The potential sale of MariaDB to K1 Investment Management for $37 million would be the culmination of an era of failed SPAC mergers that briefly rose to prominence in venture circles during the last startup boom.
Remember SPAC? Special purpose acquisition companies, also known as blank check companies, were heavily used to take many venture-backed startups public in 2021 and 2022. A myriad of combinations resulted in lawsuits and bankruptcies that wiped out large sums of shareholder wealth.
And while some companies that took advantage of this shortcut to public markets were speculative, others were more serious businesses. MariaDB was one such company.
After raising nine figures over a decade, MariaDB announced that it has completed a $104 million Series D round along with a merger with Angel Pond Holdings, a SPAC. MariaDB said in its initial pitch that the combined company's stock would be valued at his $973.6 million and its enterprise value would be his $672.1 million. The difference in valuation here is due to a major fundraising event as part of the proposed SPAC transaction.
But by the time the merger was completed, much of the SPAC's cash was nowhere to be found. Approximately 99% of the stock held by Angel Pond was redeemed at $10 per share, reducing the transaction value by $263 million. Investors who chose to sell their shares this way fared better than those who stayed put, as MariaDB's stock price plummeted on its first day as a public company. MariaDB stock is currently trading at his $0.36 per share, slightly better than his 52-week low of $0.16 per share on February 2nd. Masu.
Aside from a small rally, MariaDB has not lived up to investors' expectations. In its SPAC pitch, the company projects annual recurring revenue (ARR) to reach $53 million in fiscal year 2022 and $72 million in fiscal year 2023. The company also expects sales to reach $47 million in fiscal 2022 and $64 million in fiscal 2023.
However, the company was a full year behind its projected growth curve, reporting 2023 revenue of $53.1 million and ARR of $50.3 million. In the first quarter of 2024, MariaDB's revenue was $13.6 million, up from his $12.8 million in the same period last year. In addition to a slight improvement in sales, MariaDB managed to cut its operating loss by more than half to his $5.6 million, and its net loss narrowed to $8.9 million from $12.8 million in the same period last year. More importantly, the company has dramatically reduced its cash burn. Additionally, operating cash deficit for the quarter improved from $14.1 million to $1.4 million.
However, these improvements seemed to come a little too late. The combined effects of slowly increasing revenue and quickly emptying the coffers meant that MariaDB couldn't last much longer without raising more capital. So it's no surprise that the company issued a “senior secured promissory note” worth $26.5 million to RP Ventures last October. The funds were used to meet the deadline for a term loan with the European Investment Bank. However, the company defaulted on its bailout loan and now finds itself with limited options.
In these circumstances, K1's proposal becomes even more interesting because the terms of the RP Note were clear about the restrictions it imposed on the company. Perhaps K1 is hoping that RP will clear his potential purchase of MariaDB.
MariaDB ended up going public even though it wasn't expected to make a profit, but it didn't get as much fuel as expected. This is pretty much the worst-case scenario for any startup. Going public at a loss (reliant on cash) against limited reserves (cash balances) (subject to greater scrutiny), coupled with an industry slowdown and suddenly conservative policies, the valuation environment. In the end, you don't have much money and you don't have much stock value to invest in. Investors effectively reduce your stock price to zero. That would make all the years of hard work and roughly $50 million in annualized revenue worth nothing.
MariaDB is a two-part example. First, it's a reminder of the frenzy that led to SPAC deals that were, in retrospect, too expensive and ill-timed. Second, it shows that not all software companies that reach a modest size, such as his $25 million in annual sales, continue to grow at a sufficient pace to sustain themselves as publicly traded companies.
Be wary of exotic trades during hectic times, and don't assume future ARR growth is guaranteed, even if you reach key growth thresholds.