CBR Spring 2016

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CORNELL BUSINESS REVIEW

Exchange Traded Funds: Where did they come from and where are they going?

The Reality of Mini-IPOs: A critical look at the new A+ capital-raising rule for small businesses Counterfeit Wine: The Noir Market Red, white, or fake?

Spring 2016 | Volume VI | Issue 2

Exclusive Interview With

Robert Harrison Chair of the Cornell University Board of Trustees

TABLE OF CONTENTS Spring 2016 | Volume VII | Issue 1

04 LETTER FROM THE EDITOR 05 UNIVERSITY DIVESTMENT | Hunter Bosson 08 CAMPAIGN FINANCE REFORM | Sam Torre 10 RISE OF THE EXCHANGE TRADED FUND | Emma Nelson 12 EXCLUSIVE INTERVIEW | Chairman Harrison 16 MINI IPO’S | Sang Hyun Park 18 ECONOMIC POLICY IN THE 2016 ELECTION | Isaac Greenwood 19 EXCLUSIVE INTERVIEW | Red Route 21 COUNTERFEIT WINE | Nick Piccone 24 3D PRINTED FASHION | Catherine Wei 26 SOVEREIGN WEALTH FUNDS | Shohini Kundu 28 CAYUGA CRUNCH | Sanjana Sethi 30 CRISIS IN BRAZIL | Ignacio Garcia Conway 32 GREEK DEBT CRISIS, RUSSIAN AGGRESSION | Grace Shi

CORNELL BUSINESS REVIEW Spring 2016 | Volume VI | Issue 2

Ethan Coy Andrew Billiter BUSINESS MANAGER Jenna Roland DESIGN EDITOR Rosalyn Xu ASSOCIATE EDITORS Bjorn Bjornsson, Hunter Bosson, Shohini Kundu, Sang Hyun Park, Sanjana Sethi & Avirook Upmanyu,

Torre, Catherine Wei & Dean Xu

Casey Breznick, Ignacio Garcia Conway, Jeffrey Fung, Isaac Greenwood, Shohini Kundu, Sang Hyun Park, Nick Piccone, Samantha

DESIGN TEAM

EDITOR-IN-CHIEF

MANAGING EDITOR

EDIORIAL TEAM

BUSINESS TEAM Archana

Choudhary, Nicole Feibelman, Chloe Gulati, Nathan Kashdan, Julia Krupski, Betty Lazis, Michael Lesser, Rosie O’Regan, Minesh Patel, Kartik Ramkumar, Rhea Somaiya, Savanna Steinberg & William Van Ullen Wideska

Alvin Cao, Grace McBride & Charlie

Letter from the Editor I am pleased to welcome you all to our Spring 2016 issue. Cornell Business Review has grown tremendously since its inception in the Fall of 2010, and we owe our success to you, our loyal readers.

We are dedicating this issue to the memory of President Elizabeth Garrett, an incredible woman who had just begun to transform Cornell when her brief time in office was cut short by cancer. Her commitment to our university was unrivaled, and she will be greatly missed.

Here at Cornell Business Review, we constantly challenge ourselves to produce articles that stand the test of time. Our diverse group of writers leverage the expertise they have gained in the classroom and in the real world to author articles on topics such as the rise of ETFs, sovereign wealth funds, the challenges facing Brazil, and regulations on capital-raising for small businesses.

The Cornell campus is undergoing unprecedented change, and this issue will give you a unique perspective on what is happening on the hill. In our interview with Chairman of the Board of Trustees Robert Harrison ’76, we had the privilege of learning about the search for a new president, as well as his views on Cornell Tech and the newly-formed College of Business.

Dubbed “Silicon Ivy” by Forbes, Cornell has become a hub for entrepreneurship. Last year, three Cornellians took notice of Uber’s disruption of the taxi business and recognized a need for change in the Ithaca market.

For this issue, we interviewed the founders of RedRoute, a company which aims to become the Uber for rural college towns.

Lastly, I want to thank my colleagues on CBR’s executive board, Managing Editor Andrew Billiter ’17, , Business Manager Jenna Roland ’18, and Design Editor Rosalyn Xu ’18, who have dedicated countless hours to this issue.

Happy reading, and don’t forget to check out our website, cornellbusinessreview.com, for more articles from guest writers and our Johnson School partner publication, Cornell Business Journal.

Ethan Coy Class of 2017 Editor-in-Chief

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UNIVERSITY DIVESTMENT

circuitous nature, divesting has shown real results.

Divestment began as a particularly promising student political strategy.

BY HUNTER BOSSON The first major campaign began in the 1970s, as campus protests pressured »» Student activists are demanding new standards of investment ethics from their cash-strapped universities. universities into selling shares in firms that did business in or with South Africa »» College administrators should embrace this wave of divestment campaigns. in protest of apartheid. Large firms, including IBM and GM, were targeted by institutions such as the University of Michigan, Columbia, and the University of Wisconsin Madison. The movement’s momentum snowballed, eventually dragging nonprofits, counties, and states into the fray until its culmination in 1986 with the Comprehensive Anti-Apartheid Act, banning new investment in South Africa. By the time the apartheid regime fell shortly thereafter, 155 universities had divested. Even today the anti-apartheid movement is the godfather of divestment campaigns; one is hard-pressed to find an activist who does not pay homage to its success.

Divestment’s popularity soon began to fall as the morally dubious issues started hitting closer to American homes. The next major divestment ne of the few places where student activism, students must be the ones who campaign focused on the American protesters are taken seriously is define that role. tobacco industry, a similarly distasteful the institution that takes their money: One issue plaguing divestment lot, but this time the social crusade was universities. The university, with its campaigns is that misinformation less decisive. While numerous high resources, publicity, and networks, offers abounds as to how it works. By selling profile universities, including Harvard a praxis for political and social change far shares and bonds in a company, the and CUNY, divested beyond campus. One tactic for wielding divesting institution from America’s the academy’s power is divestment: does not actually original poison selling stocks, bonds, and investment take money away peddlers, the funds of businesses that engage in from said company, movement faced Selling stocks, bonds, and investment ethically ambiguous practices. Since but merely sells the stronger opposition. funds of businesses that engage in their genesis in the 1970s, worldwide equity or debt that ethically ambiguous practices Critics argued that campaigns for divestment have been as it holds to someone shares should be varied as they have been contentious, else. The idea is retained so that tackling such issues as South African that by liquidating responsible investors apartheid, Big Tobacco, climate change, positions in a firm, Decade in which the first major could wield divestment campaigns happened and the Israeli-Palestinian conflict. it raises the cost shareholder power The debate continued onto Cornell’s of borrowing and for good, such as campus when the Board of Trustees lowers the value of preventing tobacco recently rejected a proposal to divest the company, the latter being of great advertisements directed at children. from the 100 largest oil companies for importance to company executives Although tobacco divestment won press, their contribution to climate change. compensated in part by stock options. little evidence has emerged that the The divestment campaign has its limits As prominent institutions divest, it raises divestment campaign applied noticeable and costs, but as universities increasingly awareness for the issue it addresses and downward pressure on stock prices. acknowledge the legitimacy of financial provides movement catalysis. Despite its

Shorting the Devil

O

Divestment: 1970s

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recently began a PR campaign aimed at Cornell’s BDS movement. The rather shady organization advertised directly to Cornell students on Facebook, accusing the organization Students for Justice in Palestine of working against the IsraeliPalestinian peace process, including for its advocacy of BDS. Concerning divestment issues, Cornell remains well behind the times.

The university’s equity holdings and business deals have sparked three organized divestment movements, targeting fossil fuels, Israel, and private prisons respectively. Some proposals have catalyzed action, with Cornell recently announcing that it will honor Black Students United’s demands that security firm G4S’s contract with Cornell’s Herbert F. Johnson Museum of Art be terminated for its business in private prisons. But Above: Chief Investment Officer A.J. Edwards discussed the feasibility of divesting from fossil fuels at a University Assembly Meeting overwhelmingly, the university’s attitude towards divestment has been patronizing The most prominent divestment of an endowment’s investment strategy. and unsympathetic. A resolution for campaign today targets fossil fuels. The Perhaps the most polarizing target of BDS against Israel was not even given a coal, oil, and gas industries have inherited divestment campaigns today is Israel. In vote by the Student Assembly, and when the title of societal boogeyman and are 2005 the Palestinian Civil Society called presented with resolutions by Cornell’s paying the price on college campuses. for a campaign of boycotts, divestments, student government organizations in Over a hundred universities have divested, and sanctions (BDS) against Israel and January calling for divestment from major including Stanford, Cambridge, Oxford, firms with ties to the Israeli military or polluters, the Board of Trustees voted and the University of California System.

Israeli control of the West Bank. Unlike against divestment. The Board instead Divestment has been much more popular, other major divestment campaigns, this issued guidelines that the university and successful, among smaller colleges BDS campaign faces the challenge that would divest only from firms partaking in and educational institutions (perhaps in Israel’s actions do not receive the same “morally reprehensible” actions, such as part due to a lack of financial exposure). level of condemnation as South African apartheid, genocide, and child labor law However, the reasons for divestment apartheid and Big Tobacco. Proponents violations. provided by larger institutions are claim that BDS is justified due to Israel’s The core of Cornell’s distaste damning: Stanford invoked its investment occupation of the West Bank and the for divestment was stated by board responsibility policy, established in 1971, Gaza Strip, even going so far as to call member Donald Opatrny barring investments in firms whose it an “apartheid state,” when he extolled actions could pose a “substantial social making companies such as that the endowment’s Less than injury.” A particularly vocal group of Caterpillar and Raytheon, main purpose is to proponents are scientific academics, who contract with the “provide income for many of whom fear the coal and oil lobby’s Israeli military, prime the advancement of the Percentage of Cornell’s impact on climate change research. targets for divestment. university’s educational endowment in targeted Opponents, with dazzling predictability, Opponents claim that fossil fuel stocks objectives.”

Admittedly, called the movement pointless and Israel’s actions do not if ever there were a unproductive. However, in addition to merit any form of university that needs to the usual tropes, some investors have condemnation, and have worry about its finances, it is Cornell: raised valid points: energy sector firms’ even gone so far as to label prominent last year its endowment’s 3.4% return stock price movements have the lowest members in the BDS campaign as antion investment was the worst in the correlation with other industries, making Semitic. The BDS movement is especially Ivy League, and at least 2.4 percentage their shares a key tool for diversification, controversial on Cornell’s campus, points behind any other Ivy. But Cornell’s arguably the most important component where a website called SJP Uncovered administration used the same rationale

0.5%

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Ivy League University Endowment Returns, FY15 Last year, Cornell University had the lowest return on investment (ROI) on its endowment at 3.4% - at least 2.4 percentage points lower than any other Ivy League school.

wildly blown out of proportion. While energy stocks represent an important source of diversification, targeted fossil fuel stocks compose less than 0.5% of Cornell’s endowment. And that’s the kicker: so long as they are reasonable, divestment initiatives will never impact the endowment enough to noticeably change its composition or its return.

Clearly we should not rule out divestment completely. While most issues at the butt end of divestment campaigns are highly contentious, there are some obvious investments that no conscionable human being would be able to make. An example would be German bonds in the 1930s: perfectly legal to hold, and very profitable before war broke out, but representing an investment in actions unforgivable. Even if secondary stock purchases do not directly flush a company with cash, by holding shares one literally owns a piece of that company. As a stockholder, one not only acknowledges that company’s right to existence, but seeks to profit from its success. Not even practitioners of the dismal science can be that indifferent.

Exxon-Mobile is not the Third Reich, but we first have to acknowledge that what divides us is not whether one can rightly divest from an ethically bankrupt institution, but where to draw

the line separating the acceptable from the unforgivable. Divesting from every company that has even the smallest ethical infraction on its record is functionally impossible. However the ultimate arbiter of Cornell’s investments’ moral merit should not be Cornell administrators themselves. They have proven themselves to be opportunistic, inconsistent, and borderline incompetent, establishing a litmus test to serve the university’s “interests” without bothering to listen to what its own students want. If ever there were a responsibility to devolve to Cornell’s dilapidated student assemblies, it would be this.

