpose.
“Hopefully this will influence a new form of capitalism that doesn’t end up with a few rich people and a bunch of poor people,” Chouinard, 83, in an exclusive interview with the NYTimes.
The founder and his family decided to make a somewhat special exit, I explain in the dedicated box
↳ “The Earth is now our only shareholder.”
How it works
If you like what you read, take a screenshot of the most important steps and share them on Instagram (tagging @designstrtgy) or LinkedIn by tagging my profile or that of STRTGY so I can join the conversation.
ALWAYS MAKE PROGRESS ⤴
Antonio
● Product / Roadmap
What’s next after the Ethereum Merge
There are 4 other milestones and they are called “surge,” “verge,” “purge,” and “splurge.”
We can say that The Merge is one of the most complex projects from the standpoint of technical and distributed coordination that we have been able to witness.
Its inventor Vitalik Buterin says Ethereum’s development is only 40 percent complete, and this was a necessary step to ensure future evolutions of the coin and expand its fields of application.
The merge is just the first of 5 planned phases, and I was fascinated by the description of the roadmap if we look at the coin from the perspective of product strategy.
I report briefly, and explained in a very simple way what the roadmap consists of – so forgive any necessary inaccuracies and shortcuts. For more in-depth reading I refer you to this well-written article on one of my favorite sources on the Decrypt topic.
Milestone 1 / The Merge
It is the transition from proof-of-work to proof-of-stake mode.
In the PoW system, people are required to use hardware (and electricity) to help the network process transactions. Computers in the network compete to solve very complicated puzzles and be the first to complete the calculations of a block of transactions while receiving cryptocurrency as compensation.
In PoS, to secure transactions, instead of computational power, a certain amount of currency is required to be blocked, and validators are rewarded for this service. A random algorithm, and a system of rewards and penalties, distributes the work among validators who are collected in nodes.
This step makes the evaluation process much faster and more energy-efficient while maintaining the same level of security.
Milestone 2 / The Verge
This is a technical update to the algorithm that will see the implementation of Verkel trees (a type of mathematical proof). The introduction of this algorithm will reduce the amount of data needed to validate transactions and improve the decentralization of the protocol.
Milestone 3 / The Purge
Translated it means “purge” and will consist of the elimination of old history no longer needed by the network to operate properly.
The goal is to reduce the amount of space and simplify the protocol by not requiring nodes to store excessive amounts of information.
Milestone 4 / The Splurge
It will contain various updates that do not fall into any of the previous categories with the purpose of increasing speed, functionality and security.
By the end of the road map, the Ethereum protocol is expected to be more scalable, with the capacity to process 100,000 transactions per second (tps). Currently, the Ethereum network processes about 15-20 tps. In comparison, the Bitcoin network currently processes about five tps, while Visa processes an average of 1,700 tps.
● Profits / M&A
Why do giant companies buy small ones?
There are two types of acquisition categories. The financial ones and the strategic ones. The former are transactions that make sense from the point of view of the profit and loss account–increasing turnover, reinvesting profits…–while the latter, qthose I will deal with in the next few lines, serve to improve the company’s position in the market.
For an entrepreneur, the strategic sale of the company is the most attractive option of all because usually the buyer is willing to pay more and-usually-the merger will benefit both companies.
Here are the 4 reasons-with examples-why I think it makes more sense for a large company to acquire a smaller one:
1 / Customer Acquisition, Upsell, Cross Sell
2 / Access respective spaces, virtual and physical
3 / Accelerate their own product development
4 / Acquire talent quickly
1 / Customer Acquisition, Upsell, Cross Sell
The first reason is surely to broaden one’s customer base to sell one company’s products to another and maximize returns. For this to happen, it is important that companies share similar or adjacent Jobs-to-be-done.
One of the latest acquisitions that has gone unnoticed by most but is worth three times as much as Figma is the $61 billion acquisition of VMware by Broadcom. The business of both may not be cool enough to make headlines in the design world but it certainly did in the IT world. Broadcom is one of the world’s leaders in IT infrastructure while VMware is one of the world’s largest players in cloud, virtualization, and work-from-anywhere. Accessing their respective customer bases will accelerate the growth of both.
2 / Accessing each other’s spaces, virtual and physical
Small players are incredibly good at sustaining sales while spending less budget than the big guys, and they do so because of their ability to build supportive communities.
Figma’s community for example is made up of not only designers but also Project Managers, Marketers, Developers, Animators, and Video Makers… They are fans who actively contribute to product development and customer care beyond simply being customers. Communities are virtual spaces that support innovation while reducing costs and risks.
Five years ago, on the other hand, Amazon acquired Whole Foods for $13 BILLION with the aim of gaining access to its physical spaces-stores and warehouses-as well as its offline community, potential Amazon customers not yet reached by the service.
