ENTREPRENEURIAL

PROCESSES
72-hour home assignment, final exam

Programme:
MSc in Social Science in Organizational Innovation and
Entrepreneurship

Submission date:
22nd of December 2016

Supervisor/professor:
Dan Wadhwani

Number of characters: 22.746

Question 1: Building Zarcus
In the following, I will analyze how well Zarcus has been build as a start-up. To best analyze the case, I will
use Sahlmans POCD framework and furthermore consider the ventures business model, cash flows and
how well Goldberg has managed the risk involved in starting up the business. Finally, I will also consider the
acquisition of resources of the venture in terms of people, partnerships and property.

People
Firstly, it is important to consider the experience and skills of the founding team. The founding team behind
Zarcus is a team of extensive and complementary skills and experience. All five initial members have
extensive work experience from different industries, positions and organizational stages e.g. starting up
ventures, scaling and managing big companies, thus complementing each other well. With their skills and
expertise, three of the four main functional areas, e.g. technical, financial and marketing/sales, are
covered. Hiring a managing director to run the day-to-day operations of the company covers the fourth
functional area, e.g. administration.

Secondly, it is important to consider if the team has balance. The team has no track record of working
together before, and there is thus no proof of them being able to do so. Taking into consideration the way
they divide responsibility to play on each others strengths, it can be assumed that the team works fairly
well together. Even though some of the team members are friends, they are able to make decisions based
on what they think is the best for the company without being influenced by emotional aspects of their
friendships. This is exemplified in the decision to buy out Offer, when he cannot contribute the necessary
resources to the acquisition of Tudorvale.

Thirdly, the teams motivation to making the venture succeed is important. It is clear from the case that the
main motivation for the majority of the founding team is to build an economically successful business to
provide the founders with a good return. It is thus not the specific idea of Zarcus that drives them, but the
financial return. However, it seems like Goldberg is also somewhat motivated by the idea of keeping control
of the company and building it in the way that he envisions, which could cause friction between him and
the other founders in terms of how to develop the company going forward.
It is not clear whether any of the founding members commit full time to the venture, but as Goldberg is
also building his virtual CIO business as he is developing Zarcus, I would assume that none of the founders
work on the venture full time.

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There is no mention of considerations on equity split between the founding members, but as everyone is
expected to contribute equally in terms of financing the venture, one could assume that there is an equal
equity split between them, which could provide a good incentive for each of them to put in an equal
amount of work.

Opportunity
The idea for Zarcus originates from Goldbergs own experiences of people needing help with different
technical equipment in their homes. The market for at-home technical support, at the time of Zarcus
entrance, was growing and still fragmented with only smaller players.
To differentiate themselves from the competition, the Zarcus team has come up with a value proposition of
offering at-home technical support from quirky-but-cool technicians, assuming that people would pay for
technicians with better social skills than the average technician. Zarcus thus focused on finding a market
that valued convenience, speed and service over price and spent a year and a half researching and
identifying their target customers. Zarcus identified its target market as the high-end market, focusing on
more affluent consumers, as well as small businesses without in-house IT capabilities.
To reach customers, Zarcus focused firstly on their own network as well as marketing and advertising as a
way to get customers. To increase the customer base, a big step was the acquisition of Tudorvale, a
competing company, and at the same time spending more aggressively on marketing. Reaching customers
seems relatively easy.

A final consideration in regards to the opportunity is the development of competitive advantage. As Zarcus
is not competing on price, the competitive advantage would have to be developed through differentiation.
By differentiating themselves from other firms through their best practices and training of their staff, they
might be able to develop a competitive advantage, which could be consolidated through brand recognition
and building a large and loyal customer base. These aspects of the business can however be hard to protect
from copycats and other competitors, who potentially target the same customer segments in a market with
low switching costs.

Context
The 1990s saw a large increase of personal computers in homes, a trend that continued into the 2000s. In
European cosmopolitan cities like London, these trends in consumer behavior can be assumed to precede
behavioral trends in other smaller cities, entailing that the market for at-home technical support would
continue to increase. However, the increase of technology in homes must also slow down at some point,

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considering the saturation of the market until new technology is invented. As reliance on technology
increases, the opportunity for serving technical support needs increases as well, creating a rather large
market.

