The prospective $37 million sale of MariaDB to K1 Investment Management represents the culmination of an unsuccessful era of SPAC mergers that briefly dominated venture capital circles during the previous startup growth.
Recall SPACs? A number of venture-backed businesses went public in 2021 and 2022 with the assistance of special purpose acquisition companies, also known as blank-check companies. The innumerable permutations resulted in litigation, insolvency, and a substantial amount of forfeited shareholder capital.
MariaDB was one such company, although some companies that opted for this expedient route to the public markets did so speculatively, others were more established enterprises.
MariaDB announced that it had completed a $104 million Series D round in addition to a merger with Angel Pond Holdings, a SPAC, a decade after it had raised nine figures. MariaDB stated in its initial proposal that the merger would result in an enterprise value of $672.1 million and an equity valuation of $973.6 million; the disparity in valuations was ascribed to a substantial fundraising event that would be incorporated into the proposed SPAC transaction.
However, by the time the merger was finalized, a significant portion of the SPAC’s cash had vanished. At $10 per share, approximately 99 percent of the shares held in Angel Pond were redeemed, deducting $263 million from the transaction’s value. Those investors who elected to divest their shares in this manner fared better than those who remained, as MariaDB’s stock experienced a significant decline on its inaugural day as a publicly traded organization. As of today, the share price of MariaDB’s stock is $0.36, representing a marginal improvement over its 52-week low of $0.16 set on February 2.
Despite a modest recovery, MariaDB has failed to meet the anticipated standards of its investors. The company projected its annual recurring revenue (ARR) to reach $53 million in FY 2022 and $72 million in FY 2023 in its SPAC proposal. Additionally, revenue forecasts were $64 million for FY 2023 and $47 million for FY 2022.
In contrast, the company’s $53.1 million in revenue and $50.3 million in ARR in 2023 show that it underperformed its anticipated growth trajectory by an entire year. MariaDB achieved a revenue increase from $12.8 million in the first quarter of FY 2024 to $13.6 million. Apart from the slight enhancement in revenue, MariaDB successfully reduced its operational loss by over 50% to $5.6 million and its net loss by less than half to $8.9 million, compared to $12.8 million in the previous fiscal year. Moreover, the organization reduced its cash consumption significantly. Additionally, its operating cash deficit decreased from $14.1 million to $1.4 million during the same quarter.
However, it appeared that these enhancements were implemented a bit too late: the confluence of sluggish revenue growth and swiftly depleting funds meant that MariaDB could not continue for much longer without seeking additional funding. Therefore, it is logical that in October of last year, the organization granted RP Ventures a “senior secured promissory note” in the amount of $26.5 million. The funds were utilized to repay the European Investment Bank for the tenure of the loan. However, the organization defaulted on its rescue loan and is currently confronted with limited alternatives.
The aforementioned circumstance enhances the allure of K1’s offer, given that the RP note explicitly delineated the constraints it imposed on the organization. K1 likely anticipates that RP will finalize a prospective acquisition of MariaDB.
MariaDB ultimately went public despite being unprofitable and lacking the amount of momentum it had hoped for. This can be considered an extremely unfavorable situation for any startup. You go public (increased scrutiny) while incurring losses (cash-dependent) against limited reserves (cash balance), in addition to an industry downturn and an abruptly conservative valuation climate. You ultimately find yourself cash-strapped and with little equity value to spare. Your share price plummets to an insignificant amount, effectively rendering your years of labor and estimated $50 million in annualized revenues in vain.
For instance, MariaDB is a two-part example. Initially, it serves as a reminder of the elation that precipitated SPAC transactions that were, upon reflection, excessively costly and ill-timed. Furthermore, this demonstrates that not all software enterprises that attain a moderate level of success, as evidenced by an annual revenue of $25 million, will maintain an adequate rate of growth to remain publicly traded.
Even if you reach critical growth thresholds, never assume that your future ARR growth is assured. Be wary of exotic transactions during periods of excessive optimism.
MariaDB’s possible acquisition agreement reflects the excessive enthusiasm for SPACs in 2021.