3 / Accelerate your product development
If you want to do something right, the fastest way is to do it with people who have already proven they can do it well in the past.
Building products is very complicated, especially for sales-driven companies whose transition to product led would require enormous effort, so acquiring a player with expertise, experience, processes and talent is definitely a good idea.
So good that in January Microsoft paid $75 BILLION to acquire Activision Blizzard, which will then become a division of Microsoft Gaming.
An acquisition can also help develop side products that will help the core business in the future. Amazon for example recently acquired One Medical for 3.9 BILLION which is a subscription-based primary health care platform. If health care is not Amazon’s core business surely accessing this sphere of its customers’ lives as well will allow for increased purchasing opportunities-e.g., pharmacy and health care benefits.
4 / Quickly Acquire Talent
Those who acquire according to the reasons in the previous point also decide to leave autonomy to the acquired company by ensuring that it continues to work as it always has.
Different, however, is the case of acquisition for the purpose of simply acquiring the expertise and talent of teams-often of the founder-in a particular business area. In this case the acquired team is incorporated into the larger company.
This type of acquisition is a very common practice for large consulting or product companies, as well as being the aspiration of many founders, to sell their company to a larger group. The founder becomes “Head of …” and promises his team to work for larger clients without having the overhead of managing sales.
Famous are the cases of Teehan+Lax acquired by Facebook, Spring Studio acquired by BBVA, DesignIt acquired by Wipro, Lapika by AirBnb, and IDEO by Kyu Collective. Here the literature teaches that acquisition is more of a cultural integration challenge for talent retention than a growth project.
In Italy recently, theagency Caffeina acquired NOIS3, a Rome-based Service and Experience Design boutique, to grow its digital product development division.
● Product / Strategy
Figma + Adobe. Who will pay the acquisition cost?
Designers. But this is not a bad thing. On the contrary!
It has already happened with graphic design. When I started working in this world there was only the Corel Draw team and the Macromedia Freehand team. I was part of the latter.
Then multimedia came along and Macromedia brought out Director, an authoring software to make multimedia CDs that were so fashionable because the Internet was still too slow for a Web made of animations, videos and photos.
Along came Flash that changed the Web. It made it unusable but animated. And advertising discovered rich media banners. Agencies made lots of money and web skills began – again – to merge between different fields. The designer also had to be a director and a programmer.
Adobe then bought Macromedia and we know the rest.
The photographers’ turn came with digital photography and Photoshop. Anyone with an SLR and Adobe software could reduce the cost and time of photographing with film to a quality good enough to exist in the market.
Premier did the same with video makers.
After Effects with illustrators and animators.
What happens when the bar is raised?
Innovation lowers the entry threshold. Software over time makes it easy to achieve minimum quality standards. They have presets and features that allow anyone to do things automatically that previously only professionals were able to do because they required time and expertise.
To paraphrase a Canon manager, the job-to-be-done of companies like Adobe and Figma is not to create better products but better professionals.
And when everyone gets better two things happen: the supply of professionals in the low-end market increases but their price decreases. At the same time, standard skills for quality work increase and the market is willing to pay premium just for that extra delta. That delta is usually soft-skills that software cannot fill.
My personal prediction is that the amount of UX, UI product designers will increase incredibly because Adobe’s – current – strength is in the distribution and integration of creative work.
A real case
I taught for 10 years in IED Florence. All of the students, upon enrollment still receive the full, unlimited Adobe suite for the duration of the course and then learn to use those software with great mastery. Many of them will work as freelancers afterwards and therefore find it natural to continue to pay for the license, while others will work in companies that require the use of those software. It is a great way to grow your customer base.
When I was asked to teach UX and UI, Adobe had not yet launched XD. The alternative was to use Photoshop or Illustrator for Web Design work. An ordeal. At the time, the only alternative available was Sketch, so I asked the administration to purchase educational licenses for my students.
It was not difficult from a bureaucratic point of view; it is a very open environment for innovations. But it was a nightmare from an IT point of view.
Sketch exists only in App format and only for Macs, so a system engineer was needed to install the applications on all computers and activate all licenses.
The disadvantages were many:
- I would always have to use the same classroom which made the organization of classes rigid;
- students with PCs were penalized
- and everyone could not complete the exercises at home unless they purchased a personal license and had a MAC.
The problem was not in the software. But in the distribution and thus in the adoption. It was not possible to train future professionals!
Then Figma came along. I asked to cancel the subscription because a browser and a free account was more than enough to design and prototype quality apps.
Product Design is finally mainstream
Figma will finally move out of the niche software segment for professionals and officially enter the standard tools of every creative.