Divestment campaigns will continue to be a powerful tool for any student activist, and rightly so. They do, however, in many ways represent a morally conscious university’s greatest fear: having to put its money where its mouth is. A university’s divestment sends a powerful signal even if it has a negligible financial effect, one that has the potential to grow into something more. Cornell should welcome such moral convictions.

And for the tuition Cornellians pay, their university might at least respect them.

Hunter Bosson is a sophomore majoring in Economics and Computer Science.

13.2%

14.0%

12.7%

11.5%

12.0%

Endowment Return

in the 1980s when it declined to join the divestment campaign against South African apartheid. Cornell’s actions are striking: today its administration has the gall to advocate divestment from apartheid, when it was one of few large universities never to do so, while deploying the same financial myopia it used in the 1970s and 1980s to avoid new divestment campaigns. Even those who reject that propagating climate change is a “morally reprehensible” action must find it hard to stomach such a carelessly two-faced and opportunistic institution.

Central to the rejection of such financial activism is the misguided belief that divestment does not work. A single university, opponents pointedly argue, holds far too little of a company’s stock or debt to affect its equity or borrowing prices in a noticeable way, even in mass divestment movements like that for fossil fuel. Even the antiapartheid movement’s economic results can be attributed to congressional action. However, the awareness that the campaign raised certainly paved the path for more efficacious changes down the road. And that is the necessary lens for divestment: it is not a painful sanction but a powerful protest. Like any meaningful protest it incurs financial cost, although concerns about cost are

10.0%

8.3%

8.0% 6.0% 4.0%

5.7%

7.4% 5.8%

7.0%

3.4%

2.0% 0.0%

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Campaign Finance Reform: Yesterday, Today, and Tomorrow Is the panic caused by fear of super PACS warranted or simply blown out of proportion?

BY SAM TORRE

A

s the 2016 Presidential election nears, the anticipated and often feared influence of corporate wealth on politics through super PAC contributions continues to raise concern throughout the United States. As The New York Times Editorial Board predicted, “This election year will be the moment when individual candidate super PACs—a form of legalized bribery—become a truly toxic force in American politics.” These apprehensions breed discussion about campaign finance reforms. Proponents of reform fear that contributions by large corporations will allow the donors to exert control over policy and push their own political agendas on the candidates to whom they contribute. They look to stop organizations from using their large sums of money as incentive for politicians to pass legislation in accordance with their special interests.

Opponents of these reforms argue that the legislation violates the Constitution, specifically the right to freedom of speech, since monetary contributions enable candidates to communicate their platforms to voters. How have these regulatory policies changed in the last several decades, and how do they impact Presidential candidates’ campaigns

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today? Additionally, is the panic caused by fear of super PACS warranted or simply blown out of proportion?

After decades of mostly unsuccessful attempts at campaign finance reform dating back to the 1800s, policymakers enacted stricter regulations in 1971 with the creation of the Federal Election Campaign Act (FECA). Goals of replacing The use of super PACs in the 2008, 2012, and 2016 Presidential elections grew exponentially. previous, evaded legislation, including the Federal Corrupt Practices Act of 1925 and the Hatch Act of 1939, with more enforceable legislation remained at the forefront of the discussion. FECA, signed by Richard Nixon in 1972, required candidates in federal elections to disclose campaign contribution details. Although FECA achieved some progress in terms of regulating campaign finance, it required amending following the infamous Watergate Scandal later that year. After the discovery of a link between the money used by Nixon’s reelection campaign and the Watergate break-in, the American public’s emergent distrust of government led to the FECA

reforms of 1974.

The creation of the Federal Election Commission (FEC) arguably remains the most influential aspect of those 1974 FECA amendments. The FEC defines their duties as “to disclose campaign finance information, to enforce the provisions of the law such as the limits and prohibitions on contributions, and to oversee the public funding of Presidential elections.” This establishment provides enforcement practices which failed to exist in previous legislation. Additionally, the amendments included individual donation limits of $1,000 to a single candidate and no more than $25,000 delegated between federal election candidates. The reforms also validated Political Action Committees (PACs), or outside entities established to campaign for a candidate’s election, by limiting their contributions to $5,000 per candidate.

However, several provisions of the reforms, including candidate spending limits of $10 million in primaries and $20 million in general elections, were not readily accepted nationwide.

The Supreme Court case Buckley v. Valeo (1976) took a step away from regulation and determined unanimously that limiting campaign expenditures violated freedom of speech rights, except in the cases of candidates who received public funding. Buckley v. Valeo remains a landmark case due to its denial of financial equality as a standard for federal elections while also demonstrating the continued struggle between upholding individual rights and establishing an accepted sense of fairness in elections.

2002 marked the enactment of the Bipartisan Campaign Reform Act, more commonly known as the McCainFeingold law in recognition of the act’s main sponsors, U.S. Senator John McCain (R-AZ) and former Wisconsin State Senator Russ Feingold. A major provision of the act included ending the use of soft money in federal elections, or what the FEC describes as nonfederal “money raised outside the limits and prohibitions of federal campaign finance law.” The act also coined the term ‘electioneering communications’

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to describe paid television and radio ads which “discuss[ed] candidates in the context of certain issues without specifically advocating a candidate’s election or defeat,” and disallowed their funding by corporations or labor unions.

Additionally, individual contribution limits became $2,000 to a single candidate and $95,000 every two years for overall contributions. While these alterations were, in part, adjusted for inflation, they also demonstrated a growing tendency toward deregulating campaign finance.

The Supreme Court case Citizens United vs. FEC (2010) struck down on parts of the McCain-Feingold law.

The Court ruled that free speech rights also extend to corporations and unions, giving rise to super PACs. Individuals and corporations may contribute unlimited amounts of money to super PACs, permitting these super PACs to spend limitlessly on campaigns, as well. As a result, the use of super PACs in the 2008, 2012, and 2016 Presidential elections grew exponentially. While candidate money is capped and goes directly to the candidate, super PAC contributions have no limits and do not go directly to the candidates, but rather to outside campaigns. According to the New York Times, in 2008, before Citizens United vs. FEC created super PACs, roughly 99.9% of total campaign contributions went directly to the candidate. In 2012, the first Presidential election to follow the Citizens United case, approximately 8% of total funds were contributions to super PACs and 92% were contributions to the candidate. Surprisingly, in 2016, 49% of total funds were contributed to super PACs and 51% went directly to the candidate, nearly an even split. The ability to donate limitless amounts of money to super PACs tends to attract wealthy donors and corporations.

Additionally, super PACs may target their campaigns to specific aspects of a candidate’s platform and often use smear tactics to create negative and typically distorted (or simply untrue) campaigns about a candidate’s opponents. Although considered unscrupulous by many, this ability to donate to smear campaigns

through contributions to super PACs incentivizes others. Together, these features explain a proliferating trend toward super PAC use, only exacerbating concerns of a government swayed by wealthy contributors.

The struggle between seeking equality in federal elections and avoiding infringement on individual liberties manifests in the 2016 election season.

Senator Bernie Sanders repudiates the use of super PACs and claims that, “I am very proud to be the only candidate up here who does not have a super PAC, who’s not raising huge sums of money from Wall Street and special interests.” According to a report by the New York Times, as of February 20, 2016, Sanders received a negligible 0.1% of his total funds from super PACs/PACs, while Trump received In 2016, 49% of total funds were from super PACs and 51% were from candidate money, nearly an even split.

7%, Kasich received 25%, Clinton received 31%, and Cruz received 48%.

Interestingly enough, these numbers hardly compare to the monstrous super PAC funds amassed by several former candidates in the election. Scott Walker received 61% of his total funds from super PACs/PACs, Chris Christie received 69%, and Jeb Bush received 79%, yet all still removed themselves

from candidacy due to the meager prospects of their election. This raises the question of whether these corporate contributions are as formidable as they may seem or if hysteria may be partly to blame for the concern. Accordingly, fears regarding super PACs may be justified but misplaced; while raising the largest amount of money may not always win elections, as demonstrated by Jeb Bush, issues may still arise if a candidate heavily funded by super PACs does win and allows special interests to influence legislation.

Where does this leave us as a nation on the brink of electing a new national leader? We have been irresolute for many decades, wavering between more and less regulation of campaign finance; with the recent controversy surrounding super PACs, we can assume this indecisiveness will continue. Because limitless contributions to super PACs are a fairly new phenomenon, we are still gauging their power and efficacy.

Party nominations and the election in November may convey the initial impacts of these super PAC contributions; however, only time will reveal their true effects, as we wait in hope of an honest and upstanding President who will distinguish special interests from those of the nation as a whole.

Sam Torre is a freshman in the School of Industrial and Labor Relations.

Cash Piles

Presidential campaign, cumulative funding as of January 31st, 2016, $m Democrats 200

Hillary Clinton

Republicans

Bernie Sanders

Donald Trump

Ted Cruz

Marco Rubio

Super PACS

150

150

Campaign contributions small

100

100

large (>$200)

50

50 0

200

2015

2016

2015

2016

2015 2016

2015

2016

2015

2016

0

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EXCHANGE TRADEDFUNDS

WHEREDIDTHEYCOMEFROMANDWHEREARETHEYGOING? BYEMMANELSON

T

he speed of technological development and an anxious market forces the banking system to adapt faster and innovate further, all in the name of pleasing investors who readily take on risk to achieve any return the market will give them. And as they have time and time again, the financial industry delivers. From the safe and dependable pass-through mortgages, to the rise of securitization in the 1970s, to the intricate technological monstrosities of credit default swaps and collateralized debt obligations that brought the economy to its knees during the financial crash of 2008, technology has a way of completely changing the landscape and rules of the market, leaving investors running to catch up.

This time, a new product is poised to become a household name just as the alphabet soup of ‘asset-backed securities’ and ‘mortgage-backed securities’ have in the past.

They are known as exchange-traded funds, which only a short time ago were known only to those who traded them. What exactly are these exchange traded funds or ‘ETFs’?

Simply put, ETFs are an offshoot of the typical mutual fund structure. They allow investors to trade a portfolio of securities or index just as they do shares of stock. This hybrid security seeks to mimic a benchmark, say an index like the S&P 500 or a portfolio of a specific sector in equities or bonds, as closely as possible to generate similar returns in an efficient manner. Rather than purchasing

every stock of every company in the entire S&P 500 and managing that portfolio themselves, an investor can instead purchase, for example, Vanguard’s S&P 500 ETF, which will closely track the S&P 500’s return. All the investor needs to do is buy one share, which can be bought on an exchange without an exorbitant commission fee from a financial advisor, and instantly become a stakeholder in a fund that is being passively managed by companies like Vanguard and BlackRock.

The convenience of not having to pay for an actively managed fund really lies at the heart of the popularity of ETFs. While only $1 billion was invested in commodity ETFs in 2004, this value had grown to $109 billion in 2016. In fact, ETFs now comprise one-third of the entire market of publicly traded equities.

With major tax advantages compared to actively-managed funds that also charge large commission fees for financial advisor input and security selection, ETFs provide portfolio diversification without exorbitant cost. By giving investors access to a vast array of investment opportunities that the average investor would not normally enjoy, such as complex derivative options, ETFs provide instant liquidity and the broad capabilities of the market through diversification of asset classes and financial instruments in a portfolio.

Every innovation comes with risk. This was no more evident than during the flash crash of 2010 when ETFs rapidly crashed after

A new product is poised to become a household name just as the alphabet soup of ‘asset-backed securities’ and ‘mortgage-backed securities’ has in the past. They are known as exchange-traded funds.

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LIKE A GENETICALLY-MUTATED NEW STRAIN OF A DISEASE RESISTANT TO TRADITIONAL CURES, NEW TECHNOLOGICAL INSTRUMENTSOFTHEECONOMYREACTDIFFERENTLYTOMARKET CONDITIONS THAN THOSE OF THE PAST. high frequency trading (highly complex and rapid computerized trading programs) sent the algorithmic trading methods utilized by investors around the world into a panic, causing the entire system to fail temporarily and resulting in devastating losses for many investors’ portfolios. Like a geneticallymutated new strain of a disease resistant to traditional cures, new technological instruments of the economy react differently to market conditions than those of the past. In the new market environment, normal relationships between asset classes have completely broken down, in part from disrupters like ETFs that grow even more complex by the day. From Leveraged ETFs that promise to deliver a multiple of the return on a given index, to synthetic ETFs that don’t even hold an underlying asset, but instead use a complex algorithm to try to match the return using derivative trading, ETFs are experiencing relentless pressure to grow more complex from a market in search of ever higher returns.

