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Spatial Wires Up $27 Million Deal

When Spatial Wireless Inc. raised $10 million in Series C funding last September, everyone saw clear sailing ahead. Sure, there were some product rollout and channel partners milestones to meet, but a company spokesman reported that the Richardson, Texas-based company was fully funded and would hit profitability within 24 months.

Since then, however, very little has gone as planned – except for the product rollout and customer traction endeavors. Not only did the company come out on the wrong end of a trademark dispute and lose its newly appointed chief executive, but it also was forced back into the venture capital market due to an apparent shortfall in sales revenue.

“It was just a case of us not selling as much as we thought we would,” says Pardeep Kohli, a Spatial co-founder who regained his president and CEO posts following the health-related departure of CEO Kjell Andersson.

The new round was marketed with a $25 million target, but ultimately secured $27 million from lead investor VantagePoint Venture Partners, and return backers Austin Ventures, Sequoia Capital, Genesis Campus, Qualcomm Ventures and Dali, Hook Partners.

So how does a company raise an oversubscribed round in the face of revenue shortfalls? The answer seems to be that Spatial management was far more optimistic about its company’s immediate future than were its venture backers. Venu Shamapant, a partner with Austin Ventures and a Spatial board member, says that he never thought that the Series C round would be Spatial’s final round of private funding. “There are lots of business plans that are fully funded only in the mythical sense,” he explains. “My perspective was not that [Spatial] would get to a fully funded state, but that it would be get some channel partners and big carrier traction.”

In fact, due diligence conducted by lead investor VantagePoint Venture Partners didn’t even turn up any suggestion of slower-than-expected sales. Instead, the San Bruno, Calif.-based firm was smitten by both the company’s emergent tier one customer roster and dedication to a distributed mobile switching market with little competition.

“We’ve been following the wireless soft-switch space and its wire-line cousin for over a year,” says Eric Ver Ploeg, a partner with VantagePoint and new Spatial board member. “There are really just two categories of companies in this space: The first includes Spatial and [Winphoria Networks Inc.], both of whom have working, distributed products. The other is everyone else like the incumbents who have Powerpoint slides and no actual product.”

Ver Ploeg adds that he is unconcerned by Motorola Inc.’s acquisition of Winphoria last month. He believes that Motorola may move Winphoria away from Spatial’s desired GSM (global system for mobile) niche, and that the wireless giant will remain a strategic partner to Spatial.

It is too early to tell whether or not the Winphoria acquisition will set some sort of M&A market range for Spatial, in large part because Motorola won’t disclose the final sale price until it releases second quarter numbers next month. Tewksbury, Mass.-based Winphoria had received a $215 million post-money valuation from venture capitalists after a $42 million Series B round in early 2001, but that may have no relation to what it was worth in early 2003.

Spatial has now raised $58 million in venture capital, and CEO Kohli says that the most recent deal was sold with a slightly increased valuation over last fall’s Series C offering. Kohli declined to provide valuation details on either round, although investors had previously reported that the company’s $12.5 million second round offering closed in late 2001 with a $43 million post-money valuation.