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General Commentary
November 12, 2017

GSV Capital Third Quarter 2017 Results 

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Market Snapshot

Indices Week YTD
GSV 300 0.00% 53.10%
S&P 500 -0.20% 15.30%
Dow -0.50% 18.50%
NASDAQ -0.20% 25.40%
Russell 2000 -1.30% 8.70%
MSCI -0.10% 32.20%
Valuations P/E Fwd P/E/G
GSV 300 27.5x 0.7x
S&P 500 19.4x 2.6x
I-Rates Now YTD
10-Year Note 2.40% -2.00%
3-Month Bill 1.23% 141.20%
Sentiment - Current
Bull-Bear - 45.1-23.1
Put-Call - 1.16
Vix - 11.29
Inflation Now YTD
Gold $1276 10.70%
Oil $56.90 5.70%
Mutual Funds - Week
Fund Flows (bil) - $4.70
Growth-Value 00-09 09-Now
Growth -34% 244%
Value 87% 147%

On November 8th, GSV Capital (NASDAQ: GSVC) announced its Third Quarter 2017 financial results. Please click here for GSVC’s official press release, which captures detail reflected in the update below.

At the end of the Third Quarter, Net Assets totaled approximately $209 million, or $9.69 per share. This is up from approximately $202 million, or $9.11 per share at the end of the second quarter, and $192 million, or $8.66 per share at 2016 year end.

The GSV Capital team remains laser focused on specific, proactive steps to enhance shareholder value as we continue to concentrate the portfolio around blue chip, venture backed companies with a line of sight to an IPO or liquidity event.

  • As part of ongoing expense reduction efforts, GSV Asset Management has agreed to voluntarily waive its management fee by 25 basis points in 2018. This is consistent with the fee waiver offered in 2017.
  • On a related front, Management and the Board of Directors are reviewing GSV Capital’s incentive fee formula with the objective to better align shareholder and Management interests. We anticipate implementing a revised incentive fee formula prior to announcing our financial results for the fiscal year ending December 31, 2017.
  • As of November 8th, 2017, GSV Capital has nearly completed the $5.0 million discretionary share repurchase program announced in conjunction with the company’s second quarter earnings report. GSV Capital’s Board of Directors has authorized an expansion of the repurchase program to an aggregate of $10.0 million and an extension through November 6th, 2018, whichever comes first.
  • Finally, we are evaluating options to address GSV Capital’s convertible debt outstanding. This activity has been supported by liquidity from recently closed transactions, including shares sold in Chegg, Snap, and Spotify in the third quarter and subsequent to quarter end.
GSV CAPITAL THIRD QUARTER 2017 NAV
Net Assets of $209.4 million, or $9.69 per share, as of September 30, 2017

Source: GSV Capital

PORTFOLIO REVIEW

Of our five key investment themes, Cloud Computing and Big Data is the largest commitment, comprising approximately 36% of the total portfolio at fair value, excluding treasuries. Education Technology represents 34.5% of the portfolio, Social Mobile is 18.2%, Marketplaces is 10.8%, and Sustainability is approximately 1%.

GSV CAPITAL’S KEY INVESTMENT THEMES
As a Percentage of Total Portfolio (Excluding Treasuries) at Fair Value, as of 9/30/17

Source: GSV Capital

As of September 30, 2017, there were 37 companies in our investment portfolio, compared with 46 a year ago. This reflects GSV Capital’s continued strategy of consolidating the portfolio around top positions and later stage companies.

To emphasize this point, our top five positions — Palantir, JAMF, Spotify, Coursera, and Dropbox — account for approximately 48% of the total portfolio at fair value, excluding treasuries. By comparison, this approaches the weighting of the top 10 positions at the same time last year, which accounted for approximately 55% of the portfolio at fair value, excluding treasuries.

Historically, leading portfolio positions with a runway to an IPO or liquidity event have been a positive catalyst for our stock. In fact, GSV Capital traded at a premium to NAV in advance of high profile IPOs of Facebook and Twitter.

Our largest position continues to be Palantir, the disruptive big data, analytics, and security company that works with leading government, commercial, and non-profit institutions around the world. It accounts for approximately 13% of our total portfolio at fair value, excluding treasuries.

IDC estimates that Palantir operates in a sector that will grow from $150 billion in 2017 to over $210 billion in 2020. The company’s applications range from cyber security to capital markets intelligence, healthcare delivery, and defense. Importantly, while Palantir launched with a focus on large government contracts, CEO Alex Karp has indicated that corporate customers now represent over half of its revenue. Key clients include Airbus, AXA, Merck, BP, Deutsche Bank, and GlaxoSmithKline.

GSV CAPITAL TOP FIVE POSITIONS
Top Five Positions = 47.8% of Total Portfolio (Excluding Treasuries) at Fair Value as of 9/30/17

Source: GSV Capital

*Subsequent to third quarter-end, through November 8, 2017, GSVC sold 3,657 shares of Spotify at an average net share price of $3,800.00

Karp has suggested publicly that Palantir is positioned for an IPO, noting in February that he expects the company to be breakeven by the end of 2017. To date, Palantir has raised $1.9 billion of equity funding from syndicate of investors that includes Founders Fund, In-Q-Tel, and Tiger Global.

