BULLS

HEADLINES
• Kraft purchases Cadbury for $19.5B • Brinks Home Security will be purchased by Tyco for $2B • Wells Fargo announced a surprise Q4 profit • Obama wants to curtail bank risk taking • Chinese officials are seeking to tighten lending

& BEARS
Vo l u m e 3 • I s s u e 1 7 • J a n u a r y 2 4 2 0 1 0

FINANCIAL MARKETS
D OW NA S DAQ S&P 50 0 OIL GOLD 10 Y R 10,172.98, -4.12% 2,205.29, -3.61% 1,091.76, -3.90% $74.54, -$3.46 $1,089, -$40.90 3.598%

THIS WEEKS ISSUE
What Venture Capitalists Look For Hedge Fund Risk Management Silicon Valley’s Business Model Club Focus: Carnegie Mellon UFA This Week in Barrons 2 3 4 5 6

MARKET SUMMARY
Monday January 18, 2010 Markets closed - MLK Day Tuesday January 19, 2010 Mergers and Acquisitions news gave the bulls a reason to run during Tuesday’s session. Cadburys board accepted a $19.5 billion dollar offer from Kraft foods. The bid was increased from an initial offer of $17.1 billion. Also on the M&A front, Brinks Home Security announced that it would be purchased by Tyco for roughly $2 billion. The merger news was enough to bolster the price of Citigroups stock despite the fact that the company reported earnings that came in less than the streets expectations. The Dow Industrials Average finished up 1.1% at 10,725, the S&P 500 finished up 1.3% at 1150, and NASDAQ finished up 1.4% at 2320. Wednesday January 20, 2010 U.S. stocks end lower, but off of the worst levels of the day. The selloff was triggered by the news that Chinese officials are seeking to tighten lending. Wells Fargo announced a surprise quarterly profit and gave guidance that economic conditions continue to improve. The Dow Industrials Average finished down 1.1% at 10,603, the S&P 500 finished down 1.1% at 1138, and NASDAQ finished up 1.3% at 2291. Thursday January 21, 2010 Major U.S. averages shed roughly 2% across the board during Thursday’s trading session. The selloff was enough to leave the Dow Industrials Average and NASDAQ flat for the year. Financial stocks led the broad market decline as President Barack Obama announced a proposal to curtail bank risk taking. Goldman Sachs reported fourth quarter earnings of $8.20 vs a loss of $4.97 in the same period last year. The analyst consensus estimate was for $5.20. The Dow Industrials Average finished down 2% at 10,390, the S&P 500 finished down 1.1% at 1116, and NASDAQ finished up 1.3% at 2266. Friday January 22, 2010 Selling continued during the Friday trading session despite better than expected earnings reports from General Electric, McDonalds and Google. Market sentiment seems to still be affected by the Obama administrations move to limit the size of banks, and cut their risk taking capability, which would include an end to proprietary trading for institutions that are allowed to borrow at the Fed discount window. The Dow Industrials Average finished down 2.09% at 10,172.98, the S&P 500 finished down 1.1% at 1091376, and NASDAQ finished up 1.3% at 2205.29.

THE WEEK IN QUOTES
“The Supreme Court has just determined the winners of next term’s elections. It won’t be Republicans. It won’t be Democrats. It will be corporate America.” - Charles Schumer, New York Senator, on the court’s decision on Thursday to remove limits on corporate political spending “It’s very romantic in the TV and movies. They think it’s flying in for a weekend. They need to think of it in terms of months.” - Suzanne Brooks, director of the Center for International Disaster Information, on volunteers who wish to travel to Haiti to provide aid “I believe they failed the American people.” - Richard Shelby, an Alabama Republican on the Senate Banking Committee, on the Fed’s response to the financial crisis

