// The Bug Byte

While finishing my undergrad, I started a small business doing computer hardware, software, and networking support for clients in and around Ann Arbor. I would occasionally make house calls to help people clean up and speed up their old computers, but most of my business was through commercial service contracts. This company was a successful and profitable experience, and was really an excellent learning experience for me while I completed my studies, but the most important lesson didn’t come until just today while sitting in my Venture Capital Finance class with Professor David Brophy.

Time = Money

The core concept to understand thus far from my Finance classes is the Time Value of Money. This essentially means how much money is worth today in comparison to the future. Take the very basic example where you put $100 in the bank, and they pay you 8% interest (good luck!). At the end of one year, you’d have $108. At the same time, you need to take into consideration the risk of inflation lowering the value of your money.  Inflation is the idea that as time goes by, the price of things increases. The delicious box of Cheez-Its you bought in 2008 for $3 might now cost $3.12. This would be an example of 4% inflation. If you combine the 8% interest rate the bank pays you and the 4% price of inflation, your real interest rate is approximately (but not exactly) 4%. This might seem rudimentary to you but it’s an important underpinning in the lesson I learned today in class.

What’s it worth to ya?

As I was wrapping up my degree, I decided to move on from my small business, and close up shop. I’d been working closely w/ a local friend and colleague, and when the time came, I transitioned my main account over to him, just to be sure my client continued to get the same quality of service I always provided to them. But what never even crossed my mind is the value of future income I was giving up.

Perpetual Motion

Perpetuity is a payment that you continue to receive indefinitely. Sort of like what I feel my landlord gets from me each month. In the case of my service contract, we’ll say my profit on the contract was $10,000 per year, and we’ll assume the inflation rate was approximately 4%. So, what if I kept getting $10,000 profit every year, forever? How much would that be worth if you were to put a present-day value on it? Let’s take a look at the formula for a perpetuity, Present Value = Payment / Discount Rate. Plugging in our numbers, PV = $10,000/.04, or $250,000. Now obviously it’s not really practical to think of a service contract as lasting indefinitely, but this helps us to understand a bit of how businesses are valued.

Another way to look at the problem is to presume a certain lifespan for the deal, say 3 years. So what is it worth to get $10,000 in one year’s time, another $10,000 after the second year, and $10,000 after the third? We just need to discount the future payments using a simple formula. Present Value = Future Value / (1 + r)^n where r is the discount rate and n is the number of periods you need to discount. Plugging in all of our numbers into this formula we get:

$10,000 + $10,000 + $10,000 = $27,750.91.
(1.04)^1       (1.04)^2     (1.04)^3

So why’d I take you through all of this? Basically, when I gave the client to my friend, I was giving up somewhere between $27,750 and $250,000 worth of value.

The moral of the story is to always consider the present value of future money.

Party like it’s 1988

Shortly after my 6^th birthday, I took my life savings, consisting of birthday and Christmas money accumulated over the past few years, and asked my mom to take me to the store. You see, twenty one years ago this past May, I had a master plan. My mom and I walked into the store, and I pulled her eagerly through the aisles, toward the back of the store. I wish I could see myself through her eyes at that moment, because I’m sure the biggest smile came over my face. There it was: my first bicycle. I probably could have asked for it as a present, but it was important to me that I buy it for myself. I still remember counting out the $83.19, and handing it to the cashier. Looking back, it’s a bit alarming that a six year old would have such a strong sense of consumerism, but to me, the story represents much more. It illustrates the first step in my self-actualization. Life is all about setting goals, and striving to achieve them. Throughout my life, I’ve always had one question in the back of my mind: What’s next? But I’m getting ahead of myself. Let me tell you how I got here.

The training wheels come off

Okay, so I never actually had training wheels, and I have the scars to prove it. Several years after I outgrew that first bicycle, I was working on my undergraduate degree at a local university. With still two years left in my degree, I found myself running my own technical consulting business, providing computer hardware, software, and networking support for several area businesses and residents. It started, as I imagine these things generally do, rather unintentionally. I was building my own computers as a hobby, and helping out my friends and family troubleshoot their problems. Word got around, and I was offered my first support contract by a local business. I registered a company name at the county courthouse, printed up some business cards, and I was on my way. After a few weeks, I had grown my client list from one to several dozen. Realizing I was on to something, I decided to shift my school schedule to the evenings, so I could work during business hours. Little did I know at the time, but this pattern would be repeated again in my MBA studies.

Opportunity knocks

I’d been running my small business for several months, when an opportunity presented itself at one my largest clients to fill a critical software application gap. I built a team of three others, and together we cofounded a software company. After some negotiations, we secured funding from the customer, and we were on our way. A few months later, we delivered an initial software release to the customer, and received a second round of funding. Things were really starting to get exciting now! I had a real taste of the entrepreneurial lifestyle, and I started to make plans. Going back to the ever present question in the back of my mind, I asked myself ‘What’s next?’ I had it all planned out; we’d fully capitalize on this business, I’d walk away a millionaire, and I’d be able to retire and focus my efforts on charitable work. Little did I know, the economic downturn was about to knock me over. It was approaching 2005, and the decline of the housing market forced our customer, a home improvement company, to pull out of the project. In light of this, and the decline of our target industry, we made the painful decision to close up shop. Down, but not out, I stood back up and moved onto what’s next.

Move along now

About this time, I was wrapping up my undergraduate degree, and decided to take a position as an Engineering Consultant at a company in metropolitan Detroit. I took the next few years to learn the ropes of a large company and hone my leadership skills, ultimately rising to a Project Manager position after just a short time. But despite my success, it didn’t take long before that nagging question started to pop up again, and I found myself searching for what’s next. After my experience with my first real start-up company, I knew I was hooked on an entrepreneurial lifestyle, but I felt I lacked the broad business background required to lead a company to success. After speaking with a mentor and friend on the conundrum, I learned about a great MBA program right here in my back yard.

