Analyzing the Failed IPOs of Spatial Technology Inc. (Case Study)

This report analyzes the financial position and performance of Spatial Technology Inc., a US-based technology company specializing in 3D modeling software. The report investigates the reasons behind the company's unsuccessful IPOs in 1992 and 1996, which failed to attract sufficient investor interest. The analysis includes three valuation models (A, B, and C) with varying growth rate assumptions to assess the company's equity value and share price. It evaluates Spatial's pricing strategy, management decisions, and the impact on the IPOs. The study also explores the feasibility of investment in Spatial Technology, considering factors like intrinsic value versus market value and investor preferences. The report concludes with recommendations for improving investor interest and achieving better financial performance, emphasizing the importance of aligning capital structure decisions with market conditions and investor expectations. The report also includes a detailed analysis of the case study and provides insights into the valuation techniques and the factors that led to the failure of the IPOs.

Running head: ENTREPRENEURIAL FINANCE
Entrepreneurial Finance
Name of the Student:
Name of the University:
Author’s Note:

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Executive Summary:
This report analyses the financial position and performance of the Spatial Technology, which resulted in
less investment interest from the investors in 1992 and 1996 IPOs. Spatial Technology Inc is a technology
company based on US, developing and supplying 3D modeling software and many other information
system solutions to national and international markets. In 1992 and 1996, the company offered its shares
to public for raising capital but it catch the attention of less interest from the investors. In this report, the
reason behind such a failure have been discussed and analyzed with the help of some evaluation
techniques. Lastly, the report concludes with the possible initiatives that could have been helped the
company to gain investors interest and perform financially well in the market.

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Table of Contents
Introduction:................................................................................................................................................3
Overview of the company:...........................................................................................................................3
Key points of the case study:.......................................................................................................................3
Analysis of Valuations and understanding its outcomes:.............................................................................4
Valuation A:............................................................................................................................................4
Valuation B:............................................................................................................................................5
Valuation C:............................................................................................................................................5
Spatial’s pricing Strategy to penetrate the market:......................................................................................7
Impact of Spatial’s Management’s decision on its IPOs:.............................................................................7
Fair price assumption of the share for potential investors:...........................................................................8
Feasibility of investment in Spatial technology Inc:....................................................................................8
Reflective evaluation of the case study:.......................................................................................................9
Best valuation technique which can be learned from above:.....................................................................10
Conclusion and recommendation:..............................................................................................................10
References and bibliography:....................................................................................................................12
Appendix:..................................................................................................................................................15
Valuation A:..........................................................................................................................................15
Valuation B:..........................................................................................................................................16
Valuation C:..........................................................................................................................................17

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Introduction:
Every Company needs capital for short term and long term, for financing their short term and
long term requirements. They can raise the capital from various sources, it can be raised through the issue
of equity shares or it can be from debt capital. In every such sources of capital, there is some risk
associated with it. More the risk is assumed more the profits can be generated, but there must be a proper
tradeoff between the risk and return to achieve the overall objective of wealth maximization of an
organization (Pinto, Robinson and Stowe 2015). In this report, an analysis has been done on the case
study of Spatial Technology Inc. They have failed to raise sufficient amount of share capital in 1992 and
1996 IPOs beaus of less significance from the investors to invest in the shares of the Spatial Technology
Inc. In the following paragraphs, some valuations have been done based on some assumptions and
forecasts to know the cause behind such a failure (spatial.com 2019).
Overview of the company:
Spatial Technology Inc is one of the big technology companies of US, operating with
Excellencies in the computer software industry. The company was established in 1986 and they are
having their headquarter in Broomfield, Colorado, USA. They first developed and commercially offered a
3D modeling software in the market. They had been performing financially and operationally well. To
expand their business and to meet the rising capital needs they went for IPO in the year 1992, but they did
not get sufficient response from the investors. Later on, they offered their shares for public in 1996 again,
but once again investors showed less interest in that investment options (spatial.com 2019).
Key points of the case study:
For expansion and growth fund is required for financing and investing in the new opportunities. It
can be raised from debt issuing or shares issue. They can issues shares to raise capital or they can borrow
the fund from lenders or banks. In the given case study the Spatial Technology Inc was also planning for