Security trading and selection in the past used to require an analyst to have a gut feeling about a certain company or the direction of a sector of the market. With the rise of ETFs and other complex investment products, investing requires a new set of skills: a keen knowledge of market fluctuations and advanced computer programming abilities, to name just a few. Meeting this demand has completely transformed the identity of Wall Street.

The finance world now employs more and more PhDs with advanced mathematical and engineering degrees, especially in According to one study conducted by Cogent Reports,

40% of Millennials report owning ETFs.

firms like Jane Street that mimic Silicon Valley’s commitment to intellectualism and innovation in how it operates its massive $1 billion investment fund, which specializes in these highly advanced ETF trades. These highly-educated analysts who once were derogatively nicknamed “quants” are now well-respected and integral members of any trading floor. This reversal in sentiment is ample evidence that the Street has had to evolve with advances in technology.

ETFs are the financial tool of the future, which is exactly the reason why they are so popular amongst the Millennial generation. According to one study conducted by Cogent Reports, 40% of the age group reports owning ETFs. In an interesting yet gimmicky twist, at least two investment companies are even building ETFs designed to hold shares of companies that sell to the generation born between the early 1980s and the early 2000s. This union of Millennials and ETFs makes sense: in the smartphone age, the need for a constant stream of information from investments, combined with the ease and cost of investing, make ETFs the Millennial financial tool of choice. Where Generation X and Boomers look for more traditional tools, Millennials are moving away from the wisdom of traditional market relationships and embracing the new.

It is the new, however, that often forgets the old. History has shown the great things that can be achieved with innovation, but it can also demonstrate the huge risk that underlies the foundation of many of these advancements. The changing face of Wall Street is by no means a surprise or a bad thing. Innovation brought about by these talented analysts is inevitable. However, technology outpacing our understanding of the financial world is also inevitable. There is no greater illustration of this simple fact than what we saw in the financial crisis, which was brought about not because of the new complex mortgage products on

the market, but from analysts and market participants not fully comprehending how these instruments affected the macroeconomy at a fundamental level. This event was not an anomaly, but rather will continue to be the rule if risk management divisions and federal government regulation do not closely monitor these new financial tools in their introductory stages before they have a chance to wreak havoc on the financial system if something goes awry. So as ETFs grow in popularity and complexity, it is important to keep a mindful eye about the incredible potential – both positive and negative – that they can bring.

Emma Nelson is a junior majoring in Economics and minoring in Mathematics and Business.

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EXCLUSIVE INTERVIEW:

ChairmanRobertS.Harrison

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EXCLUSIVE INTERVIEWS

What about your experience at Cornell inspired you to take on the additional role of being Chairman, especially given your busy schedule?

Career and Role as Chairman: I really had an amazing 4 years at Cornell- they were truly transformative for me. I lived in a very small town in Jersey, and when I got to Cornell I experienced and met people from all over the world. I also I had a great academic experience. I was accepted to the College Scholars Program, which allowed to me create my own academic program. This program basically focused on personality and politics, it was a combination of government, psychology and sociology. And then from an extracurricular perspective, I really took advantage of being there. I was in a fraternity - Sigma Phi, I worked at the radio station, WVBR as a Disc Jockey and also as a newscaster, and I got really involved in student government and student politics.

I was speaker for an organization that no longer exists, but its called the Senate. I was ultimately elected as a student trustee.

So when I left Cornell I knew that I wanted to stay involved with the University over time. I participated in reunions each year, I got involved on the board of my fraternity, I also was involved on the University council. Ultimately in 2002, I went on the Board of Trustees as an alumni-elected trustee. The board appointed me as board-appointed trustee in 2006.

So I basically have been on the board since 2006 and have had the

great honor of becoming the Chair on Jan 1, 2012. I would say that it was essentially a continuing process of getting involved in the university, as I wanted to give back what the university had given to me.

It wasn’t like one day I woke up and decided to come back to Cornell, it was more like I never actually left Cornell.

After President Garrett’s tragic passing, how is the University proceeding with its search, and what qualities are you looking for in our next president?

I’m considering proposing a Presidential Search Committee (PSC), which will have a diverse group of people including faculty, students, employees and nonfaculty employees, as well as the trustees. The group will be similar to the group that was convened the last time around, when we took on president Garrett. We will also be voting on a charge to the committee, about what the committee needs to do over the next several months in order to find the next president.

So the process really begins today, assuming the board endorses the slate of the presidential search committee members.

The next step is listening to the Cornell community. The chair of the PSC and I will be meeting with many groups on campus - students, faculty, employees, deans, members of the Cornell and Ithaca Community. We will be asking the exact question that you asked - What should we be looking for in our next president. Based on that we will create a position

description, which is what we will send out to the search firm we are working with. Then we will begin the process of going through many resumes, interviewing, coming to a final group and then narrowing it down to one candidate.

Which factors led to the decision to merge the separate schools into the College of Business and in which ways do you see the merger benefiting students? What were the Board’s hesitations in making this decision?

Let me start by saying that background here is important.

Since I have been on the Board, there have been half a dozen studies that look at current configuration of the business schools on campus. Many previous Board members have looked into this and have thought that some kind of consolidation will make sense, given that we have 3 excellent but small accredited business schools i.e. Dyson, The Hotel School, and the Johnson School. If we combine those 3 into one larger college of business, while preserving the identity of each of the schools then we can do a number of things that will distinguish us globally.

First of all, the faculty hiring will be a lot of easier. Each of the three accredited programs will no longer have to act independently of the others in terms of who they recruit.

So we don’t have to recruit three different professors in the same area. In order to get accredited, we can consolidate the groups and seek out the best professors. We don’t need to compete against each other

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EXCLUSIVE INTERVIEWS

for faculty. Second thing, we can provide many more opportunities with a group of faculty that is closer to 150-160 than 3 groups that are 45 each. They can collaborate with each other on research programs that can benefit the students and benefit the faculty. We can create new initiatives by leveraging the strengths that Cornell has across colleges outside of business. For example, our focus on food and agriculture in the College of Agriculture and Life Sciences, and our focus in one of the largest industries in the world, the hospitality industry within the School of Hotel Administration.

We can leverage our focus on technology, both on the Ithaca campus and the new CornellTech Campus on Roosevelt Island, and create programs and research opportunities for business students across the College of Business and not have them restricted to whatever is taught to them by the currently small group of faculty members.

I think it will provide many more course offerings to students and more opportunities to collaborate with faculty for research. I think it will provide a lot of relevant opportunities that focus on solving pressing challenges. For instance, sustainability, shared prosperity and wealth imbalances that would be harder to do with the three silos that we have today.

A couple of things that the board wanted to make sure took place as we followed on from creating the strategic decision to establish a single College of Business were: 1.

That we would preserve the identity of each of the 3 existing schools, not a single blur but still a very distinct identity to each of the 3 schools that make up the College 14 | CORNELL BUSINESS REVIEW

of Business. The second thing, was that the details of the College of Business that are of great relevance to the students, faculty and alumni on and off campus were mapped out, discussed, and created by the relevant groups. The Board’s goal is to take the strategic decisions to create a single College of Business by amending the bylaws. And then beyond that, I’m very pleased to see reports that faculty, students, staff, and alumni are working together on the various committees that the provost has created to build out all of the details surrounding the creation of this new college.

We see Cornell Tech as an incredible opportunity for Cornell. How do you see the future of Cornell Tech, and how do you view its relationship with the College of Business?

I would put Cornell Tech in the category of handful of completely transformative events in the modern 50 year history of Cornell. I agree with you that it is exciting and it was unbelievably thrilling to win the competition to be able to build the campus. The whole world felt that and all eyes were on Cornell at that time. I think every one of our 250,000 alumni were incredibly proud of the university for winning that. And now, roll forward a few years, the progress is extraordinary.

I met with Dan Huttenlocher, the Dean of Cornell Tech, and the progress is phenomenal. We have about 150 students there now. Our faculty recruiting is going incredibly well.

I just got a progress report on the construction and we are right on schedule. So we’re looking

forward to having in the Fall of 2017 the first real class on the completed campus. It is unbelievably exciting to hear Dan talk about the academic developments, the recruiting success he’s been having with faculty, and the tremendous level of interest that students have been demonstrating.

As I think you know right now, there are tech master degrees being offered to students in the Johnson School that want to spend some time at Cornell Tech to get a very specific, very relevant masters degree in business tech. That’s also being expanded to law. We’re going to be offering degrees which will include the elements of the tech campus curriculum for law students. And my guess is that over time, there will be increasing involvement of other colleges in the Cornell Tech experience. But right now, business was the first one that got involved and from all the accounts I hear, it’s been going extraordinarily well.

There’s been a lot of talk recently about the College of Business.

What are some other important initiatives the Board is working on?

There are always many important initiatives that the Board is working on. The board has regular standing committees that address all kinds of areas around campus.

There’s a student life committee, an academic affairs committee, an investment committee, a buildings and properties committee, development committee, university relations, etc. Those are the areas the Board constantly pays attention to. The issues that rise to the top

EXCLUSIVE INTERVIEWS

today are first, identifying a new president, which is the search committee ongoing.

Second, Diversity and inclusion, and making sure we understand what kinds of efforts the university and various groups around the university are taking to enhance our diversity and enhance our inclusiveness to make Cornell the caring community that we have been trying to make it for many years. And thirdly, there is a new project which is going to focus on the residential requirements at Cornell in the long-term. We’re in the process of leading a study of what are our long-term housing needs for our students on and off campus. So we are looking at the current dorm situation, the current residential college situation, and the capability of greek houses to house students. We are looking at program houses and we are going to look off campus as well, to Collegetown and other places, to see what we may need to do long-term to make sure that all of our students have the housing that they deserve.

For the 2015 fiscal year, Cornell reported an endowment return of 3.4%, significantly below some other prestigious universities.

As the Chairman of the Board of Trustees and a former Partner at Goldman Sachs, what changes would you like to see in the endowment management?

Well, I think you have to put all of this in a context. One of the things I have learned as a Goldman Sachs investment banker and on the investment committee for a number of years is that we shouldn’t focus on one relatively short period of time as explaining the story.

So I think if you look at this past year, the 3.4% -- this was a difficult market. It was a very challenging year given commodity pricing, given oil pricing, and a number of global/political issues. Next, if you look historically at our investment returns, our returns have exceeded 10% on an annualized basis in both the three year period and the five year period. And if you go back ten years they’ve been over 7% annualized. So 3.4% is one year, but it’s not the full story.

We are thrilled to announce that we are bringing in an extraordinary individual to lead the investment office at Cornell named Ken Miranda. Ken is somebody who a number of us have gotten to know because he’s been a member of the investment committee for the past four years and he’s been extremely impressive. His full time job has been as director of the International Monetary Fund, the IMF investment office, and so we are extremely fortunate to have had Ken express a willingness to lead Cornell’s investment office going forward. He will start later this spring and I have complete confidence that Ken’s skills are going to be a great addition to our long term investment record.

to the extraordinary academic offerings on campus. Next take seriously the part of Cornell’s DNA, or mission, of public engagement.

The university has now a 150 year history of providing not just a theoretical academic experience, but an applied academic experience and it’s really been every chapter of our history including today with Cornell Tech. Cornell Tech is without question the digital expression of our land grant mission. So get involved and don’t just limit your experience to the academic experience. Also, make sure to stay connected. The networks you develop at Cornell will be invaluable for the rest of your lives, both personally and professionally.

I think that just remembering that Cornell is a lifetime experience, not a four year experience only, is probably the best advice I could give.

We would love to hear any advice you have for Cornell students, specifically those interested in law and finance.

Advice for Students: Take advantage of the full Cornell experience while you’re there, whether you’ve got one year left, two years left, three years left, or whether you’re a freshman. Get yourself involved in activities that Cornell has to offer in addition CORNELL BUSINESS REVIEW | 15

FINANCE

THE REALITY OF MINI-IPOS A CRITICAL LOOK AT THE NEW A+ CAPITAL-RAISING RULE FOR SMALL BUSINESSES

BY SANG HYUN PARK

F

or the unsuspecting entrepreneur, the announcement of an “A+” regulation in the venture capital ecosystem may seem like remarkably good news. A closer examination of the terms, however, will leave many venture heads disappointed.