We do it at night

When I first applied for the Evening MBA program at the Stephen M. Ross School of Business, I was counting on receiving full reimbursement from my employer. “You mean I can earn a fantastic education from a top notch institution, all without having to give up my salary, and someone else is going to pay my way? Where do I sign up,” I thought to myself. It sounded too good to be true, and I’m afraid once again I’d be facing another harsh reality of the economic downturn. After I matriculated, but before classes started, my employer fully cut tuition reimbursement. A seemingly devastating blow, no doubt, but when I weighed the cost against the amazing experiences the program offered, from the beautiful newly constructed business school, to the great entrepreneurial resources of the Zell Lurie Institute, and one of the most active alumni networks in the world, I knew I couldn’t let this interruption get in the way of my plans.

Wrapping up 2009

As of Fall 2009, I’m through about 33% of the program, and I’m enjoying every moment of it. Every class I’ve had to date has had immediate real world relevancy. I feel a sense of camaraderie with fellow students, who have such great positivity, despite the grueling demands of an Evening MBA Program on top of their other life responsibilities. When I think back on the bicycle I purchased when I was six years old, I realize the persistence of wondering what’s next is, just as I outgrew that bicycle, the natural result of achieving and outgrowing my goals. As I look into the future, I’m excited for all the possibilities afforded to me by my MBA education.

Expanding the Pie

This semester I’m enrolled in Venkat Ramaswamy’s course on Co-creation of Value at the Stephen M. Ross School of Business at the University of Michigan. The course thus far seems primarily focused on creating new engagement platforms to co-create value with your customer. (While by no means limited to websites, you can see some web-based examples of co-creation from Starbucks, Dell, and Nike.)  The premise, in a nutshell, is that companies, in order to remain competitive, need to reexamine the way they do business, and begin to take advantage of opportunities to “expand the pie” with their customers. However, my post this evening is not meant to teach you about the concepts — if you want to see who else is talking about co-creation, Google it, or check out ECC Partnership’s site.

It’s a two-way street

In order for co-creation to work, it’s got to be a two way street. The customer needs a forum to express their concerns and share their ideas, and the company needs to not only listen, but engage the customer with transparency. This is great, if you happen to be a customer of one of the few firms who actually get it. But what about the rest of us?

Trying to co-create my value

Even before class started, I’ve found myself giving “free advice” to businesses lately based on my experiences. For the sake of the discussion today, I’ll share just one. I played a round of twilight golf at Lake Forest Golf Club a few months back. Our tee-time was about 6:10 pm, and we were there a few minutes early. They sent us out behind a league of golfers, and the play was painfully slow. We only got through 9 holes before it got dark (about 9:00 pm), but we paid for “18 Holes Twilight”. I realize we can’t expect to play a full round starting at 6 pm, but in 3 hours I should have been able to play more than 9 for sure. The next day, on a whim, I went to their website and followed the “Contact Us” link to submit some feedback. I wrote a very brief email explaining the experience, and expressing my disappointment. I received an email back from the owner of the course apologizing for the negative experience, thanking me for my feedback, and offering me a free round. The next weekend, I took her up on her offer, and my foursome showed up for our 8 am tee time. We were going to get 18 in for sure, but they sent us off behind some gentlemen hitting from the yellow tees. They were a bit slower moving around, and we found ourselves again playing very slow golf, waiting on every hole. I wrote the owner back, thanking her for the course and for her customer service, but I explained the problem was not remedied. She responded again, thanked me for the feedback, and said she’d address the issue personally with her ranger staff. Overall, this experience was positive, and because of her responsiveness, I still recommend the course to my friends if the topic comes up.

Now that I’ve had a few Co-Creation classes, I have many interesting ideas for engagement platforms a golf course owner could use to get more feedback from their customers, which could benefit both sides. Happy golfers are return customers.

It’s like Mom always said

While the previous experience/experiment was positive, I found myself noticing a trend on the internet. Basically, everyone complains about everything. Don’t believe me? Just Google any company name followed by the word “sucks” and you’ll see what I mean. So what about what Mom always used to say? If you can’t say something nice, don’t say anything at all. Ann Arbor is a small city in and of itself, but w/ social media, the world is getting smaller and smaller. I find myself worrying about the “brand” I’m creating for myself. I don’t want to become known for someone who always complains. In other words, I don’t want to express my opinions only to be blacklisted as a blowhard. Let’s face it, some people just can’t take criticism. I think we all have to balance this fear of coming across negatively against the virtue of being forthcoming and honest, and that’s where I want to offer you some advice.

Initiating your own co-creative efforts

My first piece of advice is to take a deep breath before you fire that salvo, whether it be a tweet, facebook post, email, or open comment. Do you really want to be seen as the hothead who can’t objectively look at the situation? Take a step back from and realize that you’re most likely to get your desired result if you approach things with some tact. Easier said than done, for sure. If you need a refresher, there’s always Dale Carnegie.

Now that you’ve reassessed the situation and avoided flaming your target, make sure you choose the right forum. If you stand up and embarrass someone in front of others, they’re not likely to react well. Yes, posting something online and proving that you’re right and they’re wrong feels good, but if you really want to change the situation, try picking up the phone first. Criticism shared constructively in private has a higher chance of being heard.

After all of this, there’s still the chance they just won’t “get it”, and you’ll still be frustrated. In that case, maybe take a lesson from Jeff Jarvis and his experience with Dell. Your mileage may vary.