Circles Corporate Concierge

Executive Summary and Recommendation

During the current fundraising round for Circles, we find that the team has a strong negotiating position. While additional funding will allow Circles to continue to aggressively build proprietary software and work towards market leadership, without venture funding we think the company can survive its cash crunch and the founders’ share will be worth a material amount.

Specifically, if investment is rejected and the company’s revenues continue to grow at the conservative first quarter 2001 rate through 2002, we estimate the firm will be worth $30 million at a 10x EBIT multiple. This would value the founders’ share at around $9.8 million dollars.

If they think new infusion of capital can drive growth past a $51.5 MM valuation, then a carve out, while nice downside protection, should not be necessary for founders. However, based on our current $30 MM fundamental valuation of the firm, the founders should reject any offer without the $8 MM carve out. We encourage the founders to take a limited funding round from insiders or a bank loan and wait for positive cash flows and the return of capital.

Context

At the time of the case, Circles faces a financing environment that is highly disadvantageous to entrepreneurs. The scarcity of venture capital in this new, post-tech bubble world is clearly reflected in the term sheet negotiations, which increasingly favor Hearst, Axxon, and TL as the financing environment continues to deteriorate over time. Nevertheless, Circles is reasonably well-positioned considering that it is close to profitability, has been performing well relative to its projections, and has some flexibility in its cost structure to reduce cash burn.

Option 1: Fund Business with Internal Cash and/or Bank Financing

If Circles is willing to enter survival mode, we believe it can last for 2 or more years utilizing bridge financing and belt tightening at the expense of product development. This would allow...