The potential sale of MariaDB to K1 Investment Management for $37 million is a milestone in the failed era of SPAC mergers that briefly gained prominence in venture circles during the last startup boom.
Remember SPACs? Special purpose buyout companies, also known as blank check companies, were heavily used in 2021 and 2022 to take some venture-backed startups public. The myriad combinations created lawsuitsbankruptcies and a large amount of written off shareholder wealth.
And while some companies that took this shortcut to the public markets were for-profits, others were more serious businesses — MariaDB was one such company.
After lifting nine numbers in a decadeMariaDB said it closed a $104 million Series D round alongside a merger with Angel Pond Holdings, a SPAC; Inside initial stepMariaDB said its post-merger stock valuation would be $973.6 million, with an enterprise value of $672.1 million — the difference in valuations here attributed to a major fundraising event that would come as part of the proposed SPAC deal .
However, by the time the merger closed, much of the SPAC’s cash was nowhere to be found. About 99% of Angel Pond’s stock was redeemable at $10 per share, subtracting $263 million from the value of the deal. Investors who chose to sell their shares this way did better than anyone who stayed because MariaDB stock tank abruptly on its first day as a public company. Today, MariaDB stock is trading at $0.36 per share, which is somewhat better than the 52-week low of $0.16 per share on February 2nd.
Aside from the modest rally, MariaDB has not lived up to its investors’ expectations. Inside SPAC stadiumthe company projected its annual recurring revenue (ARR) to reach $53 million in 2022 and $72 million in 2023. It also expected revenue of $47 million in 2022 and $64 million in 2023.
But the company was a full year behind its projected growth curve, reporting revenue of $53.1 million and ARR of $50.3 million in 2023. first quarter of 2024, MariaDB reported revenue of $13.6 million, up from $12.8 million a year ago. In addition to this modest top-line improvement, MariaDB also managed to more than halve its operating loss to $5.6 million and cut its net loss to $8.9 million from $12.8 million a year ago earlier. Most importantly, the company dramatically reduced cash consumption. And in the same quarter, its operating cash deficit improved to $1.4 million from $14.1 million.
But those improvements seemed to come a little too slowly: The combined effect of slow revenue growth and rapid cash flow meant MariaDB couldn’t last much longer without raising more money. It stands to reason, then, that the company issued a $26.5 million “senior secured note” to RP Ventures last October. This funding was used to satisfy the maturity of a term loan with the European Investment Bank. But the company defaulted on its bailout and now finds its options limited.
This situation makes K1’s offer all the more interesting, as the terms of the RP note were clear about the restrictions it placed on the company. Apparently, K1 expects RP to clear a possible MariaDB purchase.
MariaDB ended up going public while unprofitable, but without as much fuel as it would have expected. For any startup, this state of affairs is pretty much the worst-case scenario: You go public (more scrutiny) while losing money (cash-dependent) against limited reserves (cash balance), combined with an industry slowdown and a suddenly conservative valuation climate . You are cash poor and without much equity value. Investors send your stock price to essentially zero, and the value of all those years of work and about $50 million in annual revenue becomes zero.
MariaDB makes a two-part example. First, it’s a reminder of the exuberance that led to SPAC deals that were, in retrospect, too expensive and ill-timed. Second, it shows that not all software companies that reach modest scale, say $25 million in annual revenue, will continue to grow at a sufficient rate to sustain themselves as a public company.
Watch out for exotic deals in tough times, and never take your future ARR growth for granted — even if you hit critical growth thresholds.