An element, which might slow down the growth of the market, is consumer education and online tutorials.
As consumers learn more about the new products, the need for technical support will diminish.
In regards to the high-end market segment, the beginning and middle of the 2000s was an economic
affluent time, which for Zarcus entailed a growing potential customer base, also outside London as smaller
cities also became more affluent.

Deals
In terms of deals, Zarcus has remained largely independent. The case states that the company sometimes
partnered with different smaller players in subcontract work, but Zarcus has not made any bigger strategic
partnerships with larger firms.

One deal, which was significant for the growth of the companys customer base, was the acquisition of
Tudorvale. This acquisition required Zarcus to raise external financing for the first time, which was raised
from an angel investor that did not play any other role in the company. The founders could have raised the
funds from a more strategic partner, but as the founding team probably did not need complementary
capabilities, the angel investor can be seen as the most opportune way for the founders to keep control
over the company.

Business Model
The founders spent almost two years tinkering with their business model to make sure that it was
profitable. It thus seems that the business model is quite clear in terms of how the company gathers
resources (competent technicians) and delivers value (technical support, focusing on convenience, speed,
good service), while retaining a profit. Through experimentation and adjustment, the business model has
been proven in London, as the company breaks even in year three and is moderately cash flow positive.
Zarcus has experienced a 100% annual growth rate over the first three years, implying that the founders
were right in assuming that people would pay for the value, they are offering. They thus have a seemingly
profitable and proven business model.

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Zarcus developed a classic service-per-visit business model for its customers, and also something similar to
a subscription-based model, where customers got annual service contracts negotiated on an individualized
basis. One of Zarcus main revenue streams thus comes from these visits, which can be considered
somewhat risky as visits are booked on a day-to-day basis and there are no switching costs involved for the
consumer in choosing another company next time they need technical assistance. Another, more
accountable, revenue comes from the annual service contracts.
Zarcus pricing model is aimed at the high-end market and prices are thus above those of the competition
to ensure that the company is profitable. Zarcus charges an hourly rate of 81-95, whereas TechGuys, a
competitor aimed at the mass market, charges 70 per hour for home visits. This difference in pricing
seems fair considering the difference in target markets.

One problem with the business model is the question of scalability. The business model has only been
tested in the London market, and it is thus not clear if it can be replicated in other cities with different
economic profiles. This is especially important for this particular business, as it is aimed at a more affluent
market segment, and expecting customers to pay a premium for its services. Other cities do not to the
same extent as London have a high-end market segment, and the pricing model could thus be a problem
when considering geographical expansion. Goldberg does not consider this a large problem, as he assumes
that salaries will also be lower in these cities, meaning that the pricing could also be lower.

Cash flow
The founders have managed to develop the company by bootstrapping and dividing tasks between them to
keep the burn rate low in early years. They launched the business on a minimal budget of the founders
own money infusions, and did not raise external financing until it was absolutely necessary for the
acquisition of Tudorvale.

As mentioned above, the company broke even in year 3 and is moderately cash flow positive (for cash flow
calculations, see appendices A-C). The company has experienced an annual growth rate of 100% through
the first three years, and if that growth continues in 2007, the company could expect a return of about 1,5
M (see appendix C). The company is thus seemingly profitable, but a consideration in this regard must be if
the profitability is sustainable. Concerns with the sustainability of the cash flow is the low switching cost for
Zarcus customers and if the company can keep growing to a higher level of profitability.

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Risk Management
A significant part of managing the risks of setting up a new business is to test and adjust the business model
on a smaller scale before expanding. The Zarcus team has done just that and spent close to two years doing
extensive research, figuring out their target market and experimenting with their business model to a point
where it is profitable.
Furthermore, by not relying on external financing in the early experimentation phase of the company, the
risk of ending up in debt has been mitigated considerably. However, as everything has been done in-house,
all the financial risk has been put on the founders.

One risk for per-visit business models is the uncertainty of holding on to customers and getting enough
business. The annual service contracts is one way of overcoming this uncertainty, and another is to provide
follow-up services, like hosting services, which provide larger switching costs for customers.

Resources people, partnerships, property

A final consideration of how the company has been built concerns assembling the necessary resources for
the company to succeed and grow.