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When I say I believe. Venture capital investments are generally made as cash in exchange for shares in the invested company. and expertise. with relevant experience. drive. WHAT DO VC FIRMS LOOK AT? Because investments are illiquid and require 3-7 years to harvest. Due diligence is nothing but a careful assess- ment of your venture to decide whether they wish to invest in it or not. • The first requirement is a strong management team. This no. That’s a well accepted/ traditional route to take in my culture and forms part of the stereotypes associated with it. Carnegie Mellon University STORY HIGHLIGHTS: • Venture capital (VC) firms provide private equity capital typically for early-stage. with relevant experience. Funds are most interested in ventures with exceptionally high growth potential (like biotech/software). • The VC wants to see the possibility of hitting a “home run” by investing in your company. something you’re really passionate about and require funding to see it materialize. needs to typically hover around 40%-50% to get investors interested. The catch phrase for VCs is “management. don’t expect to get financed.the INTERNAL RATE OF RETURN (IRR) which represents how they will realize liquidity and receive VALUE for their investment. a fund may invest in 1 out of 400 opportunities presented to it. Gross Profit Margins >>40%: This point speaks for itself. where it shall be in the next 5 years and in the next 10. YOUR IDEA The financial and economic devastation that the US has seen in the past couple of years has had its obvious effect on employment opportunities. management”. OneWire Finance When you are serious about your finance career When you are serious about your finance career onewire. drive. You need to understand the size of your market today. high-potential and growth companies in the interest of generating a return (IRR- Internal Rate of Return) through an eventual realization event such as an IPO or trade sale of the company. If your own projections show only modest growth. where are you going to get the money from? The answer is Venture Capitalists.com Precise Career Connections Precise Career Connections . people we affectionately refer to as ‘entrepreneurs’. or if the growth of the business is limited by technology/ competitive factors.e. Market growth potential: Your idea means nothing if you have don’t have a substantial market base to sell your product. management. Unless you’re a trust fund baby. self-confidence. This time presents a golden opportunity for people like these and even YOU to build on all those ideas that you’ve had in high school and college but never acted on it because you happily chose to slave away your first couple of years after college in a bank/ consultancy/ fortune 500 company to pay off your debt effectively killing your passion.**FEATURED ARTICLE** 2 WHAT VENTURE CApITALISTS LOOK FOR IN YOUR BUSINESS By Siddharth Arora. I mean the below parameters are the most for what venture capitalists have scrutinized my idea. “Home run” potential: The VC wants to see the possibility of hitting a “home run” by investing in your company. as a rule of thumb. Financial models can be cooked to represent a beautiful valuation of your business but nothing can substitute a strong management team. WHO VENTURE CAPITALISTS ARE? You have an idea. This era has spawned a new breed of people who are too naive to see the obstacles that are obvious to others i. as only such opportunities are likely capable of providing the financial returns and successful exit event within the required timeframe (typically 3-7 years) that venture capitalists expect. when I have pitched it: Strong management: The first requirement is a strong management team. They are typically very selective in deciding what to invest in. self-confidence. venture capitalists are expected to carry out detailed due diligence prior to investment. Make it worth millions. Large profit margins give a company room for error and enhance its attractiveness for a possible IPO or acquisition. and expertise. Good luck with your idea. ‘Uniqueness’ of product: What differentiates your product from what is already available out there? Does your company have a patent or other proprietary protection to forestall competitors? Why are people not aware of this yet? MONEY: Does your company have the possibility of growing quickly and becoming an attractive acquisition target or IPO candidate? Venture capitalists are primarily concerned with one figure. Venture capital (VC) firms provide private equity capital typically for early-stage. high-potential and growth companies in the interest of generating a return. So how can YOU maximize your chances of getting invested into? Here’s a quick compilation of what I believe VC firms look at (ranked 1 through 10 in order of importance).