A new amendment to SEC Regulation A, called Regulation A+, now allows young companies to raise up to $50 million in new capital online through “mini-IPOs.” However, the lack of appetite for such offerings since the revision last June points to an unfortunate reality: the amendment is hardly the sea change in crowdfunding that entrepreneurs had imagined.

The concept of a mini-IPO as a way of raising capital has been in existence for some time, but has largely been ignored. The high costs associated with the complex registration process and the ownership costs of going public have been key reasons why small businesses have preferred alternatives such as equity crowdfunding. The recent Regulation A+ was an effort to jumpstart the old system of small offerings by providing several attractive new features. In particular, it substantially increased the amount that young private companies could raise in the offering through general solicitation.

Furthermore, it created registration exemptions that would lay off the burden of following through with state blue skylaw compliance. The new regulation was made in hopes of spurring business startups by making capital formation much easier and simpler.

At first sight, entrepreneurs may see many reasons to be excited about Regulation A+. The tenfold increase in the possible amount of capital that can be raised is likely to delight many young

16 | CORNELL BUSINESS REVIEW

executives with ambitions of making a conspicuous splash in the venture capital community. There is also the matter of the considerable savings that small businesses would enjoy from the registration exemptions. Previously, small companies attempting a mini-IPO were required under blue-sky law to register in each state in which their securities would be sold. Companies pursuing secondtier offerings amounting up to $50 million would no longer need to worry Latest estimates for the average audit fees that public companies pay on a yearly basis are approximately $1.5 million about going through such an exhaustive registration process. Perhaps the most notable feature of the regulation is the flexibility of the solicitation process.

Issuers would be allowed to “test the waters” by communicating to investors via social media and measuring possible investment amounts before deciding to formally register. Moreover, even nonaccredited investors in the public would be allowed to chip in, no matter how miniscule the amount.

So why haven’t we seen more miniIPOs this past year? It turns out that, despite the hype, small initial public offerings are still not the ideal funding path for ventures for a number of reasons. Ventures seeking to go public under newly expanded rules may find relief from registration exemptions but will have to stomach the ongoing costs of audits and reports to the SEC. According to a report by the Financial Executives Research Foundation, latest

estimates for the average audit fees that public companies pay on a yearly basis is approximately $1.5 million. While such fees will be drastically lower for smaller firms, they will still materialize to a significant slice of their revenues. This has created an incentive to cut corners by turning to unqualified registration consultants for their offerings, oftentimes leading to faulty registrations that would ultimately be rejected by the SEC. Thus, even for ventures with stellar prospects of expanding their businesses, the extra layer of costs to their operations from having to prepare audited statements will be hard to ignore.

This is not to mention the traditional reasons why young ventures hesitate in going public: ownership dilution and mandated transparency. For young companies just beginning to scrape together a viable business model, the dilution in ownership and pressure from venture capitalists could create complications and distract them from their company goals. Moreover, the transparency required from having to publicly disclose financials at a regular basis can hurt any competitive advantage companies may already possess or will develop with additional capital.

Especially for young ventures, it is entirely possible to overlook such longterm difficulties in a rush to secure shortterm funds.

It’s also worth noting that the costs do not end with simply registering the products. There are considerable costs involved in marketing the products to the public. In a traditional IPO issued by midto large-cap companies, the investment banks advising on the deal would easily take care of this by turning to their equity

FINANCE

KEY FACTS:

REGULATION A+ Regulation A+ is a new SEC rule that allows companies to do a ‘Mini-IPO’ to raise funds from the general public.

Available to U.S. and Canadian companies that have primary offices located in the U.S.

$20 MILLION Tier 1 Funding option

$50 MILLION Tier 2 Funding option maximum offering size allowed by Regulation A+

capital markets and sales force teams, taking the issuer on a roadshow to meet with institutional investors and carefully structuring offerings based on an analysis of the issuer’s needs and investor demand.

Such a system will be hard to duplicate in the mini-IPO environment; without the same level of expertise that large investment banks can provide, microcap companies will find it more challenging to market their products to the public. More fundamentally, the investors themselves will not only be harder to identify but also be a tougher crowd to convince. As the amendment allows growth companies to raise from unaccredited investors, the sources of funding will be less predictable than when raising from recognized institutions. In addition, while institutional investors will typically examine each investment opportunity through careful analysis of the financial merits, investment decisions by the everyday American will typically be more psychologically-driven.

Companies looking to issue a mini-IPO will thus need to spend extra attention to their marketing investors, recognizing that they will address a completely different investor base.

This is hardly to say, however, that Regulation A+ has added no value to the venture capital community. With its flexibility and grander scale, there are still many contexts in which the regulation could make sense for later-stage ventures seeking to raise capital. In particular, venture-backed companies that are either generating or have prospects of generating substantive revenue will most likely be able to sustain the accounting and registration costs that would put small companies without stable revenue-generating ability underwater. In December, real estate crowdfunding company Fundrise raised $38 million through the new regulation.

As the world’s first online real estate investment trust, their dominance in the market for real estate crowdfunding fully enabled them to pursue and effectively

The regulation may have given a leg up for small companies looking to raise capital, but it has hardly made it more desirable.

execute the offering. More recently, Elio Motors raised $16 million in a Regulation A+ offering, topping their $12.6 million hurdle for funding their newest prototype.

What was truly impressive about the offering was not the amount of the offering but the time in which it took place. Due to the market volatility caused by record low oil prices, there were very few regular IPOs that took place by February, when the deal was closed.

If this is any indication, mini-IPOs can be successful, and in some cases, wildly so; the only problem is that, in the current environment, they will only work for a very narrow segment of ventures and startups. Both Fundrise and Elio Motors had fully credible business models and ample prospects of growth through the new initiatives they would undertake. They were also well ahead of their competitors.

Perhaps most importantly, the executives truly believed in the significance of going public. As CEO of Elio Motors, Paul Elio, put it, “Regulation A+ is how Wall Street was meant to work.” For a large portion of later-stage ventures, it is hard to see all three conditions in place. At the very least, companies will be ill-advised in pursuing a mini-IPO without seeing revenue streams taking shape and prospects of achieving greater profitability by adding the extra millions on their balance sheets.

With all the hype that had built up over the amendment, most startups will find the offering process still less than satisfactory. The regulation may have given a leg up for small companies looking to raise capital, but it has hardly made it more desirable. Early-stage ventures without a clear business model or a revenue stream in progress will do well to stick with existing crowdfunding methods rather than incurring the costs of going public.

Until a more refined offering process emerges, the current system will stand as a test for young entrepreneurs to look past the title of an “A+” offering and look closer at their income statements.

Sang Hyun Park is a junior in the College of Arts and Sciences majoring in Economics and Statistics.

CORNELL BUSINESS REVIEW | 17

FINANCE

Election Year:

Rhetoric vs Reality BYISAACGREENWOOD

2

016 has ushered in a national election cycle like none other. In the aftermath of the Great Recession of 2007-2009, and despite the rhetoric espoused by many of the leading candidates on both sides of the aisle, the still-recovering American economy would be best served by centrist economic policies given the fragility of international developments and tepid growth.

The Great Recession cost the American economy billions in productivity and had long-lasting effects on the domestic and international economic orders. Even after the height of the Recession, U.S. unemployment peaked at 10% as workers were laid off in increasing numbers.

Thousands of Americans were impacted by the sudden burst of the housing bubble, which significantly devalued their homes while also setting off a global financial crisis from the prevalence of mortgagebacked securities. While China and Russia weathered the crisis relatively well, most countries heavily engaged with the U.S. economy, notably in Europe, felt the shockwaves of distress as the turmoil increased.

The Federal Reserve, under the guidance of former Chairman Ben Bernanke, engaged in bailing out or aiding firms deemed “too big to fail” like AIG and a variety of large banks which had become increasingly interdependent with a number of industries. The Fed embarked on a policy of quantitative easing and slashing interest rates to historic lows to maintain a high money supply and embolden the teetering economy. In addition to the fiscal policies such as the Troubled Asset Relief Program (TARP) and Emergency Economic Stabilization Act of 2008, Washington was 18 | CORNELL BUSINESS REVIEW

successful in preventing a catastrophic meltdown of the U.S. economy.

However, the American economy is not out of danger yet. A myriad of factors remain that threaten not only domestic prosperity but also the international economic system given the rapid globalization of the past twenty years. The American Dream may still be attainable, but only with the careful monetary and fiscal policies that will not strain the moderate economic recovery of the past five years.

While unemployment has reached the Fed’s target of 5%, the labor force participation rate remains at 63%, down from its historic average. To maintain full employment and continued consistent job growth, candidates with job creation programs would aid in the recovery as opposed to those who seek to cut unemployment assistance and government spending.

Another key measure of economic health is inflation. Often measured by the Personal Consumption Expenditures Price Index (PCE), inflation is currently below the Fed’s target of 2%. While in the United States this number is near 1.7%, European inflation is almost 0 and has forced the European Central Bank to enact quantitative easing through 2017 as a means to prevent another crisis. Rather than meddle in the workings of the Fed and politicize the institution, the incoming President must remain aware of Chair Janet Yellen’s guidance in bolstering the American economy and work to promote job security.

Beyond macroeconomic growth and stability, issues of wealth inequality and social security have become forefront

topics for the average American. With a stagnant lower class and growing upper class, the American middle class has been shrinking over the past 45 years. The share of aggregate income held by middle-class Americans has fallen 19% from a previous high of 62% in 1970, and the Recession saw middle class wealth shrink by 28%. Once a representation of the American Dream and success, the middle class ought to be supported through tax cuts and incentives by future candidates to ensure domestic economic stability, and the increasingly wealthy upper classes should bear a larger burden of taxation to account for the wide discrepancies under the current system.

With increasing life expectancies, Social Security reserves, which are expected to run out of money by 2034, must be increased to provide for the nation’s poor and infirm. Politicians who suggest cutting Social Security benefits or taxes will fail to address the magnitude of the program by failing to provide for the 65 million who require it. As Mahatma Ghandi said, “A nation’s greatness is measured by how it treats its weakest members” and that certainly holds true with regards to the aged, infirm, and poor of the United States, although current policies seem to do little to ensure their future stability.

Given the precarious global economic situation, in addition to forecasts for another recession within the coming two years, drastic tax or spending cuts could exacerbate future economic issues and threaten to undo the slow but steady recovery of the past administration.

Isaac Greenwood is a sophomore in the College of Arts and Sciences majoring in Economics.

EXCLUSIVE INTERVIEWS

REDROUTE

Ithaca May Not Have to Wait for Uber

R

edRoute is a smartphone enabled ride-hailing app for college students.

It uses GPS and smartphone technology similar to that used by Uber and Lyft, connecting its users with drivers from partner taxi companies to reach their destinations.

What was your inspiration behind RedRoute?

Brian Schiff: The biggest thing was that we knew that Uber was out there, with this awesome technology. And obviously, despite their effort, Ithaca taxis have historically struggled to offer a modern riding experience and appeal to students.

We felt that we could help these taxi companies come into the modern age and appeal to students through technology.

We as students wanted an improved riding experience, and we thought that we could make a college-related app to deliver this.

In one interview you mentioned that Cornell eLab was initially‘highly skeptical’ of RedRoute; what inspired you to keep going?

BS: So our initial idea was having students driving students. We went into our first eLab interview and not more than 3 or 4 weeks after we started doing this, they basically told us it wasn’t going to work, and that no one was going to insure student drivers. We couldn’t even get in a room with any insurance agents, because they didn’t want 18-20 year olds driving other 18-20 year olds.

Can you describe your experience so far with eLab? BS: We are done with eLab, as the program lasts only one year. eLab is an Entrepreneurship at Cornell and Student Agencies program and it’s different from

Above: Brian Schiff (left), Leor Alon (center), and Karl Reis (right) are the founders of RedRoute and met at Cornell.

the Blackstone Launchpad. Blackstone’s big focus is anyone that has an idea and needs first resources to go to. eLab is for when you are further along, you are clearly dedicated to your project, you show some understanding of the field, and now you want to grow your business.