In terms of people, the founding team has already been discussed above. Another aspect is Zarcus
employees. These employees are carefully selected through screening processes, and furthermore
continuously trained. The company aims at a 62,5% utilization rate of their employees, and hires a new
technician once this line is crossed. This ensures the availability of the right amount of personnel without
expanding too rapidly, and creates a desirable work environment for the employees.

The founders of Zarcus have not been big on partnerships. The case only mentions a few partnerships with
smaller firms for subcontract work and investment is raised from an angel investor that does not seem to
have any say in the companys development and the same solution is considered in the second round of
financing.

Finally, the real and intellectual property of the company should be considered. As the company provides a
service, it is not a type of company that would have a lot of real property.
In terms of intellectual property, the brand and story of Zarcus should be protected by a copyright, as the
brand is a part of creating a competitive advantage. The best practices of the company could also be

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considered intellectual property. This is slowly developed through practice and training, and should be
protected in some way, maybe as a trade secret.
The case does not specify whether the founders have taken any such precautions to protect their
intellectual property.

Sum-up: was Zarcus skillfully built?
Goldberg has gathered a strong founding team and together they have managed to build a company with a
clear value proposition, which differentiates them from the competition, thoroughly identified customer
segments and a seemingly profitable business model.
The market is growing as consumer trends increase the need for at-home technical support and the
economic upturn increase available income for consumers. The company is growing by 100% annually, has
recently broken even and is cash flow positive. It seems that several risks have been considered and
managed through research and experimentation, as well as developing a business model with
complementary revenue streams. The acquisition of the necessary resources seems as thoroughly planned
as the positioning and development of the company.
Goldberg has thus succeeded in building Zarcus in a convincing way, preparing the company for possible
expansion. This is however not without further risks, which will be discussed below.

Question 2: What now?

Zarcus has gone through the experimentation phase, and is now possibly moving into the expansion phase.
This poses a new set of challenges in terms of expanding in a market, which is currently changing and
presenting new threats from competitors.
I will structure my recommendations for Goldberg by considering three questions: (i) whether to grow, (ii)
when to grow and finally (iii) how to grow.

Whether to grow
In deciding whether to grow, it is firstly important to consider the entrepreneurs motivations. In the case
of Zarcus, the greatest motivation is to get substantial economic gains from the venture, and the most likely
way to do so seems to be strategic acquisition from a larger player in the industry. For Zarcus to be
important strategically, it will have to have a certain market presence and possibly threat the competition
in taking over their market share. Expanding is thus strategically important for Zarcus. However, it seems

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that especially Goldberg is also concerned with maintaining control with how the company develops as he
wishes to grow the company to a greater level of profitability, but also because he is proud of what they
have built and somehow wants to protect it.

Another element to take into consideration, when deciding whether to expand, is the market situation and
whether that requires the company to grow to be successful. The market of at-home technical support is
not a market with winner-take-all dynamics, nor is it an industry that requires players to be large to take
advantage of economies of scale in production. The market as such does thus not require Zarcus to expand.

When to grow
In regards to deciding when to grow, it is important to consider if the business is ready to be replicated and
scaled up. Zarcus has a clear value proposition, has figured out its target markets and has spent two years
fine-tuning its business model. The risk for Zarcus is that the business model has only been tested in one
environment, and it is thus not clear whether it will work in other settings. If the goal is geographical
expansion into other cities, it would be a good idea to test the business model in an environment with
another economic profile than London before embarking on a larger expansion journey.
Another consideration is that the company has just broken even and is only moderately cash flow positive.
It is thus seemingly profitable, but it is not yet clear whether this profitability is sustainable.

A final aspect to consider in when to grow is the nature of competition. When Zarcus was founded, the
market was fragmented and they had room to grow organically at their own speed. However, the
competitive environment is changing as smaller competitors and new entrants into the UK market have
made deals with larger players and must be assumed to plan for expansion. These competitors are mainly
aimed at the mass market, and thus another customer segment than Zarcus, but it is unclear whether they
plan to also expand into the high-end market. This provides an incentive for Zarcus to consolidate its
current market share and possibly expand further, again relating to the overall goal of becoming an
attractive target for a strategic acquisition.

How to grow
Finally, it is important to consider how to grow. In this case, Zarcus is considering three options for
expansion, which I will analyze along four dimensions of needs (e.g. strategic, organizational, financial and
personal) before discussing what other elements Zarcus should consider.