IIM Calcutta STORY HIGHLIGHTS: • This article reviews several aspects of risk management. VaR does not capture liquidity risk. • There is an urgent need for new generation risk management tools.com. event risk. VaR has a number of limitations that are sPress. counter derivatives portfolios and hence are not sufficient for capturing the risk exposures of hedge fund To read more of this article. there is an urgent need for new generation risk management Traditional risk management tools such as Value at tools. the implications and causes of these risks for hedge funds. This article also aims to suggest the way forward to mitigate the risks outlined. During the financial crisis many hedge funds were caught in an swirl of asset price declines. the implications and causes of these risks for hedge funds. is an urgent need for risk analytic tools that can provide investors with a meaningful snapshot of a hedge Mentioned below are few of the key aspects of Hedge fund’s exposures without compromising the proprifund risk management. Because these funds typically employ significant tive methodologies.FINANCIAL NEWS 3 INTRO TO HEDgE FUND RISK MANAgEMENT By Pavitra Venkatraman & Prerak Vohra. as hedge correlations being linfunds become more and ear measures of associamore regulated. Besides this. . Both managvaluation and build infrastructure to support risk ers and investors seek risk transparency. please visit www. and margin calls as the liquidity crisis and credit crunch paralyzed the world’s financial system. Against the ing to provide position backdrop of such an entransparency. the leptokurtosis and negative skewness typically associated with hedge fund strategies presHedge funds today are an extremely popular asset ent a significant challenge to the existing quantitaclass. hedge fund tors usually do not have managers are being forced to bolster controls around the time or resources to infer positions. Need for Complex Risk Management Tools To mitigate the factors considered above.BullsBearinvestments. particularly challenging for hedge-fund investments. factor exposures. • Traditional risk management tools such as Value at Risk (VaR) were originally developed for over-the-counter derivatives portfo- lios and hence are not sufficient for capturing the risk exposures of hedge fund investments. managtion often ignore certain ers have to face significant nonlinear relations that challenges such as greater characterize hedge-fund regulatory scrutiny and investments. Post the the S&P 500. hence there management. The most obvious drawback is the fact that VaR cannot fully capture the gamut of risks that hedge funds exhibit. and time-varying risks due to dynamic trading strategies that may be systematically keyed to market conditions. Another significant feature for leverage. financial crisis. increasing demand of risk management from Managers are unwillthe investors. and invesvironment. This article reviews several aspects of risk management. etary information held in the manager’s positions. they play a more alternative investments of important role in global Hedge funds is their low securities markets than correlations to traditionwhat the sizes of their seal market indexes such as curities indicate. specifically designed to handle the myriad risks Risk (VaR) were originally developed for over-the.associated with hedge funds. However.