There were 60-something companies that applied this year and they accepted 12 into the program. You receive class credit and they give you $5,000 for your company. They also set you up with legal work, so we’ve had all of our legal documents completed by one of the top law firms in the world and we have not paid a cent.

You meet with your instructor weekly and there are two boot camps in the Fall and then a pitch event in NYC in early December. Then this semester there is a class with all of the companies and all of the mentors, as well as some guest speakers, and we go over core principles so it’s more like an entrepreneurship class. You continue with your weekly meetings and participate in two more bootcamps. Then there’s Demo Day, the pinnacle of the program.

I didn’t realize there was such a huge culture and community of other people doing entrepreneurship and helping entrepreneurs, and eLab

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EXCLUSIVE INTERVIEWS

WE AS STUDENTSWANTED AN IMPROVED RIDING EXPERIENCE, ANDWETHOUGHTTHATWE COULD MAKE A COLLEGE-RELATED APPTO DELIVERTHIS. competitor of ours. They target big cities and struggle in smaller college towns where they are for the most part not operating. We are different on so many fundamental levels as a business all the way down to the core problems we are solving.

How receptive have local drivers been to your platform/application? connects you to all of that. I cannot imagine starting a business without eLab. It was absolutely the most incredible academic-related experience I’ve ever had. I feel like I’ve now gotten my money’s worth at Cornell. eLab is one of those things where we thought it was going to be awesome and it has been on another level and completely blown away our expectations.

What resources have you utilized to acquire funding for Red Route?

BS: In the beginning, we were putting everything in: we talked to a few people and they told us that no one is going to give you money until you put your own into it to show you have skin in it. So we basically self-funded it until we got into eLab. The $5,000 they granted us plus our own funds has basically carried us to where we are now. We are now going about the process of trying to raise our first real round of funds. We are fishing around our networks, the Cornell networks, and Demo Day is definitely a big part in leveraging that. We have had some early success, but we still have a good amount to go to reach our goals.

There is talk about Uber coming to Ithaca.

How do you plan on competing against them? What makes you different than Uber?

BS: So Uber is not really a direct 20 | CORNELL BUSINESS REVIEW

BS: I would say that all the drivers have their own opinions on it. These drivers have been doing this for years and years.

Change is tough for a lot of them. That being said, there is a big number who use technology in their daily lives and they understand what we are trying to bring.

I think there is a lot of enthusiasm from inside the company, but there is a natural level of skepticism in any situation.

Drivers will pick it up quickly though.

We have been very encouraged and we are very pleased with how things are going, and drivers are happy that they are getting more business.

What sorts of expectations do you have regarding RedRoute in terms of growth opportunitiesandcapabilities?Essentially, where do you see the company in 5 years, 10 years?

BS: We’re looking at scaling the business, so we want to get a few more taxi companies to sign up over the summer.

The long-term goal, is that this is how students are getting around everywhere, even though a lot of people would call us ridiculous for saying that. It’s definitely one step at a time, but we’re all committed to seeing it through.

We’re hopefully going to be at two other schools by the end of the summer.

This semester is really about Cornell and getting our foot on the ground, seeing how everything runs, cleaning up the technology, getting some customer

feedback, and testing things out like our marketing plan.

People often ask, “what’s the exit strategy? When is this going to end?” and I think that there are a lot of different ways. The classic, start-up way to do it is to either sell or go public, and those are very lucrative and desirable, but there are a lot of stages to success and there are an infinite amount of ways that this could end up.

What advice do you give to other Cornell students who want to start an entrepreneurial venture?

BS: First I would say just do it - if it’s something that you think would be cool, or useful, or you’re passionate about it, and it’s gotten to the point where it’s like I might want to do this, I would say just do it. Second, and this is kind of a pet peeve of mine, is that a lot of people have this mentality ‘oh I’m starting a startup, I need to be really hush-hush.

We don’t want to tell anyone because then someone will steal our idea’ and that’s just not true in 99% of situations.

You should really be doing the opposite.

Really strong entrepreneurial people will tell you not to build a single thing until you’ve talked to dozens of customers.

Additionally I’d like to say that it’s been the most incredible learning experience. I feel like I understand so much more about the way money works, the way businesses run, and the way things happen through all my experiences with RedRoute. Around Cornell there are so many opportunities, and all these professors know so much and have done so many big things. You can email them and explain that you have a new idea for a company and they’ll just take time out of their day to give you all of the advice that they can.

INDUSTRY

WINE FRAUD

BY NICK PICCONE

E

arly Christmas morning in 2014, the front door of the iconic Napa Valley restaurant French Laundry was greeted not

by Saint Nick, but by an unknown masked man whose intrusion would only be discovered the following day. The burglar, however, was not after the cash in the vault nor the expensive décor of the restaurant.

Owner Thomas Keller and investigators instead found that the wine cellar had been pried open with a simple crowbar, a task made infinitely easier given that the normal ultra-secure state-of-the-art security system was disabled and that the building was in the midst of a large-scale renovation.

Moreover, French Laundry does not possess an ordinary wine collection, even for a three Michelin-starred restaurant; in fact, its wine collection is likely to be worth more than most people’s homes. The thief was also no ordinary thief—he meticulously chose 76 of the finest bottles that totaled over $300,000 in value, an average price per bottle of almost $4,000, and left all else untouched.

This burglary represents neither the first nor the last of its kind in the area.

On the same day, Prima, a high-end wine

shop and restaurant outside of Oakland, experienced a failed robbery attempt that was only foiled due to a new alarm system installed after a February 2013 thief made off with tens of thousands of dollars of Bordeaux and Burgundy wines. Similarly, The Plumed Horse, a Michelin-starred restaurant an hour south, was burglarized in January of 2013, weeks before Prima, and had thousands of dollars in similar wine stolen from its cellar. Redd, another Napa Valley restaurant merely a mile away from French Laundry, had 24 rare and expensive bottles stolen after a burglar simply smashed a window with a hammer to gain entry January 2014.

While all these crimes remain unsolved, Thomas Keller remains the lone owner who was lucky enough to recover much of his restaurant’s pilfered wine.

However, they were recovered 3,000 miles across the country in Greensborough, North Carolina: how the French Laundry

wine got there and who brought it there still remains a mystery.

Interestingly, all of these break-ins have involved both a crude choice of tools such as crowbars, hammers, and ladders, and yet an exquisite selection of specific vineyards and vintages. The combination of everyday tools and extraordinary bottles suggests that these ordinary criminals act either directly for an informed “customer” or know their target audience exceedingly well. A Thanksgiving Day 2013 robbery at a Seattle wine warehouse further reinforced this notion, in which thieves simply disabled motion detectors, spray-painted cameras, and stole $650,000 worth of wine before leaving a gas leak that destroyed the warehouse. Unlike the aforementioned restaurant robberies, the perpetrators were caught, allowing authorities to confirm suspicions that these thieves were everyday burglars, not experienced wine sellers.

While high-end robberies continue

[The thief ] meticulously chose 76 of the finest bottles that totaled over $300,000 in value.

CORNELL BUSINESS REVIEW | 21

INDUSTRY

Michael Egan, a counterfeit wine specialist, estimates the total black market for wine to be at least $100 million. to become a growing concern across the wine community, counterfeit wine remains an even larger obstacle to overcome. Take the example of Bill Koch, billionaire and member of the famed Koch Industries family, who in 2005 bought four bottles of wine allegedly from Thomas Jefferson’s personal cellar for an estimated $500,000 only to discover that all were counterfeit.

In fact, Koch estimates that he has lost $25 to 30 million in purchases of fake wine over the course of his lifetime. A large bloc of his fraudulent purchases—211 bottles worth $2 million—could be traced back to an Indonesian wine seller named Rudy Kurniawan. When the FBI raided Kurniawan’s operation in March 2012, they found repurposed old corks and over 19,000 fake labels from 27 of the world’s finest producers littering his home, which was cooled to 59 degrees (the temperature of a wine cellar). He was later sentenced to ten years in prison for selling an estimated $130 million in counterfeit wine. In the wake of Kurniawan’s arrest, the auction market for fine wine actually shrunk as

much as 20% for a brief period due to hesitance in spending such hefty sums on potentially fake products.

Although the discovery of Kurniawan’s counterfeit operation shocked many and awoke the industry to how great the threat of fake wine could be, the global auction market has continued to grow. While estimates vary for how much counterfeit wine is currently in circulation, lifestyle magazine Wine Spectator estimates it to be around 5%, while French newspaper Sud Oest puts that number as high as 20%. Some of the most commonly faked wines include Bordeaux First Growth chateaux such as Chateau Lafite-Rothschild, Napa Valley estates like Screaming Eagle or Opus One, or Burgundy Grand Crus such as Domaine de la Romanée Conti, which runs as high as $25,000 a bottle for certain vintages. In fact, according to the 2013 documentary “Red Obsession,” there are currently more bottles of 1982 Chateau Lafite circulating auction houses than were ever actually produced by the estate. Although it is impossible to know the exact size of the black market

An ink-jet printer (right) does not reproduce the same detail nor metallic design of the original label.

22 | CORNELL BUSINESS REVIEW

for fine wine, Michael Egan, a counterfeit wine specialist, estimates the total black market for wine to be at least $100 million.

This number could prove to be even larger considering that many fake products go unreported; private collectors frequently exchange wines and many collectors refuse to report fake wine out of embarrassment.

The explosion of the wine market is a very recent occurrence that has been driven by high demand and soaring prices. For example, a bottle of Chateau Lafite retailed for a few hundred dollars in the mid-1990s now sells for over $2,000. Wine experts point to one culprit for this massive price inflation: the Bao Fa Hu of China. With a name literally translating to “explosive rich,” they have contributed heavily to the growth of the wine-collecting market from $90 million in 2002 to over $300 million by 2013. Many of these nouveau riche Chinese businessmen have become infatuated with Western cultural status symbols and eye top-quality wine as a means of displaying their wealth and connections to the West.

Their presence in the market has also likely increased the incentive for burglars to steal high-end wine—the thieves will receive higher prices from buyers who are desperate to find certain bottles or vintages.

Apart from simply boosting demand, China has contributed to the explosion in the black market wine market through poor record keeping of production and sale for older vintages as well as relaxed copyright laws. The lack of records and security measures such as serial number identification make many stolen bottles hard to track or many counterfeit wines to be passed off as authentic. Furthermore, the relaxed copyright laws enable counterfeiters to operate more freely in the nation and to imitate brands in order to fool inexperienced Chinese buyers. The Comité National des Conseillers du Commerce Extérieur de la France (CNCCEF), a foreign trade group, currently estimates that there is one counterfeit bottle of foreign wine for every real bottle in China. The estimate not only accounts for ultra-expensive fine wines but also everyday table wines.

Luckily, steps are finally being taken to curb this explosion of fraud. In late 2014, the Chinese government shut down a Chinese

INDUSTRY

wine label called Yantai and arrested its owners for counterfeiting many wellknown foreign wine labels. The company originally began as a legitimate importer but attempted to capitalize on the boom in the Chinese market for fine wines. Even more importantly, almost every luxury winemaker meticulously tracks every sale of every individual bottle as well as labels each bottle with a unique serial number.

Both steps are done to ensure against theft and prevent fraud in the case that duplicated serial numbers or unused numbers should arise at an auction.

A large push from individuals has also been made to prevent the spread of crime within the wine selling industry. Auction houses now routinely hire specialists such as Michael Egan or Maureen Downey—a wine

The CNCCEF, a foreign trade group, currently estimates that there is one counterfeit bottle of foreign wine for every real bottle in China. authenticator who commonly works with the FBI in investigations—to ensure that all sales are legitimate products. Furthermore, many wine collectors of significant means, specifically Bill Koch, have made it their mission to stomp out crime and expose fraudulent or black market sellers.

The rich clientele of the wine-collecting world have thus spurred the growth of a new, albeit extremely expensive, industry in wine authentication. Koch is said, for example, to spend $800 to authenticate every bottle he purchases—a sum greater than most people will ever spend on a single bottle. One such method of authentication uses the University of Bordeaux’s particle accelerator, which more frequently is used to examine wastewater from hospitals or fallout from nuclear disasters. Lead physicist Philippe Hubert will often, by request, examine the contents of a wildly expensive wine bottle using the machine, which could determine the chemical makeup of a bottle in question and compare it to a known composition of the bottle from that year. It is so effective that some estates, such as Bordeaux’s legendary Chateau MoutonRothschild, have created a database of bottle compositions compiled by testing the vintages in their own cellars.