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 Option 1: Growing Option 2: Fully owned Option 3: Franchised
organically rapid expansion expansion
Financial Earnings have to be Offer from angel investor: Expansion using very little
retained and founders Pre: 3 M / 75% resources as franchisees
will have to supply more Money in: 1 M / 25% use own capital to set up
capital. Possibility of extra Post: 4 M / 100% operations.
financing through New revenue stream:
partnership in new operation fee from
locations franchisees.
Strategic Careful, cautious growth, Rapid expansion through Rapid expansion into
one location at a time own expansion plans many locations at once
with little resources
Organizational Maintain control of Maintain some control of Franchisees take care of
company and the the company in setting up recruiting etc.
development of the operations in new locations Difficult to have control
business model over franchisees brand
and business model
quality might suffer
Personal Maintain control, avoid Maintain control, but Lose control, but avoid
dilution of ownership dilution of ownership dilution of ownership

The three options above all have both pros and cons as outlined above. When considering how to grow, it is
important to consider the risks of growing. The further something is from what you know, the more risky it
is. The franchise expansion model is the farthest away from known ground for all the founders of Zarcus,
and should thus be considered thoroughly if that is the road, they choose to take. Another risky element of
the franchise model is that the business model has not yet been proven in smaller cities, making this
expansion even more risky, as the founders will not be able to experiment with getting the formula right
as they would with a more organic expansion plan or even more rapid expansion with external funds.

Another element to consider is in what strategic direction it makes sense to go. The above options only
seem to consider geographical expansion, but that is not the only kind of expansion. The company could
also consider product or service expansion or expanding into other customer segments. Goldberg mentions
that much of the companys recent revenue growth comes from follow-up services to current customers,

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for example hosting services. Expanding into hosting services or other kinds of follow-up services could be a
way to consolidate market presence, as it entails higher switching costs for customers and would be a way
to protect the company against competitors.

Considering the competitive changes in the market, I would recommend Goldberg and his team to take the
option of external financing to be able to expand more rapidly and consolidate their market presence. In
regards to geographical expansion, I would focus on creating partnerships in new locations and helping
these partners figuring out how the business model works in their economic setting. However, geographical
expansion would only be one part of the expansion plan. As Zarcus already has a presence in a strategically
important market, I would also focus on expanding into new services for existing customers in that market.
This would help consolidate Zarcus position in the London market, making them strategically important for
competitors wanting to take over the market.

Question 3: Ockhams financing options

Financial and organizational needs of Ockham Technologies

- Financing needs:
o $7 M over three year - $2 M now (exhibit 2)
- Organizational needs:
o Software development outsourced or in-house
o Solve conflict between founders
o Build board of directors

Pre- and post-money calculations and pros and cons

Pre-Money Money In Post-Money
Bobby Crews, angel $10 M $10 M $20 M
50% 50% 100%
Noro-Mosley & $4 M $2 M $6 M
Monarch, VCs 67% 33% 100%

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In terms of financial needs, the deal from Bobby Crews covers the total financing needs of the company,
leaving the founders with 50% of the company for ever.
NM offers $2 M, which only covers the immediate financing needs and the valuation of the company is
considerably lower ($4 M in stead of $10 M). Furthermore, the investment comes with a liquidation
preference and an 18% preferred annual return. Ockham considers taking money from both VCs, but it is
not clear if Monarch will agree to a pre-money valuation of $4 M, as their offer of $1,5 M assumes a pre-
money valuation of $3 M.
Taking the VC deal would entail more financing rounds, which would dilute the founders share in the
company. However, developing the company previous to future financing rounds could drive the valuations
of the company up.

Organizationally, Crews does not offer more than keeping the founders in control of the company it is
dumb money. The board of directors would consist of Crews and the two founders, which could make
decision-making faster than with a larger board. However, leaving decision-making to the two founders in
increasing conflict might slow decision-making down, as there is no one to competently intervene.
NM proposes a board made up of two VCs, two insiders from Ockham and one outsider. This would provide
a board of directors with experience, network and capabilities to draw on in developing the company. It
might also slow the decision-making process down, as further financing rounds might increase the number
of board members. The downside is thus losing control over the company. However, a strong board of
directors can help in solving the growing conflict between the founders, and steer the company in the
direction of growth.

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