Welcome to the major leagues of debt. Collateralized debt obligations, almost always referred to as a CDOs, are horrendously complicated deals that often leave anyone without a MBA wondering what was put into these CDOs.

The first thing to understand about bonds, (aka debt) is that bonds are often backed by something else. Think about your home mortgage. If you don't pay your mortgage, the bank can take the house. You end up homeless, and the bank sells the house to pay off the rest of that mortgage. There is something "backing" that mortgage; something lender can fall back on, if you don't pay your bills like a good human being. That's called collateral.

CDOs are one flavor of an entire sector of investing called structured finance, and they are also backed. CDOs, in the simplest concept, are just bonds backed by something else. In most cases, a CDO is backed by a collection of various types of debt. CDOs can be home mortgages, or other types of debt like credit cards, auto loans, and personal loans. Most of these types of debt are usually considered a bit more risky and they don't have the backing that a home loan does. So, if you think it through, you can imagine that CDOs are usually considered a risky investment.

To take a step further, understand that CDOs have multiple flavors within each CDO. These flavors are called tranches. If you've taken French, you might recognize the word, it means "slice" or "portion." Each slice of that CDO you invest in is a little different and carries different amounts of risk.

You could invest in the lowest risk tranche of the CDO, which would provide you lower risk. But, you don't get a good return on that investment. Or, you can be the heroic adventurer of bonds and invest in the lowest-grade tranche of the CDO. You'll make an amazing return, but if the economy even looks at you wrong, you might lose the entire investment.

CDOs aren¿t easy, and are almost always invested in by mutual funds, insurance companies and hedge funds. As an individual investor, you will probably not come across a CDO you can participate in.

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Tuesday, June 10, 2008

Three Days in the Valley: Liz Claman Sits Down with Sridhar Vembu

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Sridhar Vembu, CEO of AdventNet, the parent company of Zoho, sat down with Liz Claman to discuss the possibility of being bought and “cloud computing,” which he defined as “software on the Internet.”

“You don’t install it, you don’t maintain it, you just go to a browser and visit Zoho.com or one of the sites, and you use it,” Vembu said of the technology.

Visitors to Zoho.com can log in using their Google or Yahoo e-mail addresses, Vembu said, making it unnecessary for users to go through a lengthy registration process.

Zoho applications include the basic office applications, including a word processor, spreadsheets, and applications for presentations.

“For consumers it’s entirely free. That’s the new business model now,” said Vembu.

For businesses that sell software and applications like Zoho’s, Vembu said, “It is quite disruptive to their business models,” adding that “Microsoft, of course, has the most to lose in this.”

Vembu said the Zoho system costs a lot less to maintain and keep up than a traditional software system, and allows them to pass on the savings to the consumer.

“In our case, we actually make money from businesses. We use the consumer edition to get the brand awareness out there, and then we make money from businesses, and we feel that’s a very viable business model,” Vembu said.

Claman asked Vembu of his recent decision to turn down an offer from SalesForce.com to acquire Zoho.

“I see a big potential in this, so we really are not selling anything,” Vembu said. When asked if the company was making more than $1 million a month, Vembu replied, “It’s a lot more than that. We don’t disclose numbers, but it’s a lot more than that,” he said.

With regard to an IPO, Vembu said, “It’s not something we are focused on right now. We are focused on building and serving the customers right now. When asked about selling the company, he replied, “Never say never in business, but we are actually in this for the long haul.”

Zoho’s name began as Soho, which would have stood for “Small office, Home office.” But Vembu said Zoho was a “cooler version” and a “nice domain.”

When it comes to hiring, over half of Zoho’s staff is from India. Vembu said this was due to finding a “huge talent shortage in the Valley.” Zoho now has its own internal recruiting system in which graduates from lesser-known colleges around the world are recruited and put through Zoho’s unique training system, according to Vembu.