Not all anti-fraud measures are coming from wine collectors—many are also coming from industry leaders, such as David Pearson of the famed Napa Valley producer Opus One. All bottles made today of Opus One come with a near-field communication (NFC) chip that customers can scan with a smartphone to watch a short video clip from the winemaker ensuring the authenticity of the product. Obviously, the method has a critical flaw in that an empty bottle could be repackaged and faked by a skilled counterfeiter, which is why producers will also include a tamper-proof seal. For example, Opus One hires SICPA, a Swiss company that makes ink for many of the world’s currencies, to create proprietary inks on the seal that show different images

under different colored lenses.

The fine wine market has grown alongside an even greater explosion in stolen and counterfeit wine as criminals look to profit from ever-inflating prices.

Winemakers face many challenges similar to those dealt with by other luxury goods producers, such electronics or leather goods, and these various industries must work together to combat escalating theft and fraud. The Coalition Against Counterfeiting and Piracy estimates the cost of intellectual property theft worldwide at $650 billion—which is greater than the GDP of all but 19 countries in the world in 2015—and the global market for fake goods at $68 billion. Significant progress in the fight against the black market, however, will not be made without cooperation from major manufacturing nations for counterfeit goods, most notably China, which have turned a blind eye to the illegal manufacturing of fake or knock-off goods.

One must hope that in the near future China, along with similar manufacturing nations, succumbs to pressure from other developed nations and major corporations to crack down on illicit production. The expanded enforcement of intellectual property laws coupled with evolving technology used to both track authentic and combat counterfeit items would thus present a promising future in the fight to shrink the global black market for fine wine and other luxury items.

Nick Piccone is a senior in the College of Arts and Sciences studying Economics.

The wine-collecting market has grown significantly:

$ 90 mm 2002

$ 300 mm 2013

CORNELL BUSINESS REVIEW | 23

INDUSTRY

3D PRINTED FASHION:

Fashion Friend or Deadly Foe?

BY CATHERINE WEI he world has never seen anything like this before. These revolutionary machines have changed society’s preconceptions of innovation by lowering production costs and increasing mass customization. They surpass traditional manufacturing processes and have become applicable to any field ranging from medicine to fashion. The gamechangers: 3D Printers.

In the words of Heidi Klum, at New York Fashion Week, “One day you’re in, and the next day you’re out.” The stakes are high.

After months of drawing, designing, and dyeing, fashion designers are finally able to come out of their shells and watch models dressed in their work strut down the runway.

For NYC-based designer Alexis Walsh, not only was the 2016 New York Fashion Week an opportunity to present her latest LYSIS Collection, but also a chance to exert the power of a 3D printer on the runway.

Walsh first learned of 3D printing in one of her industrial product design classes at the Parsons School for Design. In an article with 3D Printing Industry, she recalls how she started the process as an experimental whim,

T

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yet now, it has become her favorite design method. Her LYSIS Collection showcases numerous 3D printed pieces to complement the soft fabrics of the rest of the outfit. To her, the collection is meant to imitate the growth of viral structures. It is a combination of organic shapes with rigid silhouettes.

One of Alexis’ past pieces was titled “The Spire Dress.” In collaboration with designer Ross Leonardy, Walsh assembled 400 3D printed individual titles using tiny metal ring connectors. The dress expresses a geometric formation with spirals around an individual’s body. Furthermore, rather than sketching her initial thought process and designs, Alexis digitalized a 3D model of the dress using Grasshopper, a software algorithm, and prototyped her piece with a MakerBot 3D printer. With 3D printing, designers now have the opportunity to create extraordinary pieces, challenging traditional fabrics and fashion craftsmanship.

Alexis Walsh is not the only designer to bring 3D printers into the fashion workplace.

Back in 2011, Iris van Herpen debuted of one her first 3D printed pieces at Paris Haute Couture Fashion Week in her collection

titled “Crystallization.” The black lace dress she designed had been developed by van Herpen’s own textile called TPU 92A-1, the first printable material that is both flexible, durable, and machine washable. That said, 3D printing has accelerated the possibilities for fashion. Rather than being custom-made, clothes are custom-printed.

The invention of 3D printing first appeared in 1983, when Charles “Chuck” Hull invented the first stereolithography machine, a printing process that enabled a 3D object to be created from digital data using a UV laser. Shortly after, in 1986, Hull patented the first stereolithography apparatus and one year later, in 1987, Carl Deckard patented the US Selective Laser Sintering (SLS) process.

3D printers operate using an additive process. While traditional manufacturers use a subtractive method to break material into products, 3D printers build a product up, layer by layer. After modeling an object or design on a digital software, an individual can send the file to the 3D printer. A laser source containing common materials like plastic, titanium, or resin, begins to draw out the base layers, solidifying the material as the

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Rather than being custom-made, clothes are being customprinted laser begins to continuous draw layers.

With 3D printing comes many advantages. First, printing is cost-efficient compared to traditional manufacturing counterparts, as objects can be crafted at a fraction of the original cost. After investing in a 3D printer, the plastic material can cost as low as $3 to make a product. Second, the supply chain is greatly diminished. Rather than requiring the interaction between equipment makers, suppliers, prototypers, warehouses, and transportation, 3D printing simplifies the process to a digital-stored file that can upload data to a printer anywhere. Lastly, 3D printing provides a great medium for customization.

For example, when designers Alexis Walsh and Iris van Herpen needed to adjust their measurements based on a model’s body, it was as simple as changing the increments on a digital file. Designers who invest in 3D printing can easily modify their garments through the 3D modeling software. This creates mass customization and a genuine connection between customers to a product that perfectly suits them as individuals.

However, it’s important not to immediately idolize 3D printers. While they have provided society with innovation, customization, and alternatives to the costly manufacturing process, 3D printers have been susceptible to abuse.

Although 3D printing allows for mass customization, it struggles with mass production. Individuals cannot benefit from economies of scale with 3D printing. The time to produce and wait for the printer to design a product layer by layer is only acceptable for prototyping and small series, not for large scaling.

The speed of printing depends on the speed of the printer-head extruding the raw material used.

There are also negative consequences to the environment caused by using 3D printers.

According to Loughborough University, melting plastic through lasers by 3D printers consumes 50 to 100 times more electrical

public arenas. More so, his gun, which costs roughly $25 to print, is good for at least nine rounds. Before the US State Department took down the files, 100,000 people were energy than injecting molding of the same able to download the digital file after Wilson item. Additionally, based on a 2013 study, uploaded it to the Internet. Instantly, this printers that use a plastic filament can emit presents a controversial issue. According to 20 billion ultrafine particles per minute. As the Bill of Rights, citizens have the rights to bear arms. However, should that allow for a consequence, these particles potentially deadly misuse of 3D can end up in the lungs and printers? bloodstream, posing great risk Yet back at New York Fashion to those with asthma.

Week, designers like Alexis Walsh Lastly, as the 3D printing and Iris van Herpen have used industry grows, there are Ultrafine particles 3D printers to design magnificent per minute several legal risks that need pieces that are idolized on the to be addressed. For instance, runway.

This new technology if a helmet produced by a 3D disrupts supply chains and traditional printer reveals a flaw following an accident, fashion process.

Within the fashion world, who is to be blamed? The original model 3D printers have been praised for providing manufacturer or the printer manufacturer? an alternative to the injustice and violence of With digital files, the line between who manufacturing sweatshops.

With great speed legally possesses data is thin. Through openand affordability, models and customers source 3D printing websites, intellectual data can easily be manipulated. With a click of a have become one with their style. 3D printed button, customers can download a company’s garments can now be tailored to specific body types, praising individuality in the modern product file and adjust it.

The answer of whether 3D printers world. These extraordinary printers have truly benefit society remains unclear. Several created a new age of clothing.

It begs to ask the ultimate question: Are years ago, 25-year-old Cody Wilson became 3D printers fashion’s friend or deadly foe? famous for producing the first 3D printed

20 bn

gun. After less than a year’s worth of work, Wilson was able to design and print a plastic, yet durable gun called “The Liberator”, easy enough to slip through metal detectors in

Catherine Wei is a freshman in the Dyson School of Applied Economics and Management.

CORNELL BUSINESS REVIEW | 25

Soverign Wealth Funds While there used to be little correlation in how the two markets rose and fell, stock prices and oil prices are now moving in tandem with each other, and increasing sell-offs of sovereign wealth funds may be behind this new rhythm

BY SHOHINI KUNDU

S

ince the summer of 2015, crude oil prices and the Dow Jones Industrial Average have been dancing a twostep tango. The pivot steps, marked by a sharp change in direction, are fully synchronized even when the music from the Fed signals no such turn. This is a sharp departure from the past five years when every turn of the stock market could be traced back to a change in key, orchestrated by the Fed. The drivers for the oil market and stock prices are distinctly different. Oil prices are determined by supply and demand: demand increases during economic expansion, and the supply curves follow this trend in demand. The Organization of Oil Producing Countries, better known as OPEC, sought to buck

26 | CORNELL BUSINESS REVIEW

this trend through collusion, and despite brief success in the 1970s in curtailing their crude supply, OPEC has not had a similar accomplishment in the recent “Rivalry and mistrust among OPEC members and ballooning government budgets nudge them towards greater production, even at the risk of over-supplying the market.” past. Rivalry and mistrust among OPEC members and ballooning government budgets nudge them towards greater production, even at the risk of oversupplying the market. On occasions when oil prices have increased, deflating

consumer spending, infrastructure spending on clean technology and energy production has increased, offsetting the negative implications on the real economy. Consequently, the level of correlation between oil prices and the stock market has been low—only around 5%. This begs the question, why is the market ignoring cues from the Fed and dancing this tango with oil prices?

To understand this, one has to look no farther than the disproportionately large role Sovereign Wealth Funds (SWFs) are playing. SWFs are owned by states that seek to invest balance of payment surpluses for maximizing returns – accepting risks over liquidity.

Nearly all countries that run a surplus balance of payments have created a SWF, and they generally fall into two

INDUSTRY

categories. In the first category, there are industrial exporter countries such as China, Singapore and South Korea that have accumulated enormous amounts of foreign currency through trade surpluses. These states also have a persistently high rate of savings allowing governments to allocate a sizeable portion of savings for foreign investment. Apart from the obvious benefits of diversification, such investments assist countries in dispersing excess liquidity which may otherwise lead to appreciation of domestic currencies and imperil exports. The second group of countries that operate a SWF are commodity-producing countries.

These countries use the SWF to

prices increase above their fair valuation for use at a later date when the commodity prices fall. In terms of assets, the Norwegian Sovereign Wealth Fund tops with nearly $900 “...we expect to see that stock valuations will decouple from oil prices... when crude prices again go above $50 a barrel.” billion in investments, followed by the Abu Dhabi Investment Authority, Saudi Arabia Foreign Holdings, and China Investment Corporation at about $750 billion each, followed by the Kuwait Investment Authority at nearly $600 billion.

backdrop we are witnessing massive selloffs of SWFs by commodityproducing countries to meet pension and social welfare obligations.

According to the Financial Times, SWFs from commodity countries pulled at least $46.5 billion in 2015.

The rate of selloff accelerated sharply in 2016. The scale of redemption moves inversely with the price of oil; when the price of oil turns lower, the level of redemptions rise bringing the stock prices lower. Hence, we have this two-step tango.

In the long run, stock valuations are determined by earnings, wages, interest rates and production costs.

Energy costs today comprise a small fraction of the overall production

Dancing to the Petrobeat - Total Return of Crude Oil (blue) vs DJIA (red) hedge against precipitous drops in commodity prices. In other words, the SWF is used as a vehicle to manage windfalls when commodity

Falling prices of crude oil are resulting in massive selloffs of SWFs by commodityproducing countries

While the price of crude oil is set by supply and demand, the cost of production varies widely by country.

For obvious reasons, the cost of crude production from shale oil or off-shore drilling is significantly higher than that of light sweet crude produced inland. While the cost of production per barrel of crude oil is just below $10.00 in Kuwait or Saudi Arabia, it is $23.50 in Venezuela, $36.00 in Norway and $52.50 in the United Kingdom.

