Venture Finance Business Case_Hunter Risdon
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Describe Spatial Technology’s business model in terms of revenues, profits, and cash flows.
A key part of Spatial Technology's business model is the design and sale of solutions and services in the field of spatial technology. Providing these solutions and services at a lower cost than generating revenues allows the company to generate profit. The management of cash flows consists of managing expenses, receivables, and investments effectively. To leverage the AC IS compatible 3D modeling technology, expand into new market arenas, and expand applications based on AC IS, the company has opened up the new product, 3D Building Box. In the early years, Spatial Technology entered various markets which include animation, virtual reality, filmmaking, entertainment, and internet applications. Furthermore, the AC IS compatible 3D Toolkit can be extended with a series of optional components that significantly enhance its functionality.
As the company's marketing strategy is primarily focused on selling to software vendors, Spatial's technology is generally integrated into their own products. As a result, the company's machine tool industry has been the target of crises in the first two development years. Due to the declining machine tool industry and the lack of investment, the company knew the original strategy would not work in the future. Its core business strategy is to license the 3D modeling technology, instead of targeting the original end user market. For the past three years, the cash flow statement is displayed in exhibit 6c. Operating cash flows have only recently become positive (Melicher, p. 648).
What intellectual property, if any, does Spatial Technology possess?
Its primary intellectual assets are its file format (SAT) and modeling approach.
A key intellectual property of Spatial is its file format (SAT) and modeling approach. The company has published a file format even though parts of its IP are protected by trademarks, in order to be adopted by others and compete with it. Describe the four successful rounds of venture financing (A through D) achieved by Spatial Technology in terms of sources and amounts. What additional financing sources have been used?
During round A, which ended in September 1986, the company raised $1,000,000 from Naz and Company. In exchange for $1.00 per share, it issued 1,000,000 shares.
June 1989 marked the completion of round B of venture funding. By issuing $3.75 shares, the company raised $7,300,000. Mostly institutional investors raised the fund because they believed in the company's growth. Major investors in this round were B. Capital, HP and Naz. and Company.
Sp.Technology completed round C in April 1991 and was able to raise $3,100,000. This time the institutional investors contributed $3.84 per share.
The company was able to raise $2,742,557 from the same institutional investors in its final round of venture financing, round D, which was completed in February 1993 (Melicher, p. 649).
Discuss possible reasons why Spatial Technology’s plan for an IPO of common stock at the end of 1992 was withdrawn.
This idea of an IPO for Technology was dropped at the end of 1992. This was due to several factors. Investors believed that the management was not broad enough, which was one of
the major reasons. There was only one person in charge of all company business, which was the CEO. A few investors and clients were concerned by his aggressive style.
Customers were also frustrated by the instability of the core ACIS product since it was not stable enough for them to ship the ACIS based application. In response to the company's announcement of its new product for the lower end of the computer market, customers complained to the company. Due to a lack of stability in the core of ACIS, a new product was being launched instead of stabilizing its core (Melicher, p. 653).
Describe the IPO market conditions in 1996 and discuss possible reasons why the proposed IPO at a price of about $10 per share planned for October 1996 and involving Dain Bosworth as lead underwriter failed.
A company's IPO price and the number of its IPOs influence the IPO market conditions. IPOs of Internet search engines were the big event in 1996, which attracted the interest of many investors. Yahoo, Lycos, and Excite were among the companies offering their IPOs. On the NASDAQ, Yahoo! sold 2.6 million shares at $13 each, and nearly $33 was reached within the first week. When Lycos went public, it raised $40 million, then following the above successful IPOs, other Internet companies announced plans to go public.
Underwriters failed because of a lack of significant demand. Nevertheless, a number of factors contributed to the failure, including an insufficient understanding of the investor base before closing the deal." Spatial's management appears to believe that the investment bankers did
not adequately grasp the companies' technology and business model. Due to this they could not reach the right investors with an appropriate pitch.
D.Bosworth was chosen as lead underwriter in an initial public offering (IPO) following interviews with many investment bankers. Shares were initially planned to be sold for $9-$11 each. In October 1996, the company made an initial offer of $9 to $11 per share, which was unsuccessful. Underwriters failed to understand the business model and technology of the
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company as one of the main causes of its bankruptcy. In addition, a company's profile could not be conveyed to customers by underwriters pitching to them (Melicher, p. 667).
Since its concept was not fully understood, the company had difficulty finding customers interested in investing. Underwriters, as a psychological principle, seek reassurance that other investors are also buying shares. The book could have closed if one of the major institutional investors had agreed (Melicher, p. 669).
Evaluate the compound return on investments made at startup, Round A, Round B, Round
C, and Round D if the acquired shares eventually sell at $10 and $5. Evalu-ate the compound return on all investments of each existing investor. Analyze the incentives of each investor and founder for taking the Cruttenden Roth offer to execute a $5 IPO.
L. Using the provided financial statements as a starting point:
1. Prepare and present a discounted cash flow valuation and pro forma financials with five years of explicit forecasts using license fees and royalties’ growth rates consistent with recent history (e.g., two to three years) at Spatial.
2. Modify your analysis to consider a more successful scenario where Spatial’s main revenue sources (combined) grow at 50 percent for five years and then flatten to a more sustainable growth rate.
M. Discuss the $5 and $10 IPO prices for Spatial within the context of comparable firms and their multiples. (There are some glimpses of multiples in the case materials, but you may wish to use some outside historical reference material. Please state your sources.)
O. Take a position on whether you would recommend the $5 IPO. Take a position on whether, as an investor, you would have purchased shares in the $5 IPO.
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