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General Commentary
October 16, 2016

VChIIP Switch

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Market Snapshot

Indices Week YTD
GSV 300 -2.8% -7.3%
S&P 500 -1.0% 4.4%
Dow -0.6% 4.1%
NASDAQ -1.5% 4.1%
Russell 2000 -2.0% 6.7%
MSCI -2.1% 14.6%
Valuations P/E Fwd P/E/G
GSV 300 27.9x 0.8x
S&P 500 18.0x 2.7x
I-Rates Now YTD
10-Year Note 1.8% -20.7%
3-Month Bill 0.3% 100.0%
Sentiment - Current
Bull-Bear - 25.5-33.7
Put-Call - 0.93
Vix - 16.12
Inflation Now YTD
Gold $1 18.1%
Oil $50.74 34.9%
Mutual Funds - Week
Fund Flows (bil) - -$3.40
Growth-Value 00-09 09-Now
Growth -34% 176%
Value 87% 109%

The future for me is already a thing of the past.

— Bob Dylan, Nobel Laureate (Literature, 2016)

Looking in the rearview mirror, the economic engine for the last 100 years was the United States, Europe, Japan, and Canada.

In 2000, with just 9% of the global population, these countries contributed over 50% of global GDP. But over the last 15 years, GDP growth in these countries has been flat-to-negative. Today they contribute just 41% of Global GDP.

A key driver behind this change has been aging populations. Over 26% of these populations are over the age of 60 while just 15% are under the age of 15. In Japan last year, there were more adult diapers sold than baby diapers.

In 2015, there were more adult diapers sold than baby diapers in Japan

Source: The Tokyo Times

These dynamics are not changing anytime soon. The average (weighted) fertility rate in Canada, the United States, Europe, and Japan is 1.6. At a fertility rate under two, you’re essentially dying.

Where is the growth and opportunity as we look ahead? We call it the VChIIPs — Vietnam, China, India, Indonesia, and the Philippines.

These countries are home to over 43% of the global population and command 28% of global GDP, growing at 6.6%. If you look at the demographics, they are the mirror opposite of what you see in the developed countries. Just 11% the VChIIP population is older than 60, 24% is younger than 15, and the fertility rate is 2.3, driving organic growth.

The center of gravity is changing. Africa is on deck with five of the 10 fastest growing countries last year.


Source: The Economist, World Bank, GSV Asset Management

*Includes Eurozone, United Kingdom, and Denmark

**2008-2013, as reported by the Economist, based on most recently-disclosed country data

Interestingly, conventional wisdom is that the China growth story is yesterday’s news. Exports in China were down 10% last month, which gave the “Chinese-Sky-is-Falling Crowd” extra ammunition.

But the Chinese story is just beginning.

If you look at the growth dynamics, it’s truly remarkable. A key catalyst is massive urbanization that is constant around the world but exploding in China. If you look at the United States, there are 10 cities with a population of one million or more. In China, there are 160. These are young people who are embracing technology, brands, and digital commerce. They’re getting ready to change the World.

Top Cities Ranked by Population

Source: OECD, U.S. Census Bureau

The official population for Shanghai is 34 million. But demographers will tell you that based on cellphone subscription data, it’s probably over 40 million. That is larger than the entire population of Canada. Most people have never heard of China’s tenth largest city, Xi’an. With a population of nearly 13 million, it is bigger than Sweden.



According to the Organization for Economic Cooperation and Development (OECD), the world is in the first inning of a demographic transformation that will result in the rise of a Global “Middle Class” numbering more than 4.9 billion people, ascending predominantly from the low income populations of the world’s developing and emerging economies. Defined as households that spend between $10 and $100 per day, the Middle Class is a cohort of CONSUMERS.

The world has never witnessed income growth at this speed or magnitude. China and India, for example, are doubling their real per capita incomes at 10 times the pace England achieved during the Industrial Revolution and 200 times the scale.

Global Share of Middle Class Consumption, 2010 vs. 2030 (P)

Source: The Brookings Institution

The VChIIPs are where the action is. According to the Brookings Institution, the Asia-Pacific region accounts for roughly 23% of global middle class consumption today. By 2030, it will be nearly 60%. This shift will create profound opportunities and challenges.


Expanding populations with discretionary income is creating a remarkable opportunity for multinational corporations and homegrown startups. This trend will drive new product development and marketing dynamics for a generation.

Coca Cola, for example, has implemented a layered strategy for China in which Coke is sold in urban areas at a comparable price to Western markets. As a result, Coke is established as a brand to which new consumers aspire. At the same time, Coke is being sold in the countryside for less, but consumers must return the bottle to the vendor on the spot — a strategy that saves costs and drives down the price.

Facebook’s recent failed Indian gambit on “Free Basics” — a “free” internet service that drives users to Facebook applications — underscores the digital land grab underway in the VChIIPs.