At current prices of $30-35 per barrel of crude, the profit margin has shrunk significantly for Saudi Arabia and the United Arab Emirates, while losses are mounting for Norway, Brazil, Canada and the UK. Against this

cost, thus we expect to see that stock valuations will decouple from oil prices. The current tango will end only when the redemption by SWFs wanes in magnitude, which will likely happen when crude prices again go above $50 a barrel. Until then, let us charm ourselves with the two-step tango to the petrobeat: down-downup-up-down…

Shohini Kundu is a junior majoring in Economics and Computer Science.

CORNELL BUSINESS REVIEW | 27

It’s Crunch Time! The Cayuga Crunch Story

BY SANJANA SETHI

A

dorning the shelves of cafés on the Cornell campus is a new entrant, and what they’re selling is not just a scrumptious mix of healthy goodness: Cayuga Crunch is selling a story. Their story. A story of unassuming freshmen who found something they loved doing and decided to share a bite of their passion with fellow students. And so the story goes.

Alex Strauch, founder and “Chief Crunch Officer” of Cayuga Crunch, recalls baking granola in the kitchen of his freshman dorm, Donlon. What began as an antidote to cure homesickness slowly started gathering momentum as business venture, with humble beginnings of a less than $1,000 investment and a mere five friends as inaugural customers.

At the time, Alex likely did not predict that his innocent dorm activity would metamorphose into one of the most enviable start-ups at Cornell. Was this just a happy coincidence?

Enthused by the growing demand for his new venture, Alex began thinking about selling his granola on a larger scale. As the idea began to develop, Alex discovered that the first granola ever made was in Dansville, New York, a little over 81 miles from Ithaca, not too far above Cayuga’s waters. Perhaps another fortunate coincidence?

Alex contemplated: why not make something as good, if not better, than what was originally produced here, by giving it a unique spin and serving it as an alternative to the sugary granola available in the market? Commencing from the dormitory kitchen, the Cayuga Crunch team began supplying Bear Necessities in RPCC. This attracted 28 | CORNELL BUSINESS REVIEW

scores of freshmen midnight-snackers, resulting in a wave of success for the new venture. Next, the Crunch team, comprised of six friends, began baking granola every Sunday in a kitchen in the Cornell Law School. However, soon thereafter, authorities discontinued their use of Cornell premises for a private “Visitors to their website are immersed in this closeknit team having a great time producing what is not a business product, but a passion project” business. This meant an “emotionally exhausting” two-month long halt in manufacturing because of a lack of available kitchen space. Undeterred, Alex and his team viewed this unexpected hurdle as an imminent opportunity for growth.

Following deliberations, Cayuga Crunch partnered with Ithaca Bakery.

Not only did this provide them with a professional kitchen, but also a unique partnership resulting in the supply of Cayuga Crunch to Collegetown Bagels (CTB) and Ithaca Bakery itself. As of now, Cayuga Crunch is available in five locations across campus: Mac’s, Terrace, Temple of Zeus, Manndible, and Fork and Gavel, apart from Ithaca Bakery’s locations and The Shop in downtown Ithaca.

What makes Cayuga Crunch succeed in the highly saturated market of snack bars, breakfast bars and granola? Unlike most competitors, Cayuga Crunch is handmade from locally-sourced ingredients including maple syrup, honey, dark chocolate

chips and bananas. It promises to be less sugary and more wholesome than its processed counterparts, and markets itself as a healthy snack, one that will keep you going for the day. While the group promises that a full bag of Cayuga Crunch can keep you satiated for two hours, the product is designed to remind consumers that they are not meant to consume it in one go. This lends to Cayuga Crunch’s versatility, both in terms of consumption and shelving.

Ziploc packaging enables consumers to keep the granola as a constant snack on hand, ready to be consumed with yogurt, ice cream, milk or on its own. Rounding out their product design, the quirky packaging and eclectic names–Monkey Business, Aztec Energy and Crumble Rumble–are a direct and tantalizing invitation to explore this new brand.

“The best way to market something is with great people. If they are passionate about the product, they’ll make other people passionate about it,” claims Alex.

The Crunch team realizes that a good brand need not spend exorbitantly on marketing its product. The honesty of the brand and the passion of those who produce it are meant to be contagious, supplanting traditional marketing strategies. The first look at their website sends an immediate sign of the quirky nature of this brand. The Founder is named the “Chief Crunch Officer”, and then there are Financial “Gurus” and Advertising and Marketing “Guys”.

The website is replete with outlandish biographies of each of the team members.

Visitors to the website are immersed in this close-knit team having a great time producing what is not a business product, but a passion project. Apart

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from its website, Cayuga Crunch is present on Instagram and Facebook.

The young entrepreneurs identify and capitalize on the importance of using social media particularly for attracting Cornell students, who can spread awareness of the brand through word-of-mouth.

Cayuga Crunch has achieved unprecedented growth in a short period of time, and from the sound of it, Alex, the Chief Crunch Officer, shows no signs of slowing down.

The team is reaching for every opportunity to expand and grow the brand, first by hoping to partner with local farmers to make this growth process a collaborative one, as well as to pursue its endeavor of being a locally-sourced snack. Second, the group wishes to venture into Cornell Dining with the aim of becoming a staple of every Cornell student’s diet. Third, they wish to expand their sales space to coffee chains and cafés beyond the familiar surroundings of Cornell’s campus.

Although growth prospects are abundant and available, the challenges interspersed are many.

At present, every member of the Cayuga Crunch team participates in hand-making the granola. Expansion would necessitate a rise in production and in turn more manpower. For students simultaneously balancing grades and their commitment to this venture, challenges are imminent.

In the comfortable marketplace of Cornell campus, Cayuga Crunch received a roaring welcome, which augmented the immediate spur in demand. Venturing into the real world market and competing with existing substitute products entails a complete overhaul of business strategy to cater to the new market.

Even so, Alex’s passion for his brainchild shines through every time he speaks of his brand: “Cayuga Crunch is ingrained in who I am. I think about it when I sleep. It’s the first thing I think about when I wake up. It’s like you just can’t stop.” It is contagious, enough to make you immediately believe in him, in his brand, and that Cayuga Crunch will surpass or adapt to obstacles in its course as it edges closer towards the mass market. His sentiment is echoed

by each of his teammates. Every new idea or concept learned in class spurs “The snack group is vying to become a staple of every Cornell student’s diet” the mental conflict in each of them over how it can be applied to Cayuga Crunch.

It is the passion and hard work of the Crunch teammates that turned a string of coincidences into what Cayuga Crunch is today. If their journey up to this point in time is any indication, Cayuga Crunch is here to grow and go places (literally) far above Cayuga’s waters.

A big thanks to Alex Strauch, Hotel Administration ’18, for speaking with CBR and sharing his story! We are truly inspired. The Cayuga Crunch team includes sophomores Ritesh Shinde, Javier Perez, Kristin Zak, Sam Turer, Jacob Bigenwald, Kupono Liu. Sanjana Sethi is a sophomore majoring in Economics.

CAYUGA CRUNCH FLAVORS

Crumble Rumble

Aztec Energy

Monkey Business

CORNELL BUSINESS REVIEW | 29

BYIGNACIOGARCIACONWAY

D

uring the late 20th century, Brazil’s story was not very different from that of the rest of Latin America. As the 1980s began most South and Central American countries, along other developing nations of the world, faced stagnant economies with high levels of inflation. The Mexican default in 1982 augmented monetary pressures throughout the region, leading to the loss of Brazil’s access to foreign financial markets. By 1985 one thing was clear: economic and fiscal reform was necessary.

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For close to a decade, the Brazilian government failed to reduce inflationary pressures or accelerate economic growth. It was not until 1994 and the election of President Fernando Henrique Cardoso, who would serve until 2003, that Brazil would start a successful stabilization program. The “Real Plan” managed to decrease levels of inflation and thus create a new consumer class in Brazil that would push for the development of the country.

Initially, investors had doubts on the Real Plan’s success, but these were silenced by an increasing GDP and rapid growth.

The government’s actions were not unique to Brazil, but reflected the results of what economist John Williamson termed the Washington Consensus of 1989. It originally consisted of 10 policy areas Williamson observed to be common in the advice given to Latin American governments by Washington-based institutions such as the International Monetary Fund, the World Bank and

the U.S. Treasury. The term quickly went on to represent the neoliberal and market-based approaches most governments took to confront the crisis.

Yet the Washington Consensus had social and political undertones as well.

The quick economic recovery was at the expense of many, increasing inequality and leaving lower class citizens out of the equation. This led to a leftist backlash in the region, leading to many political victories for worker and socialist party leaders such as Hugo Chavez in 1999 and Evo Morales in 2006. In Brazil, Luiz Inácio Lula da Silva, founder of the Brazilian Worker’s Party, was inaugurated as president in 2003, and throughout his presidency, the country prospered. Many deemed the new political spectrum of Brazil and other South American countries a success, yet by the end of the decade and the beginning of the next, the economy would suffer a contraction.

Crippled with falling demand for exports, a devaluing currency, increasing levels of unemployment and a new administration, Brazil entered the second decade of the 21st century on tough terms.

For most of the 2000s, Brazil had an export dependency on China, but as the Chinese economy began to slow down, fewer Brazilian products were demanded and prices plummeted along with a surplus of goods. Investment fell 12% in the second quarter of 2015 as unemployment rose to 8%. By August 2015, the real had devalued 25% against the dollar. The high levels of public and private debt led to a decrease in consumption of more than 1.5% in both sectors, and by the last quarter of the year, GDP had an annual growth rate of -5.9%.

Amongst all the economic turmoil,

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Crippled by falling demand for exports, a devaluing currency, increasing levels of unemployment and a new administration, Brazil entered the second decade of the 21st century on tough terms. corruption scandals involving President Dilma Rousseff, da Silva’s handpicked successor, and Petrobras, a state-owned oil and Energy Company, spread through Brazilian society. An investigation that began inspecting money laundering in car wash establishments led to the discovery of bribery to Petrobras executives from construction companies in order to secure contracts. It was estimated that the funds used in the scheme amounted to almost $2 billion. Since “Operation Car Wash” became public, many politicians and company executives have been detained and questioned. Coincidentally, the majority of these events were said to take place when Dilma Rousseff was chairman of Petrobras. While the current president denies any knowledge of the alleged events, Senator Delcídio do Amaral testified on March 15, 2016 that Rousseff was aware of the corruption and tried to impede the investigation along with members of her cabinet. Unfortunately for Petrobras, these accusations greatly affected the company’s market value, reducing it by 60% in 2014.

By late 2015, Rousseff ’s approval rating was a dismal 8%, and Brazilian society was infuriated with its government’s affairs and the general economy. Large protests began to form, calling for action, with some even leaning towards military intervention. The president reaffirmed the people’s right to protest and agreed with them that Petrobras should be cleaned up.

Yet, she has not taken any immediate action against the company or the members of her party involved, relying on the already corrupt judicial system. The delicate situation reached a climax when former president Lula da Silva’s administration was also called into question.

On March 4, 2016, da Silva’s house was under federal investigation and the former president was taken in for questioning.

Investigators claim that Lula da Silva

received benefits, including renovations for his beach homes and campaign funding, in connection to the Petrobras scandal.

Furthermore, doubts about the success of his presidency emerged. Lula left office with almost 80% approval after having improved the minimum wage and other popular measures, but in hindsight, his failure to deal with structural inequality is now said to have contributed to the current crisis.

Moreover, in an attempt to help Lula da Silva avoid prosecution, Rousseff appointed him as her Chief of Staff. A federal judge later blocked the appointment.

Massive protests are calling for the impeachment of President Rousseff, for having allowed the economic situation to worsen as her party is investigated for corruption. She has refused to step down on the grounds that she was elected in a democratic process, and Rousseff blames her political opponents for prolonging the economic crisis by creating a negative image of her administration, causing political disorder. However, members of the president’s administration also seem to disapprove of her tactics since some, such as Sports Minister George Hilton, have

resigned from their positions in protest.

As her administration and government coalition crumble before her, Dilma Rousseff ’s impeachment becomes ever more likely, and on April 5, a justice of the Brazilian Supreme Court ordered the country’s legislature to begin impeachment proceedings against Rousseff ’s Vice President, further deepening the crisis.