Distributing new tools on such a large scale will lead to the proliferation of new languages and aesthetic trends, but as quantity increases, it will also be necessary to filter quality.
For new designers, designing an aesthetically pleasing digital product will be a standard requirement, somewhat like a computer license.
What companies will be interested in instead will be designers capable of having business impact. The designers who will move to the top end of the market will be those capable of influencing strategy, managing teams, and bringing about, and measuring, tangible business results.
● Profits / KPIs
The most important KPI behind Figma’s assessment.
Some basic numbers of the company:
- Users: 4 million
- Employees: ~850
- Annual Recurring Revenue ARR: $200 million in 2022 with the target at $400 million at fiscal year-end
- Gross operating margin: 90%
- Positive cash flows
But the most important metric of all is net dollar retention NDR which for Figma is best-in-class, above 150%.
What is Net Dollar Retention (NDR)?
How is Net Dollar Retention (NDR) calculated?
What is a good value for NDR?
What is Net Dollar Retention (NDR)
It is the percentage of revenue that the company is able to retain for each period taking into account new paying users, upsells and cross sells (expansions), and downgrades and cancellations from the previous period.
It allows us to appreciate changes in customer loyalty to the product and is an excellent indicator for predicting growth and financial strength of a product led organization.
How Net Dollar Retention (NDR) is calculated.
Net Dollar Retention (NDR) = (Beginning ARR – Churn + Expansion) / (Beginning ARR)
Figma example:
An enterprise customer pays $85/month/editor for the full version.
According to NN, the average ratio of Designer to Developer in companies of 50 people and up is 4 percent.
If we take the case of a company with 1000 employees, we have 40 designers. The contribution to the MRA of such a client for Figma would be $85×40×12= $40,800
Let’s imagine that Figma has 20 clients so her ARR in the month we calculate them would be $816,000
Consider two scenarios.
Scenario A
Throughout the month:
- 1 customer adds 7 designers then makes an upgrade of
$85×7×12=$7,140 - 2 clients downgrade 2 designers each
-$85×4×12=-$4,080 - 1 customer completely cancels his contract
-$85×40×12= -$40,800
We calculate the NDR for scenario A
($816.000 + $5.100 – $44.880) / $816.000 = $776.220/$816.00 = 95,12%
Scenario B
During the month:
- customer base grows by 50% by acquiring 10 new customers who add 40 designers each
$85×400×12=$408,000 - 3 clients downgrade 3 designers each so
-$85×9×12= -$9,180 - 3 customer completely cancel their contract
-$85×120×12= -$122,400
We calculate the NDR for scenario B
($816.000 + $408.000 – $131.580) / $816.000 = $1.092.420/$816.000 = 133,87%
What is a good value for NDR
A good NDR varies between 100% and 125%.
Below 100% means that the company is losing paying users as in scenario A in which there are no new entrants but only contract expansions.
Above 100% means that the company is increasing the number of paying users and those who leave. Scenario B is that of a healthy company.
An NDR above 150% is that of an extraordinary company with a product made so well that it is hard to give up.
● Profits / Going Purpose
Patagonia. What does “Earth is now our only shareholder” mean?
This is the title of a letter from Yvon Chouinard, CEO of Patagonia, announcing that he has transferred the ownership of Patagonia, valued at about $3 billion, to a specially created trust and a nonprofit organization.
Patagonia will continue to operate as a private for-profit company, but the Chouinards, who controlled Patagonia until last month, will no longer own the company.
It will be the trust that will ensure the company’s independence and ensure that all of its profits-about $100 million a year-are used to combat climate change and protect undeveloped land around the world.
It is reported in the NYTimes interview that in August, the family irrevocably transferred all of the company’s voting shares, amounting to 2 percent of the total shares, into a newly formed entity known as the Patagonia Purpose Trust. The purpose of the trust, which will be overseen by family members and their closest advisors, is to ensure that Patagonia lives up to its commitment to run a socially responsible business and to donate its profits. Because the Chouinards donated their shares to a trust, the family will pay about $17.5 million in taxes on the gift.
The unconventional spirit, ethics, and commitment to the environment led the family to consider several options including selling Patagonia and donating all the money, but the new owner would not have ensured continuity of the good deeds undertaken. Another possible option might have been to go public, but the pressure on numbers would soon have compromised the quality of long-term decisions.
Chouinard says in the letter, “Actually, there were no good options available. So we created our own.” While everyone aspires to “going public” he decides on “going purpose.”
All profits will forever be dedicated to the mission of saving the planet. The chart below(source Statista) shows annual revenues from 2017 to date averaging $1 billion per year.
A bold and pragmatic move that will surely have the effect of defining a new baseline against which to assess the ability of companies to be consistent with their purpose.