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expansion and they needed some amount of fund to finance the expansion. They are planning to go for
IPOs and to raise capital through issue of share capital. Their IPOs did not get much interest from the
investors and their plan to attract institutional investors. In this report, a pre money valuation has been
done to find the reason behind such a situation. In the case study, the yearend profit and loss account is
available for the year up to 1996. There is also a yearend balance sheet for the year 1994 and 1995. A six
months balance sheet as on June 1996 and an estimated balance sheet have also been given with the effect
of newly issued shares in IPO. Their failures in rising capital from the issue of shares lead them in trouble
to manage their investment plans and to manage their business efficiently. Shortage of fund in time when
it was needed for their projected growth led them to the failure of their proposed plans and projects.
Based on all those information, following appraisal has been done. Please refer to the excel workbook for
valuations (spatial.com 2019).
Analysis of Valuations and understanding its outcomes:
Valuation A:
In the first valuation report, the total revenue for the year 1996 has been manipulated to show
estimated earnings after tax for an amount of $1.7 million. The revenue has also been manipulated for the
year 1997 to get total revenue of $5.4. It has been further assumed that there would be a growth rate of
almost 52% which can lead to the total value of equity to $60 million. In this process, all the components
have been inflated based on the proportion of total revenues for the previous years. It means every
component of the revenue has been increased using the percentage of the total revenue for the last year. In
computing various expenses, it has been assumed that the ratio of expenses would remain same as in the
previous years, hence the expenses have also been computed based on the historical data (spatial.com
2019). Then an suitable rate of discounting has been used to compute the value of equity of the business.
Value of equity means the total value attributable to the equity shareholders. From all the computations
the value of the firm came to approx around $60 million and dividing the total value of equity by the

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given number of shares the value per share came at $10.20. In this valuation model, the projected intrinsic
values of the shares are less than the estimated market value of the shares. Therefore, it will not be a good
investing opportunity for investors
Valuation B:
In the second valuation model, the supposition of the growth rate has been changed to 29%,
which leads to a total equity value of around $30 million. All other expenses and incomes have been
measured as a percentage of the revenue and respective parameters. In this calculation also the 1996 and
1997 years’ earnings after tax has been kept intact as in the first valuation model. Rest of the values has
been changed ad revised using some best assumptions and appropriate ratios. Please see the formulas and
relationships established in the excels sheet calculation. In this valuation model, the value per share came
to $5.12, which is again less than the estimated market value of the share which justifies the behavior of
the investors. At last in this valuation model, the balance sheet figures have been projected using the
historical ratios and relations from the historical data and balance sheet of the company. A medium
growth rate reduced the equity value of the company to a large extent.
Valuation C:
In the third valuation table, the growth rate has been considered as the average growth rate of the
same industry at 45%. All other assumptions and rates have been kept intact. All the expenses and
revenues have been projected using the same techniques as in the first two models. Following all those
assumption and valuation techniques, the total value of the equity came to $50 million. The value per
share has been computed by dividing the total value of equity by the number o shares, which came to
$8.43 per share. A restrained growth rate as existing in the same industry did not showed a good growth
in the hare price and a high inherent value of shares.
It can be learned from the above valuations, there are different techniques and process of
valuation of business and shares. To complete such valuation all the required and relevant information