But the VChIIPs are spawning a stable of game changing new businesses in their own right. China is intent on creating its own consumer brands, exporting them and putting up roadblocks for foreign players. Alibaba (e-commerce), Tencent (digital media), Xiaomi (mobile devices), China Mobile (mobile), Vipshop (digital retail), and Baidu (search & internet services) — collectively valued at nearly $870 billion — are just a few examples of what China has in store for the World.

India, which has lagged China in recent decades, has had its own proliferation of consumer brands — without the onerous state protections of its neighbor in the Middle Kingdom.


Among the remaining VChIIPs, Indonesia — home to Tokopedia (Digital Marketplace, $1 billion market value), and Go-Jek (Transportation & Logistics, $1.3 billion market value) — is on deck.

Go-Jek, particularly, crystallizes the dynamic opportunities emerging from the VChIIPs.

Ride sharing, in most parts of the World, involves getting into someone’s car. But in a few countries, ride sharing is done on motorbikes. Thailand, Vietnam, India, and Indonesia have significantly more motorbikes than cars on the streets. The reason is simple — most of the population cannot afford a car. In Indonesia, approximately 80% of urban transportation is done on motorbikes, with an estimated 80 million motorbikes sold annually.


Source: Go-Jek

Go-Jek, which launched as a motorbike peer-to-peer ride sharing service, has quickly risen in popularity despite the entrance of heavy hitters like Uber in the region. It is applying technology in a way that makes sense for the nuanced Indonesian market. And now Go-Jek is evolving into an integrated logistics company. Additional announced services include Go-Send, Go-Eat, Go-Box, Go-Mart, Go-Busway, Go-Tix, Go-Massage, Go-Glam, and Go-Clean (you can guess what each entails).


Source: CrunchBase, Company Disclosures, GSV Asset Management


William Faulkner, who served as a cultural ambassador for the State Department during the Cold War, remarked that if we simply gave people a used car and a TV, they would understand the benefits of the American model.

Unfortunately, under the current model, the Earth cannot sustain transition of VChIIPs into carbon copies of America. Today, we are already using 1.5 planets worth of resources to meet global consumption demands (it takes 1.5 years to replenish the resources we consume in a year). We will need another half of a planet to simply sustain the next generation.

According to a recent study by the University of Michigan, for example, if India, China and Indonesia were to use air conditioners at the same rate as the United States (they are on pace to do so), energy consumption in those countries would be 50x levels in the United States.

The International Energy Agency projects that global energy demand will grow 37% by 2040. This additional demand is equivalent to the total current annual consumption of the United States and European members of the OECD combined. China and India alone are expected to account for over half of the total increase.


According to research from the Brookings Institution, the developing World is about 100 years behind developed countries in educational achievement. You might think these gaps would have tightened significantly with the technological advancements and increased connectivity of the Internet Age.

Average Years of Schooling, Developed vs. Developing Regions

Source: The Brookings Institution

But educational models have remained effectively unchanged for over a century — which has resulted in linear progress.

In India, for example, the number of private universities doubled from 2007 to 2012 in response to massive demand for higher education and a growing knowledge economy. But linear growth through brick-and-mortar models has been no match for demographics. According to research from the Parthenon Group, India is on track to have 40 million more college-uneducated adults in 2020 than today.

The same dynamics that have paved the way for disruptive global businesses to launch at lightening speeds — from Uber, which is upending the transportation industry, to Airbnb, which is redefining the hotel industry — are now propelling a new generation of education and talent companies the will help the VChIIPs bridge the gap.

“Weapons of Mass Instruction” — rapidly growing, scaled education models with disruptive technology — are using the Digital Tracks that have been laid over the past 15 years to reach and impact massive audiences.

Weapons of Mass Instruction: Scaling Education

Source: Company Disclosures, New York Times, TechCrunch

As GSV continues to seek out the the most dynamic growth companies in the World — what we call the Stars of Tomorrow — we believe an increasing number of opportunities will be emerging from our friends in the VChIIPs.

Stocks were heavy last week, burdened by a Fed that seems to be itching to raise rates and punk Third Quarter earnings. For the week, NASDAQ was off 1.5%, the S&P 500 fell 1.0% and the GSV 300 dropped 2.8%.

World Indices

Source: Yahoo Finance, GSViQ

Earnings season was already expected to be uninspiring, with a forecasted sixth quarter in a row of negative earnings growth. Early results last week, including Alcoa’s mega-miss, had investors fleeing for the exits.

2016 IPO star Twilio didn’t twinkle last week, falling 24% on news that it was doing a secondary following its rocket ship earnings. Continuing the trend of the “Four Amigos” (Apple, Amazon, Alphabet, and Facebook) doing everything the other friend is doing, Amazon announced a music service and Facebook announced a business collaboration service called “Workplace”.

