SPACInsider contributors Anthony Sozzi and Sam Beattie this week compiled their three favorite potential SPAC targets among B2B SaaS players that are hitting their inflection points. We look at why they are compelling and why each could be a fit for a blank-check merger.
Counting on the whims of consumer behavior has become a complicated game in 2022 with inflation and a possible recession looming. The Biden administration’s student loan forgiveness throws another factor in the bullish direction, but it remains unclear which macro factor will win out.
But, B2B SaaS players that are able to derive stable, recurring revenue from a level that is a few layers removed the end consumer may stand to be the safest harbors for SPAC capital in the current market conditions.
SPACs have combined with 44 SaaS targets since 2015, including some big winners like Grid Dynamics (NASDAQ:GDYN), which last closed at $21.99, and Vertiv (NYSE:VRT), which closed Thursday at $12.22. More recent deals include Gorilla (NASDAQ:GRRR) and Ironsource (NYSE:IS), which each completed their SPAC deals in the last 14 months and last closed above $11.
Not all of these firms achieve the flywheels of growth they assert for themselves. But the stronger targets among them can promise both cash generation and rapidly achievable upside. SPACs also shouldn’t have to content themselves to legacy enterprise software players, as there are many SaaS firms built to serve the next generation of businesses – including other SaaS players.
Boston Consulting Group found in 2021 that such companies had far outpaced biotech, B2C ecommerce and other software categories in growth since 2005. Of the top 100 tech companies founded in or after 2005 that had the fastest growth in their own valuations, about a third were in B2B SaaS and 75% of these were based in the US.
One of the emerging B2B sectors not covered by legacy players is influencer commerce. Both brands and influencers alike have been forced to find one another through improvised means as social media creators have gained steadily greater power over consumer purchasing decisions.
Enter LTK. The Dallas-based company has grown from its 2011 founding to become the largest global middleman between them. So far, about 1 million brands and 5,000 retailers have signed onto the platform, which now hosts about $3 billion in annual trackable sales. About 8 million shoppers use the LTK app, which provides brands additional consumer data, and LTK’s base of influencers numbers in the hundreds of thousands across about 100 countries.
Brands using the network pay a one-time $2,400 onboarding fee and the cheapest subscription thereafter is $3,600 annually, allowing them to send offers to up to 10 influencers per month for up to $25,000 in collaborations. To be able spend up to $100,000 monthly on up to 50 influencers, the subscription jumps to $12,000 annually while LTK strikes customized rates for even larger clients.
Those kinds of numbers vaulted LTK to a $2.5 billion valuation when it raised $550 million from Softbank and others in a November 2021 Series B. This move accounts for the majority of the capital the company has raised, having pulled in just $11.7 million in its Series A and an undisclosed sum in an earlier angel round, according to Pitchbook.
Although the company claims to have been profitable for years, the raise was designed to aggressively hire across the platform and generate new products for creators, brands and the shoppers. Much of that work may already have been completed in the nine months since and LTK could be ready for a bigger bite at the apple while providing retail investors a window to get in on a pure play stock in influencer commerce SaaS – a unique sector that likely to continue to trend up.
All of this makes it a company that would pair well with Lead Edge Growth Opportunities (NASDAQ:LEGA), a $345 million SPAC led by Chairman and CEO Mitchell Green and President and CFO Nimay Mehta. At Lead Edge Capital, this duo has invested in a variety of high-growth companies, many of which later IPO’d in the past several years including Bumble (NASDAQ:BMBL), Delivery Hero (DE:DHER) and Uber (NYSE:UBER).
Digital River has been on a more winding road since its founding in 1994. It IPO’d in 1998 as a small cap enterprise software firm valued at about $142 million, but was later taken private again by Siris Capital and Farol Asset Management for $840 million in 2015.
These new owners sorted through the 32 acquisitions the company had made as a public company and disposed of many of those that had never integrated well. By 2018, the Minnetonka, Minnesota-based company had revenues of about $280 million and was profitable heading into the pandemic in 2019.
While Digital River has may competitors in its specialty of payments, order management and user-experience software for ecommerce, one of its differentiators is how internationally its network is already embedded as a long-time player. It uses what it calls its “onshore advantage” to allow companies to act as a local company in about 240 global markets for tax, legal and compliance purposes.
It had about 1,400 employees as of 2019, and now integrates with many software platforms that it formerly considered competitors such as Adobe (NASDAQ:ADBE), American Express (NYSE:AMEX) and BigCommerce (NASDAQ:BIGC). As such, now may be the right time to give its private equity owners an exit and rejoin the big dogs in the public markets.
In June 2021, it refinanced $100 million in debt, which could potentially be wiped in a SPAC transaction, perhaps with funds from Agile Growth’s (NASDAQ:AGGR) $310 million trust. Agile is among a group of tech-focused SPACs that IPO’d with underwriters Citigroup and Jefferies in March 2021 before terms got tighter. As such, it comes without an overfunded trust, but will need to announce a deal soon with its deadline coming up in March 2023.
Another firm that appears ready for the moment is Paddle, which is forging ahead with the SaaS-for-SaaS companies approach. All of the things that make subscription software companies attractive – rapid scalability across borders, recurring, predictable revenue – are things that can cause accounting and local compliance headaches.
London-based Paddle is focused on parsing that SaaS revenue for clients that have B2B contracts and B2C deliveries. It can centralize processes that normally would involve multiple payment processors across borders as well as internal CRM services and fraud-detection softwares. Paddle, takes on all fraud and tax liability as well as handling billing-related support questions.
With all of this, it reconciles SaaS revenue data across a company’s wide spectrum, which can ease back-office burdens and lead to more efficient renewal efforts. This streamlining also comes in handy particularly for SaaS companies that are frequently acquiring and integrating peers and their systems, but must still present clean financials to prospective investors.
So far, it has racked up about 43 million payments processed and $111 million in taxes collected and remitted across its 3,000 clients. These clients pay either 5% of the transaction value plus $0.50 per transaction or may negotiate a custom-pricing model with the company.
Paddle recently raised about $200 million in a May Series D, but this funding was largely put to work in its acquisition of ProfitWell – a deal with a similar price tag. ProfitWell brings it additional financial analytics tools, but also more “do it for you” functions for SaaS clients, handling more of their taxes, payments, billing, reporting, retention, and pricing.
This raise increased the company’s valuation to $1.45 billion and a further step-up could be on its mind, while a trip to the public markets could make more roll-ups in its space easier. Integrating these is after all one of its specialties. One of the SPACs on its switchboards could well be Stratim Cloud (NASDAQ:SCAQ), which raised $250 million in its March 2021 IPO and has a management team with broad SaaS experience.
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