The IPO of collaborative design software company Figma FIGMA +250.00% ▲ set Wall Street abuzz after the company’s stock skyrocketed 250% on its debut, briefly valuing the firm at a staggering $60 billion. But while critics claim the underpricing left billions on the table, a deeper look reveals the offering was less a botched move than a strategic play in a flawed, but still functional, system.
The central point of contention revolves around the $33 IPO price compared to the stock’s $115.50 opening price. On paper, that discrepancy meant over $3 billion in potential value lost for early investors — a gap that venture capitalist Bill Gurley and others argue is proof of malpractice or even a rigged system that favors elite institutional clients.
However, this view may oversimplify what is a much more nuanced, strategic process.
Among the biggest sellers in the IPO were top VC firms — Index Ventures, Greylock Partners, Kleiner Perkins, and Sequoia Capital — who sold a relatively small portion of their holdings (roughly 11 million shares combined). Even with the price surge, these firms are sitting on massive long-term gains, some reaching 27x to 1,900x their initial investments.
They could’ve demanded a higher IPO price. That they didn’t suggests intentionality — perhaps prioritizing long-term brand visibility, talent recruitment, and future capital raises over a few billion more in immediate gains.
One exception may be the Marin Community Foundation, which sold all its shares for $440 million. While it may feel some sting from the missed upside, a windfall of that size is still considerable.
The massive stock surge wasn’t necessarily a failure — it may have been part of a deliberate strategy. A strong debut creates momentum, enhances public perception, and strengthens business development efforts. It can also be a catalyst for easier future share sales, particularly once lockup periods expire.
In contrast, IPOs that underperform on their debut — like NIQ Global Intelligence and SailPoint — can make follow-on offerings or exits more challenging for existing investors. For VCs still holding over 200 million shares of Figma — now worth over $25 billion — the big-picture matters more than Day One.
Limited Supply + High Demand = Scarcity Frenzy
Figma only floated about 7% of its total share capital. That limited supply, mixed with intense demand from both institutional and retail investors, led to the inevitable spike in price. Reports suggest 40x oversubscription for shares — a telltale sign of market hype and anticipation.
In such scenarios, investors tend to inflate orders massively just to secure a tiny allocation. The price jump becomes self-fulfilling as buyers chase the illusion of “free money.”
Retail enthusiasm was a major driver behind Figma’s post-IPO momentum. But this behavior remains unpredictable and difficult for underwriters to factor into pricing models. Should bankers have set the IPO at 80x 2024 revenues, as implied by the closing price on day one? That’s debatable.
There’s also a widespread myth that Wall Street banks favor hedge funds in IPO allocations. In Figma’s case, mutual funds and long-only investors likely received the lion’s share, aligning with company and VC preferences.
This isn’t the first IPO to face public criticism, nor is it the first time alternative methods have been proposed:
- Google tried a Dutch auction in 2004.
- Spotify and Slack used direct listings.
- Countless startups have merged with SPACs (special purpose acquisition companies).
But none of these alternatives have replaced the traditional book-building process, largely because each comes with its own pitfalls. Dutch auctions often struggle with price discovery. Direct listings only work for well-known brands and can be volatile. SPACs, meanwhile, have earned a tarnished reputation amid poor post-merger performance.
Chesterton’s Fence and the IPO Machine
Critics often see the traditional IPO system as a relic sustained by a cartel of bankers. But like Chesterton’s Fence, the system endures for a reason: it balances complex interests — founders, VCs, long-term investors, and underwriters — in a high-stakes, high-pressure environment.
Yes, the system has flaws. In the 1990s, banks were accused of allocating IPO shares to executives to curry future business — a practice that died out but could re-emerge without regulatory vigilance. Yet, no better replacement has proven itself at scale.
Figma’s IPO might look scandalous at first glance. But on closer inspection, it reflects calculated trade-offs in a system that — while imperfect — remains resilient. The firm’s backers likely made their decisions with eyes wide open.
As Winston Churchill once said of democracy:
“It is the worst form of government — except for all the others that have been tried.”
The IPO process, it seems, deserves the same faint praise.
Figma’s debut mirrors the broader IPO market’s renewed energy in 2025, following a two-year lull. Investors are cautiously optimistic, though volatility remains a concern. Expect more tech unicorns to test the waters this year — and for the IPO debate to rage on.