IPOs continued their upward beat, with four new issues coming to Market last week. One issue priced above the range and one price below — more or less what would expect in a normal IPO environment.

We continue to be optimistic on the outlook for leading growth companies as their advantages are in many cases accelerating. Accordingly, we remain BULLISH.


by Luben Pampoulov

Who’s Driving?

Currently, there are about 2,000 direct job offerings for autonomous driving technology worldwide. Indirectly however, the real number is much larger than just 2,000. All the big tech companies have dedicated teams focused on developing self-driving technology: Google, Apple, Baidu, Tesla, Uber, Lyft, Didi to name a few. And the traditional car industry is not sleeping either: GM, Ford, Volvo, Nissan, BMW are all working and hiring for self-driving tech positions too. Approximately 100 companies have currently job listings relating to autonomous driving, and that number is rising.

According to Indeed Hiring Lab, a firm that tracks more than 16 million jobs worldwide, GM and Google are at the top of firms with self-driving hiring needs.

Self-Driving Car Job Offerings

Source: Indeed Hiring Lab, Fortune

Earlier this year, GM invested $500 million in ride sharing leader Lyft. Also this year, GM acquired self-driving car technology startup Cruise Automation for $1 billion. The trio is now combining efforts to mass-produce a fleet of self-driving cars that will be used to transform public transportation soon. According to Lyft’s CEO John Zimmer, such cars are already circling the streets of San Francisco and Phoenix, and he expects they will make up the majority of Lyft rides within five years. (Disclosure: GSV owns shares in Lyft).

Late in the summer, Cambridge-based startup nuTonomy beat Uber to become the first company to put self-driving cars out on the streets for public use. The 3-year old MIT spinout launched a taxi fleet in Singapore’s One North district. Passengers can request free rides on nuTonomy’s network and enjoy being driven by a computer. The company expects that by 2018, it will deploy its self-driving fleet across the entire island of Singapore. nuTonomy is also testing self-driving cars in the U.S. and the U.K., where it collaborates with Jaguar Land Rover. To date, it has raised $20 million from Highland Capital, Signal Ventures, Samsung Ventures, and Singapore’s EDBI.

Coming in second, Uber then launched its self-driving cars in September. Equipped with an army of cameras, the Uber-Ford fleet offers rides on a 12-square mile area in downtown Pittsburgh. While mostly autonomously, the Ubers do have drivers seating in front who can take over at any time.

Uber also acquired self-driving truck startup Otto for $680 million, and together they intend to deploy autonomous trucks for the long-haul freight transportation industry by next year. The potential for disruption is enormous: “In Uber, you press a button and an Uber shows up after three minutes,” Otto Co-founder Lior Ron said. “In freight … the golden standard is that it takes five hours of phone calls to find your truck. That’s how efficient the industry is today.”

At the same time, Ford announced it is partnering with Baidu, and the two said they are investing $150 million into Velodyne, a major supplier of self-driving car technology. Velodyne is the maker of LiDAR, a light-sensitive radar mounted on the top of vehicles, which provides a 3D view of surroundings of up to 200 meters away. LiDAR’s price tag has come down significantly over the years, from $80K to now $8K, and the new investment should further reduce the cost. Ford executives believe cars with this new technology will be ready for the road by 2021.

We believe that self-driving cars will be on the streets much sooner than most people expect. A year ago, none of the above partnerships had occurred, and the only visible progress was happening at Google. Today, most tech companies and every car manufacturer is working on producing autonomous vehicles. 

Pioneer Notes

by Li Jiang

An Innovator’s Dilemma

Professor Clay Christensen at Harvard Business School is probably most well known for his book “The Innovator’s Dilemma”, so much so that The Economist named it as one of the six most important books about business ever written.


Recently, I was fortunate to read one of his other books, “How Will You Measure Your Life?” It was profound for me. Christensen offers no easy answers, only a framework to help each of us evaluate what matters to us and how to pursue those things in our lives. This has become the book that I recommend and give to all of my colleague and friends.

You Are What You Do, Not What You Say You Do.

Many companies have elaborate and sophisticated strategies and value statements, yet they never reach those aspirations. Many organizations aim for the same high level of success. What differentiates the companies that do and the companies that don’t climb to their summit?

It’s what they do, not what they say they do that matters. This happens to all of us personally. If we say that our family and friends are our biggest priorities, does our daily decisions reflect that? It’s easy to think that your friends and family will support you if you spend more time at work because they love you and want you to succeed. But if you make small daily decisions that prioritize your career or something else rather than your family and friends, that debt adds up over time.

In this case, your life strategy is the accumulation of small decisions you make every day rather than the stated strategy you lay out. Make sure that the small daily decisions you make reflect what your life strategy is. That matters way more than what you say your strategy is.