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may not be present there, but some best assumptions and estimates can be taken for such valuations. In
the above valuation and projection of the earnings and financial position of the Spatial Technologies Inc,
profit and loss account information have been taken from their historical records and then it has been
projected in the future years based on such types of important assumptions and relations which fits best
for the respective parameters (spatial.com 2019). It can also be learned from the whole case study, that
which situations or what investment opportunities the investors prefer. It can well be observed from the
whole case study that, a situation when the market value of a share or bond is less than the intrinsic value
of such bond or shares the investors likes it the most as they hope it to increase the value of the bond or
the shares to the intrinsic value (Liu, Uchida and Gao 2014). If the market value of the bond or share goes
up to its intrinsic value, then it will fetch an additional capital yield or capital profit to the investors. On
the other hand they dislike and investment opportunity where the intrinsic value of the share or bond is
lower than the market value. They hope that the market value will go down to its intrinsic value in future,
which will fetch a capital loss to the investors.
From the companies or the entrepreneur’s point of view it can be learned that, every injection of
capital of rising of capital should satisfy the market situation and the overall objective of the business
organization. It must also make a proper tradeoff between the risk and return which will give maximum
benefit to the entrepreneur. Every decision relating to the capital structure of the organization should be
backed by proper feasibility and justification and there must be a reasonable expectation from the market
and the investors (Liu, Uchida and Gao 2014).
From the above analysis, it can be concluded that, considering a very high growth rate in the
company’s revenue in the future years, the intrinsic value of the shares were coming less than the market
price of the shares. It’s a general rule that, the market price of the shares will come to the intrinsic value
slowly, hence investors considered to be a bad investing opportunity for them, that is why they showed
less interest in the IPOs of Spatial Technology Inc’s shares.

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Spatial’s pricing Strategy to penetrate the market:
Spatial Technology Inc was the first one to offer their customers with the 3D modeling software,
which could be used in various infrastructure and engineering industries. as they were the early players in
the market to offer such types of products and services, they were gaining a good market share and
enjoying a significant growth in their revenue. Their strategy was to penetrate into various national and
international markets with some unique products and services offerings (spatial.com 2019). Their strategy
helped them to capture a huge market share globally, and the market price of their share followed an
increasing trend, but their shares were not properly backed by adequate assets or net worth, which
resulted into a lower intrinsic value. Investors think an investment opportunity to be good, if its intrinsic
value is more than the market value. Therefore, from the perspective of pricing strategy of the Spatial
Technology Inc, it can be concluded that, in the early stages, as they were the pioneer and company in the
industry software technology and having core competencies in developing 3D modeling software, they
priced their products marginally but extracted as much revenue as possible. Later on with the introduction
of some other companies in the same field, they have changed their pricing strategy.
Impact of Spatial’s Management’s decision on its IPOs:
In 1996 the company was having a requirement of fund for their expansion and development.
They decided to raise capital through issue of share capital. At that point of time various big financial
institutions and banks were showing interest in IPOs of various companies. The management of the
company thought that they could also raise capital through the issue of shares to the financial institutions
and banks. Their expectations proved to be wrong as financial institutions never invests their funds
without good earning potentials. Banks and financial institutions showed less interest in their IPOs as they
also found the intrinsic value of the Spatial INC to be less than the market price. Therefore, the whole
expectation of the management got failed and they couldn’t have raised sufficient capital through the
IPOs. It can easily be understood that, the management’s intention and assessment was faulty and affected

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the whole process of their initial public offerings of shares. They must not have targeted only the
institutional investors and banks, or they would have raised the capital through barrowings. Lastly, it can
be learned from the case study, that the assessment and timing of IPOs are also very important for every
company. They must be assessing the market condition, present situation of the company and the
potentials from the investors before going for IPOs.
Fair price assumption of the share for potential investors:
From the above computations and analysis, it can be obsered that, their shares were having an
intrinsic value of around $5 to $ 10 per share while the market price was $25 per share. Hence, the fair
price of the share should have been more than the market price of the share, which could have generated
ore capital appreciation and dividend yield for the investors. There the fair value of the share should have
been at least $25. The technologies industry is ever varying with the rapid change in technology and
innovation in the technologies. Therefore, there is a high volatility in the shares of companies in
technologies industries. The market price of the company for this appraisal has been projected based on
the industry average and best measures for the particular industry.
Feasibility of investment in Spatial technology Inc:
As can be observed from all of the above discussion and analysis, the company is having a
considerable growth rate in their revenue, as the company is revolutionary in the industry. Considering a
very high growth rates in three of the above valuation model based on discounted cash flow technique and
various assumption, the intrinsic value of the shares are coming at $5 to $10, which is much lower than
the market price of the shares. It is common trend in the market, that in long run the market price of the
shares tends towards the intrinsic value of the shares. Hence, the market price of the share of Spatial
Technology Inc will come to its intrinsic value in near future. Therefore, despite having a good growth in
the revenue of the company, it would not be a good investment opportunity. To be it a good investment