an equity market for the capitalisation of Somalian pirate ventures. lowering the VC firm’s exposure but also reducing its exit valuation. The Boston model has the advantage in that strategic exits can be performed at an earlier stage in a company’s development. the entrepreneurs or the VCs.FINANCIAL NEWS SILICON VALLEY’S HIgH OCTANE BUSINESS MODEL By Arnav Guleria. Arizona State University STORY HIGHLIGHTS: • Boston VC focuses on exits via strategic acquisition while Silicon Valley prefers on IPOs. it tends to invest more conservatively by entering ventures at later stages and by avoiding companies that aren’t easily acquired. Silicon Valley can invest in earlier and more eclectic companies than can Boston. skill and know-how. sea turtle reproduction – several high-risk bets of which a small fraction will succeed. and secretive” companies that trapped “technology.as the Somalian example suggests.. munitions or sons – one divorcee received 75.but that the Boston model with a heavy reliance on strategic partners and academic research institutions is a more plausible bet. venture markets can and do erupt organically . Graham relates this to VC – Silicon Valley just understands its disruptive flavour of venture capital better than anyone else. without respect for the interactions that make up the entire cluster. Vivek Wadhwa asserts that Route 128’s failure was based on its dominance “by large.within the boundaries of large corporations”. and as we’ve witnessed with the recent IPO slow-down.. operates on a strategy more akin to that of. Reuters reported of a new “stock exchange” that increased its listings from 15 to 72 in just four months. out of poverty. serial entrepreneur paradigm where a single entrepreneur may start several successful companies in his life-time and where a single piece of IP. courtesy of her ex-husband’s alimony payment – but that a functioning venture capital (VC) market. but where those that succeed will do so with great magnitude. as a result. the Boston model invests in more conservative. may be levered across many companies? A key difference between Boston and Silicon Valley VC is that Boston focuses on exits via strategic acquisition while Silicon Valley focuses on IPOs. fragility. the crown of tech capital of the world proudly and securely rests on the Silicon Valley. • Silicon Valley just understands its disruptive flavour of venture capital better than anyone else. Thus. Yet how and why did Silicon Valley develop its open. Yet this is not a traditional emerging markets phenomenon. As a result of the lower exit price and risk. the companies being traded no Apples. technical or experiential. staying with our pirate theme. however deplorable its societal implications. later stage companies than Silicon Valley. The Silicon Valley ecosystem rivals that of biological systems in its complexity. The employee replied that there isn’t anything specific. has emerged in a region otherwise written off by civilised society. • Strategic exits bring lower risk at the cost of lower valuations. Boston VC cannot afford to lose too many of its portfolio companies. Silicon Valley. but that Google just understands search so much better. Thus. uniqueness. What is intriguing about this example is not that investors can contribute in the form of cash. and eclectic since the IPO market isn’t constrained by possible acquisition partners. on the other hand. The high octane fuel for this machine is the IPO. including hospitals and public schools. Attempts to replicate Silicon Valley elsewhere are flawed in that they attempt to imitate one part of the system. No more – today. which thrives on early stage game-changers. Paul Graham. a Y Combinator founder. recalls a story where he asked a Google employee why Google is better at search than Yahoo. 4 On 1 December. The latter requirement rules out disruptive companies that don’t presently have an apparent acquisition candidate. The author isn’t suggesting that attempts to build a VC community are in vain . Boston’s Route 128 was once considered humanity’s source of technical wunderkind. The article goes on to describe how the exchange’s proceeds have helped fund the locality’s public infrastructure. Googles or Goldman Sachses – described here is the Haradheere Maritime Stock Exchange. earlier since the high return IPO exit allows for high risk. the Boston VC partner who turned down Facebook now says that “may turn out to have been a mistake”3.000 USD for contributing a rocket-propelled grenade launcher for 38 days. . vertically integrated.

twitter. Salesforce. How is the organization you’re interested in – netstructured? What sets the working always helps. President of the coming an active member of UFA helped me decide Undergraduate Finance Association. I’ve held a few different positions on the e-board since 1. you like right now? Marketing Director.com eral committees that focus (CRM). I knew I wanted to major in business.com/CMU_UFA). years. And don’t be er activities. We also have sevLately. What advice do you have for students who are tunities to learn more about the industry. What are the goals of the UFA and can you tell my freshman year. cmufinanceclub. and IT Director. reading books about information sessions. I got involved with UFA in the first semester of my freshman year. and it has posted impressive growth in in the financial industry. 3. prothe industry.and learn everything you can by participating in titions. I’m in the process of transitioning into the role of President now. Secretary.looking for a job on Wall Street? menting academic courses in finance with events and workshops open to students from all majors. from corporate finance to revenue and earnings per share over the last several jobs on Wall Street. We work toward this goal by offering case compe.com/group. What stock investment do surer.CLUB FOCUS CARNEgIE MELLON UFA By Dylan Ozmore. . including Secretary and Vice me how the organization got started? President. cmu. As a freshman. and UFA apart from other orthey can give you a lot of ganizations? valuable information about the kind of work they do.facebook. includsets itself apart from other organizations by catering ing Software as a Service and Platform as a Service to students interested in a wide range of occupations applications. UFA tors of the growing cloud computing market. and following fessor dinners. Our organization has an eboard with a President. Our website. and othStreet Journal. Get involved with relevant campus organizations. Vice President. Trea5. networking events. Activities Director. Carnegie Mellon University 5 An Interview with Kristin Carew. guest speakpublications like the Wall ers. but I was uncertain about what particular career path to follow – finance was among my interests. can you tell me about yourself ? How did 6. that I wanted to pursue a job on Wall Street. and we also maintain a group on Facebook (http://www. supple. I like Salesforce. php?gid=2200705364&ref=ts) and a Twitter account (http://www. Kristin.edu. when I interviewed for a position on the e-board and became Activities Director.4. and beWe can be reached by email at finance@andrew. always been to provide Carnegie Mellon students who are interested in finance careers with oppor. with a track in finance and an International Relations and Politics minor. afraid to reach out to alumni contacts working for firms 2. alumni panels. is currently undergoing a full redesign and should be back up later this semester. Where can students go to get more information you get involved with UFA and become President? about the UFA or to reach out to you? I’m a junior in Carnegie Mellon’s Business Administration program. since our last President is UFA’s primary goal since its founding in 2000 has graduating at the end of the semester.com is a on specific types of events major player in several seclike case competitions or alumni programs.com. clubs.