Decide What You Stand For. And Then Stand For It All The Time.

One of the people in Christensen’s Harvard Business School class was Jeff Skilling, the former CEO of Enron, caught and jailed in one of the biggest business fraud cases in recent memory.

Clay questioned how a well meaning person could end up in jail. Certainly no one’s life strategy is to end up in jail. So how did it happen to someone who was smart and very capable?

In the book, Christensen observed that the unintended consequences happen as a result of an accumulation of decisions. Once you decide to break the rule “just this once”, it becomes very easy to make that choice over and over again until it escalates into a major ethical and legal problem. To borrow his point, “life is just one unending stream of extenuating circumstances.” If someone is willing to break their commitment “just this once” for an extenuating circumstance, it justifies any number of breaches.

Christensen never concludes with exactly what you should believe in and commit to, but that you commit to someone and do it 100% of the time.

Clay Christensen has taken his years of learning and distilled it down into a short book that was at the same time simple in principle yet profound in its depth. It provoked my thinking and gave me the opportunity to reflect on whether my intentions and actions were truly aligned. I highly recommend this book to anyone who believes she is still a student, which includes everyone because we are all students of life.

Six I's: Growth Economy Update

Week ending October 16, 2016

Interest Rates Now Week Trend Comment
10-Year Note 1.8% 4.0% N USD is down 1% against the Euro YTD
3-Month Bill 0.32% -3.0%
Spread Corp vs. Govt. 0.88% -
Spread Junk vs. Govt. 4.1% -
Euro vs. $ $1.10 -
Pound vs. $ $1.22 -
$ vs. Yuan Y6.73 -
$ vs. Yen ¥104.15 -
Valuations Now Month Trend Comment
CPI 240.9 0.1% + GDP Growth in Q2 was +1.4%
PPI 110.5 -0.1%
Oil Price $50.74 5.6%
Gold Price $1 -5.1%
Corn Price $3.54 5.4%
GDP (latest Q) 1.40% -
Indices P/E ttm Month Trend Comment
S&P 500 22.9x -1.6% + MSCI at attractive value
Small Caps - -2.7%
Value 16.0x -1.8%
Growth 22.0x -3.60%
MSCI Earnings Mkts. 12.0x -1.5%
S&P 500 Earnings Yield 5.56% -
Sentiment Current - Trend Comment
Bulls-Bears 25.5-33.7 - N Neutral sentiment
Put-Call 0.9 -
Vix 16.1 -
IPOs YTD - Trend Comment
# of IPOs 80 - + 4 IPOs with avg. performance at -6% last week
Pricing Above Range 14% -
Pricing In Range 65% -
1-Day Pop (Avg.) 15% -
YTD Performance (Avg.) 41% -
Median Market Cap (M) $372 -
Inflows Week - Trend Comment
Mutual Fund Flows (B) -$3.40 - - $15.3B outflows in last 4 weeks

Market Update

Week ending October 16, 2016

World Indices

America Index 10/16/2016 YTD Week
U.S. GSV 300 82.8 (7.3%) (2.8%)
NYSE 10521.3 3.7% (1.0%)
Dow 18138.4 4.1% (0.6%)
NASDAQ 5214.2 4.1% (1.5%)
NASDAQ-10 4808.5 4.7% (1.2%)
Russell 2000 1212.4 6.7% (2.0%)
S&P 500 2133.0 4.4% (1.0%)
Brazil Bovespa 61767.2 42.5% 1.1%
Mexico IPC 47701.5 11.0% 0.2%
Canada S&P TSX 14585.0 12.1% 0.1%
Euro-Asia Index 10/16/2016 YTD Week
China SSE 3063.8 (13.4%) 2.0%
Heng Seng 23233.3 6.0% (2.6%)
Singapore Straits Times 2815.2 (2.3%) (2.1%)
Indonesia JKSE 5399.9 17.6% 0.4%
Japan Nikkei 225 16856.4 (11.4%) (0.0%)
India Sensex 27673.6 6.0% (1.4%)
Russia RTS 1966.4 11.6% (0.7%)
France CAC 40 4470.9 (3.6%) 0.5%
Germany DAX 10580.4 (1.5%) 0.9%
U.K. FTSE 100 7013.6 12.4% (0.4%)

U.S. Indices Snapshot

Valuation P/E Est. P/E/G Price/Sales
S&P 500 22.9x 18.0x 6.7% 3.4x 2.7x 2.4x 2.2x
NASDAQ 24.4x 17.4x 6.6% 3.7x 2.6x 2.4x 2.2x
Russell 2000 23.1x 17.3x 6.5% 3.6x 2.7x 1.7x 1.6x
GSV 300 51.0x 27.9x 33.9% 1.5x 0.8x 5.5x 4.3x