GSV’s second-largest position is JAMF, a pioneering enterprise IT management platform for Apple products. We are pleased to report that on October 11th the company announced a definitive agreement to be acquired by Vista Equity Partners, a leading private equity firm focused on software, data, and technology-enabled businesses. The transaction is expected to close in the Fourth Quarter of 2017.

While financial terms have not been disclosed, if completed, we believe the transaction will represent a return of approximately 3.5x on GSV Capital’s investment, which is reflected in our third quarter valuation. JAMF’s other primary backer is Summit Partners.

GSV’s third largest position is Spotify, the world’s leading music-streaming platform, which now counts well over 140 million users and 60 million paying subscribers across 60 international markets. To date, it has raised over $1.6 billion from a syndicate of investors, including Accel Partners, Founders Fund, Technology Crossover Ventures, and Goldman Sachs.

According to multiple reports, Spotify is considering a direct listing on the New York Stock Exchange in late 2017 or early 2018. At Third Quarter end, GSV Capital valued its position in the company at approximately $32 million, or 11% of the total portfolio at fair value, excluding treasuries. GSV’s Third Quarter valuation implies a value for Spotify of approximately $14 billion.

But we are seeing growing interest in the company as a potential listing approaches. On September 27th, Reuters and Forbes reported that private trades were valuing Spotify at about $16 billion. Since then, CNBC, Forbes, and Yahoo Finance have cited estimates that the company’s value could jump to $20 billion when it goes public.

While we are pleased to see growing excitement around Spotify, the company’s long-term valuation growth has been driven by outstanding fundamentals. Spotify reports that since 2014, listening hours per user are up 25%, and the average number of artists each listener streams per week has increased 37% over the same period. In other words, not only are people spending more time on the platform, they are engaging with a broader range of content. It’s a double play.

SPOTIFY “DOUBLE PLAY”

Source: Spotify Public Disclosures

Not coincidentally, since 2014, Spotify has invested heavily to improve its core technology, including an advanced recommendations engine powered by artificial intelligence that tees up new music people love.

At the same time, as the company continues to renegotiate royalty agreements with leading record labels — including a crucial deal signed with Warner Music Group in August — we are seeing a positive impact on gross margins.

The net result is that Spotify appears to be well positioned for long term, open-ended growth in a market that Goldman Sachs predicts will double to $12.3 billion by 2020.

GSV Capital’s fourth-largest position is Coursera, the world’s leading digital education platform. Today Coursera reaches over 25 million learners with more than 2,000 courses from 149 premier global universities, including Stanford, Yale, Princeton, the University of Pennsylvania, Peking University, and others.

On the one hand, Coursera is capitalizing on new technology fundamentals that enable people to learn anytime, anywhere. But it is also addressing accelerating demand for lifelong education, sparked by the twin forces of globalization and automation, which are making career obsolescence a new reality.

Kaizen is a Japanese business term meaning “continuous improvement.” An education corollary is GSV’s concept of “KaizenEDU,” which means “continuous learning.” In a world with smart machines, you can no longer fill up your “knowledge tank” until age 25 and cruise through life. Effective workers must refill their knowledge tanks continuously. But it will not be feasible to drop out of life and take on massive amounts of debt to stay educated.

Coursera has the potential to democratize global access to high quality education with certificates from leading academic institutions that cost as little as $29 and accredited degrees in high demand fields like data science that start at $15,000. Lucrative, recurring revenue engagements with enterprise customers — including IBM, BNY Mellon, Boston Consulting Group, AXA, and L’Oreal — complement its consumer offering.

Coursera represents approximately 6% of the GSV Capital portfolio at fair value. In June, it completed a $64 million Series D financing at a valuation of approximately $800 million as reported by PitchBook. To date, the company has raised $210 million from a syndicate of investors that includes NEA and Kleiner Perkins.

Dropbox rounds out the top five, representing about 6% of the GSV Capital portfolio at fair value. It continues to be widely viewed as a top IPO candidate following July reports from Bloomberg, Business Insider, and others that the company was likely to hire Goldman Sachs as a lead advisor.

DROPBOX IS THE FASTEST SAAS COMPANY TO $1 BILLION REVENUE RUN RATE

Source: IDC, Company Public Disclosures

The fundamentals speak for themselves. Dropbox is the fastest Software-as-a-Service business to reach a $1 billion revenue run-rate, according to IDC. It has reported that it is profitable on an EBITDA basis since April. And it counts over 500 million users and 200,000 business customers — including a majority of Fortune 500 companies.

To date, Dropbox has raised over $600 million from a syndicate of investors, including Sequoia, Benchmark, Accel, Goldman Sachs, BlackRock, Greylock, Morgan Stanley, and T. Rowe Price.

Outside of the top five, Lyft announced that it raised $1 billion at an $11 billion valuation on October 19th. The financing was led by CapitalG, a venture investment arm of Alphabet. (Click HERE to read GSV Asset Management’s recent analysis on the state of play in the global ridesharing market.)