Ben Bernanke potentially NOT being re-appointed to the FED – nope. instead of going along with every agenda they have. and confirmed by U. But after looking at the transcripts of the speeches – I get the impression that Obama was personally wronged. I drink to stop the voices in my head. Consider that there may be more wars because companies love getting giant military contracts.” So what about the Democrats losing Massachusetts: it was a true “rebellion” by the masses giving the message: “no more!” But what about Obama coming out strongly for his new financial reform at the banker level. By r.” Obama wants rules and regulations that would seriously crimp the bankers style. can spend any amount of money they want on advertisements supporting a political candidate. what if when Congress bailed out the banks. Something’s brewing folks. And now it’s Chicago Politics gone wild – it’s PAYBACK time. Exxon Mobile in order to get elected. Obama made one of those back door “deals” where the banks had to do something to make Obama look good when it was over – such as lower bonuses or understate profits. It means Exxon Mobil. What does this all mean? It means future Supreme Court Justices will be appointed by presidents who have been bought. Ben Bernake is Wall Street’s best friend – giving them money when (and even if they don’t) need it – and now his appointment is clearly in jeopardy. smell it. over real people. senators who also have been purchased by corporations. And do I think that the ‘paper dollar’ can withstand the onslaught of all the ills we face right now – honestly – I’ll continue to trust gold. This week the biggest news in many years hit the wires. It was the Supreme Court’s 5 to 4 decision on Thursday to allow Corporations to spend any amount of money they please on the Politician of their choice – deciding that corporations are people and people are entitled to “free speech”. sense it. The bad part about the voices in my head is that they stutter. So we fell 500+ points in 3 days – blasting thru 10. you can feel it. purchased. I smell a bit of warfare between Obama and his Banker elite handlers. It also means these same companies can place people in our government.f. General Electric.200 on the DOW as a level of support – because the idea of “Helicopter Ben” not giving out free money to Wall Street scared all the bankers – and honestly Wall Street could be saying to Obama: “Let’s see how many people love you after we crash this market and take the 401K’s down to next to nothing.. Carnegie Mellon University Thoughts – “When I was a kid I used to pray every night for a new bicycle – then I realized that the Lord doesn’t work that way so I stole the bike and asked Him to forgive me. who will pass and enforce legislation favorable to their special interests. and there may be less labor rights because they just ‘get in the way’ of profitability. and if they want a candidate elected – they have billions to spend on that candidate. who earned $45 billion last year. Potentially you could dismiss this as politics – losing Massachusetts – striking out at Wall Street so that he looks good to the voters. The market falling 500+ DOW points in 3 days – nope. Corporations have an unfair advantage over the small guy.S. and are controlled by corporations. Heck. How on earth could an honest man compete? It means candidates will cut deals with Google. In other words. . HIgH RETURN THIS WEEK IN BARRONS.. 6 Andrew Dice Clay: “I don’t drink to get happy or to forget the pain.HIgH RISK. Obama challenging the banks – nope. ” Andrew Dice Clay. culbertson. It throws out over a century of restrictions imposed by Congress against corporations so that they could not influence the outcome of elections. And let’s assume the banks did not keep up their end of the bargain. in the amount of money they control. This decision could eliminate the last vestige of any integrity in our election system. Microsoft.

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