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opportunity its shares value backed by the net worth of the company or the future profitability of the
company must have been more than the market price of the shares.
Reflective evaluation of the case study:
Entrepreneurial finance means financing new business startups and new ventures and new
capitals. The startup of any business organization has some potentials or opportunities and risks
associated with it. Every startups or new business establishments requires investment on funds. Therefore,
before investing funds into any startups one must analyze the future prospects and risks associated with it.
The main objective of this valuation and discussion is to have an exposure on those aspects of
entrepreneurial investments and startups (Liu, Uchida and Gao 2014). Every entrepreneur must assess the
risk and return of the investment opportunities before investing funds. There are various ways of
evaluating the risks and returns and the profitability and growth of any business. Some are quantitative
and some of them are qualitative. These valuation techniques are known as project appraisal techniques.
For example, NPV method, IRR method, Payback period, Payback profitability analysis etc (Goedhart,
Koller and Wessels 2015).
It is not always possible for entrepreneurs to arrange funds from their own sources to finance the
new startups. It leads them either to borrow the fund from the banks or financial institutions, or they can
sell the ownership of the organization by way of shares, which is known as issue of shares (Liu, Uchida
and Gao 2014). In doing so, there must be a basic objective of the organization, which is to maximize the
shareholders wealth. It means they must make the combination of debt and equity in the total capital
structure which maximizes the shareholders return by minimizing the overall cost of capital. This is
known as the tradeoff between risk and return (Goedhart, Koller and Wessels 2015). In my opinion, every
organization should have this type of an objective and they should do such restructuring in their capital
structure which gives them the best risk and return trade off.

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In this report the Spatial Technology Inc’s such future earnings potentials have been analyzed to
find out the value of the equity and the intrinsic value of their shares. It can be learned from the whole
valuation process that, there are various factors which needs to be considered in valuation and proper
basis for their projection must be used. In my opinion, it is best to value the business in terms of present
value by discounting all the expected cash flows by a suitable discounting factor (Pinto, Robinson and
Stowe 2015). The same thing has been done in this valuation process of Spatial Technology Inc.
Best valuation technique which can be learned from above:
After assessing and understanding all those valuation techniques and appraisal policies, it can be
concluded and recommended that, the present value technique of valuation is the best and appropriate. It
takes into consideration the future earning capabilities of the company, as well as the future financial
position of the company (Bollerslev and Zhou 2015). It also takes into consideration the time value of
money as it requires to discount all the future cash movements by appropriate discounting factors.
Therefore, for analyzing and valuing the business or any investment opportunities, application of such
type of valuation technique would be justifiable (Goedhart, Koller and Wessels 2015).
Conclusion and recommendation:
From the above discussion and analysis, it can be concluded that, the company is having a good
growth rate in revenue but their shares are not backed by adequate amount of assets. Their shares were
trading at a high market price in the market, as they were projecting a very high growth rate in their
revenue. They targeted various banks and financial institutions for their IPOs but, they did not showed
much interest as there is no long term capital appreciation in the share price of the company. Based on
these observations and facts, it can be recommended for Dick Sower that, they need to focus on the public
and the financial institutions as a whole for IPOs and they need to manage their assets so as to increase
the net worth as well as the intrinsic value of the company. Lastly, Project valuation or investment
appraisal is an important issue as it includes various future certainties and uncertainties, every aspect of

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those risk and rewards must be taken into consideration while conducting an important investment
valuation.