For all of the drama surrounding the scandals in Brazil, their government is not the only leftist administration facing problems in Latin America. On November 22, 2015, Mauricio Macri, a centerright politician, won the presidency of Argentina, marking the end of the 12-year Kirchner leftist government. In Venezuela, approval for Chavism has been in decline since 2007 and is now at an all-time low due to President Nicolas Maduro’s unsuccessful attempts to boost the mess that is the Venezuelan economy. Meanwhile, Evo Morales, Bolivia’s democratic socialist President, enters his last term after losing a referendum that would allow him to extend his presidency to a fourth term. A centerright backlash is beginning to solidify throughout most of South America as many of the region’s economies and governments cripple.

Could it be then that, like in the late 20th century, Brazil’s story today is not very different from that of the rest of Latin America?

Ignacio Garcia Conway is a sophmore in the Dyson SchoolofAppliedEconomics and Management.

AS HER ADMINISTRATION AND GOVERNMENT COALITIONCRUMBLEBEFOREHER,DILMAROUSSEFF’S IMPEACHMENT BECOMES EVER MORE LIKELY. CORNELL BUSINESS REVIEW | 31

INTERNATIONAL

Every Man for Himself: Greco-RussianRelationsHeightenTensionwithEU

BY GRACE SHI

G

reece became the epicenter of the European debt crisis in October 2009, when it announced that it had been understating its budget deficit for years.

To avoid a greater eurozone catastrophe, the so-called troika—the International Monetary Fund, the European Central Bank and the European Commission— issued several bailouts to Greece that came with harsh terms: austerity measures requiring severe budget cuts and tax increases. This money was meant to buy Greece some time to stabilize its finances and alleviate market fears, however, it mainly went toward paying off Greece’s international loans rather than stimulating the Greek economy.

Now, adding a new complication to an already strained system, hundreds of thousands of Syrian refugees are fleeing to Greece. Nearly 130,000 migrants arrived by sea between January and March 2016 as neighboring countries, including Hungary, Poland, the Czech Republic, Slovakia, and Macedonia, have stopped allowing Syrian refugees to pass through. Greece, struggling to handle the refugee crisis and six years 32 | CORNELL BUSINESS REVIEW

deep in financial deadlock, has seen a drastic reduction in its ability to respond efficiently to these problems, forcing the country to call upon the troika and fellow European Union members for aid. Conflicts have arisen due to Greek citizens’ hatred of the austerity measures and complaints that the troika is not doing enough to help Greece reboot its economy.

As Greece seeks salvation from these financial woes, Russia has stepped in with a tempting gas deal that will allow Russia to build a pipeline through Greece and western Europe. Through this deal, Russia has given Greece the opportunity for foreign investment as well as the chance to become an integral part of the energy industry in Europe, to the point where a “Memorandum of Understanding” was signed on February 24, 2016 by three natural gas companies:

Russia’s Gazprom, Italy’s Edison SpA, and Greece’s DEPA SA. The Memorandum introduces the Interconnection Turkey Greece Italy-Poseidon project that will allow for deliveries of Russian natural gas to Greece, and from Greece to Italy, through an undersea pipeline in the Black Sea. Russia has the world’s largest natural gas reserves, making it the largest oil producer in the non-OPEC countries and the second largest in the world. The ITGI-Poseidon pipeline deal comes after several other Russian gas pipeline plans, including the failed Turkish Stream project (terminated after disputes over Turkey shooting down a Russian jet in Syria) and the controversial Nord Stream 2 pipeline, which bypassed Ukraine and brought oil through Germany to the rest of Europe.

Countries in the EU are in discord over these Russian gas pipeline projects, because while many European countries worry about over-dependence on Russian energy, some—like Greece, Germany, and Italy—clearly stand to benefit from these projects. Moreover, after the 2014 Ukraine Crisis, irate EU countries and the United States imposed trade sanctions on Russia. However, the few EU countries that continue to conduct business with Russia find less incentive to continue these sanctions, as the Russian pipelines hold promise in shaking off the debt crisis. The 2016 deal with Greece has caused increasing alarm and conflict. Western nations fear that Russia and Greece will become too close, especially since the two countries already share cultural and religious ties, and

As Greece seeks salvation from these financial woes, Russia has stepped in with a tempting gas deal that will allow Russia to build a pipeline through Greece and western Europe.

INTERNATIONAL

Russia’s aggressiveness indicates that it may be taking deliberate steps to exacerbate the financial conditional in Greece for its own economic and political gains. after Greece voted the left-wing Syriza party into power. Strong ties between Syriza and Russia are evident through the extensive correspondence between Syriza leader Alexis Tsipras and Russian president Vladimir Putin. These talks ended with an agreement in 2015 on boosting investment ties between the two countries, and Tsipras has also said that Greece would seek to mend ties between the EU and Russia. Western nations view this growing relationship with unease, worrying that Greece is distancing itself from the rest of the EU and that they will use their relationship with Russia as a bargaining chip to improve its position in further negotiations.

On top of the energy dispute, many European countries are increasingly alarmed by Russian aggression. They fear the implications of Russia’s annexation of Crimea in the Ukraine Crisis. Western states worry that the annexation will allow Russia to easily conduct a possible invasion of Poland or the Baltic states.

As reported by the 2015 North Atlantic Treaty Organization (NATO) annual report, “The pace of Russia’s military maneuvers and drills have reached levels unseen since the height of the cold war.”

RAND Corporation, with the help of American military experts, conducted a series of war simulations from summer 2014 to spring 2015, and concluded that a Russian offensive against NATO countries in the Baltic—Estonia, Latvia, and Lithuania; all ex-Soviet countries and members of the EU—would overwhelm NATO forces in under three days.

Although NATO is expected to

renew talks with Russia to improve military transparency, NATO Secretary General Jens Stoltenberg says it would be difficult to convene this meeting, ironically, with all the pre existing conflict between Russia and the alliance.

US General and NATO Commander Philip Breedlove also accused Russia of “weaponizing” the migration of Syrian refugees in order to destabilize Europe, citing the use of barrel bombs against civilians in Syria to “get them on the road” and flee the country.

EU countries are split on how they should deal with the European debt crisis, dependence on Russian energy, sanctions on Russia, and Russian aggression. Greece needs money to deal with Syrian refugees—possibly spurred on by Russian terrorization—and its own debt crisis, and the Russian pipeline project seems like an ideal option. On the other hand, the Baltic states and Poland, countries that would be immediately threatened by a possible Russian invasion, oppose dependence on Russian energy and support increased sanctions against Russia.

The Greek Minister of Economy, Infrastructure, Shipping and Tourism, Giorgos Stathakis, has claimed that “there is a lot of potential” in RussianGreek relations, and once problems which “exist…between the EU and Greece are overcome, then relations [between Moscow and Athens] will be fully developed.” The head of the Greek Foreign Ministry’s economic relations department, Giorgos Tsipras, said that the Greek government is looking to

“have more multidimensional foreign policy and economic foreign policy and Russia is one of the countries” with which Greece is looking to develop a stronger relationship. Tsipras also said that Greece has made “every possible compromise” with the EU on the debt crisis, adding that “Greece is not going to make more sacrifices.”

The Syrian refugee crisis, however, casts a shadow on Greece’s relationship with Russia. At the very least, Russia seems to be taking advantage of Greece’s situation.

Russia’s aggressiveness indicates that it may be taking deliberate steps to exacerbate the financial condition in Greece for its own economic and political gains. Deteriorating relations between both countries and the EU mean that a consensus on relief measures will be even more difficult to reach.

Greece, as the focal point of the European debt crisis, faces strong pushback for its fraternizing with Russia.

At the same time, the EU faces the challenge of unifying its members under a common financial relief banner, which seems to require mitigating conflicts in foreign policy, at least on the topic of Russian aggression. Since the EU is merely a currency union and lacks punitive enforcement mechanisms, this big picture problem may be well out of its scope. The EU can only continue its interest rate cuts, bond purchasing programs, and bailout plans in hopes of yielding positive results to end the debt crisis. With economic policy and foreign policy clashing, and each EU country looking to fend for itself, it will be harder than ever to create unity and a common cause.

Grace Shi is a junior in the College of Arts and Sciences majoring in Economics.

CORNELL BUSINESS REVIEW | 33

““As you set out for Ithaca hope the voyage is a long one, full of adventure, full of discovery.”

When I heard Elizabeth Garrett recite these words from the poet CV Cavafy in the midst of her inspiring inaugural address just six months ago, I dearly hoped her journey with us at Cornell would be a long one indeed. This brilliant and charismatic woman held such great promise, possessing the leadership talent to navigate these challenging times in higher education while staying true to our mission. I am deeply saddened by this loss and send my sincere condolences to her family.”

“Our classmates echo the many words of sympathy for the family and close friends of our president Beth Garrett.

Her remarkable dynamic spirit and caring will remain an inspiration to everyone.”

“As a Cornell alumna, I was so very proud of Cornell’s first woman president, Elizabeth Garrett. Although her tenure was tragically brief, she has touched us all in deep and important ways. Cornell has been enriched by her presence and her legacy is a significant one. My deepest condolences to her family, friends, and loved ones. May she rest in peace.”

“I join in the chorus of condolences to President Garrett’s family, to her friends and colleagues, and to the Cornell community all over the world. I was honored to represent Johns Hopkins University last September for the Inauguration of President Garrett. I was excited for the leadership and vision. In her short time as President, she brought so much that will forever ring sweetly in the history of our illustrious alma mater. My prayers and condolences to all. Thank you, President Garrett, for your service to our beloved Cornell.”

“No words can express our feeling of sadness and loss over the news of Elizabeth Garrett’s untimely passing. As a distinguished legal scholar and academic administrator with remarkable intellect, she joined the ranks of celebrated personages heading some of the top universities in the world. She will be missed and her legacy as a visionary leader will be remembered.”

“I wish to extend my deepest condolences to the family of Elizabeth Garrett and all who had the privilege of working under her leadership in Day Hall on the Cornell campus. I remember meeting her when she came to campus last summer and being so proud on that breathtakingly beautiful fall day on the Arts Quad when she was inaugurated as our President from among all the qualified applicants for the position. All we attorneys and Cornell women took an extra measure of pride in her for her accomplishment as our first woman President. Even within such a brief period of time, Beth made her mark on Cornell with her seriousness of purpose, great humor, work ethic which is all the more amazing given the illness we did not realize she was battling. The sense of shock and mourning was palpable in the hallways and offices of Day Hall last week. My heart goes out to all who knew her best and loved her most.”

“Dear friends, We have just learned of the sad death of Elizabeth Garret, as President of Cornell University. We cannot express the sadness we feel at this time. We remember Elizabeth as a fine and kind woman who was always so full of energy. She will be sadly missed by many. We know that words can give little consolation to relieve grief but we should like you to know that we too will be grieving for her. Finally, we express our heartfelt condolence to her family and the members of Cornell University.”

“We are saddened by the news of the untimely passing away of President Elizabeth Garrett. We send our heartfelt condolences to her husband and family. We have been away from campus on sabbatical this year and did not have a chance to meet President Garrett personally. Our enduring memory of her, then, will be of the great surprise and pleasure we experienced when President-to-be Garrett made an unexpected appearance at the last year’s Sesquicentennial Presidential Panel, “The Future of Higher Education.” Sparkling, vivacious, and looking just a bit mischievous in her bright red dress, she spoke of the task she was about to embark on with an enthusiasm that was infectious. That her life was cut short too soon is a tragedy for Beth and her family, and a great loss for all who are members of the Cornell community. Her dynamism, care, and commitment will be sorely missed.”

“When Beth Garrett first spoke to faculty on campus last spring she immediately made an impression. Here was a person with great leadership skills: vision, intellect, eloquence, decisiveness and good judgment. As we got to know her we learned that she had a gift not just for asking questions but also for listening. She was warm, funny, modest, and showed a rare ability for making people feel at home. The last time I saw her was at an event with students in December. I noticed with great admiration how she tried to talk to everyone there and I could see how deeply it was appreciated. Her passing is an enormous loss for us all.

Beth will be deeply missed.”

IN MEMORIAM ELIZABETH GARRETT 1963-2016

CORNELL BUSINESS REVIEW 6 YEARS