GSV Capital’s Third Quarter valuation implies a value of approximately $6.7 billion for Lyft. The position is currently marked at a fair value of $8.8 million.

ALPHABET LEADS $1 LYFT FINANCING VALUING THE COMPANY AT $11B
Lyft Co-Founders Logan Green (CEO, Left) and John Zimmer (President, Right) with CapitalG (Alphabet Investment Arm) Partner David Lawee, who is joining Lyft’s Board

Source: Lyft

We remain extremely bullish on Lyft’s long-term growth potential. The company reported its 500 millionth ride in October, and in 2017, it has already completed more rides than in all previous years combined. Lyft is now available to 95% of the U.S. population — up from 54% at the beginning of the year.

To date, Lyft has raised over $3.6 billion from investors including Andreessen Horowitz, General Motors, Founders Fund, KKR, Alibaba, AllianceBernstein, Coatue, and others.

IPO UPDATE & LOOKING AHEAD

According to Renaissance Capital, there were 131 U.S. IPOs through November 8th, a 37% increase over the same period last year. At nearly $32 billion, proceeds raised to date are up over 88% year-over-year.

For context, just 102 U.S. companies went public in all of 2016 and only 40 were venture backed. There have been 46 VC-backed IPOs in 2017.

IPO MARKET REBOUND
2017 U.S. IPOs and IPO Proceeds

Source: Renaissance Capital, GSV Asset Management

Data as of 11/6/17

Through November 8th, 17% of IPOs priced above the range, 62% priced in-range, and the average one-day pop was 13%. Overall IPO performance was up 29%, which mirrors the positive movement in broader markets this year.

We maintain a strong conviction that GSV Capital shareholders will benefit from these tailwinds as we continue to concentrate the portfolio around what we believe to be some of the world’s most dynamic, venture-backed private companies. With GSV Capital selling at a roughly 39% discount to NAV as of November 7th, we believe that there continues to be a great risk-reward opportunity for our investors.

Bubblin'

by Luben Pampoulov

Open Sesame

The IPO window is now wide open, with a flood of deals pricing over the first two weeks of the month, and with another 11 IPOs on deck this coming week. Additionally, tech IPOs in China are starting to pick up as well, as was evidenced by Tencent’s spin off China Literature, which raised $1.1 billion and traded up +83% last week.

M&A activity is also picking up, with Musical.ly getting acquired by China’s Bytedance for ~$900 million last week. We have been fans of Musical.ly for a long time, as it’s been one of the most engaging social media apps we’ve come across. Its users spend close to 40 minutes per day, on average, which is higher than the average daily engagement on Facebook, Snapchat, Instagram, Pinterest or Twitter.

Few people know that Musicval.ly is a Chinese startup, which first became popular outside of China. Unlike most Chinese startups that become local copy-cats of leading services from the U.S. and Europe, the Shanghai-based company saw its biggest adoption across the U.S. and Western Europe first.

We’ve written about it in the past, but briefly — the Musical.ly app allows users to create short videos singing along pop songs with layered-on effects like time lapse, fast motion, or repeat. It’s a combination of music, video, air guitarring, dancing, stickers, filters and social sharing, all in one. Its demographic is younger than that of Snapchat and others, with the large majority of users between the ages 10 and 18, and with nearly 3/4th of them being female.

In recent years, it’s been one of the most popular apps in American and European classrooms, also providing an early stepping stone into the music industry for talented and creative kids. Some of the most popular creators, also called “musers,” have amassed millions of followers, and in a few cases even tens of millions.

With Millions of Followers at Very Young Ages

About one year ago, Musical.ly crossed 40 million daily active users (DAUs), and today it is reported at 60 million. The company is still very early in its monetization efforts, and we estimate they will generate about $20 million of revenue this year.

While many might be surprised by the optically high $900 million valuation, which puts the startup at 45x price-to-sales, it is actually quite attractive when valuing it on a Price-to-DAU basis — at just 15x. Additionally, Musical.ly’s daily active users are growing at an estimated +50% rate, and the app has one of the highest time spent per user per day (engagement) metric in the social media space.

Leading Social Media Platforms

Source: Company filings, GSV estimates

On the IPO front, Stitch Fix is on deck to go public this coming week. The San Francisco-based startup is an AI-driven fashion and styling platform that delivers personalized clothes and accessories. The user base is predominantly female, and the average user is spending approximately $500 on the platform per year.

Benchmark’s Bill Gurley has been lauding Stitch Fix as one of the top AI-driven companies in their portfolio, competing on talent against the likes of Facebook, Google, and Uber. To date, the startup has raised only $50 million from Benchmark, Lightspeed and Baseline Ventures, and it is expected to price its IPO at a $2 billion market cap, or about 2.0x P/S. Second quarter revenue growth was +26%, with barely positive operating margin and with $38 million in operating cash flow.

We expect to see a handful of blockbuster IPOs over the next 8-12 months, including Spotify, Airbnb, Dropbox, Palantir, and perhaps Lyft. (Disclosure: GSV owns shares in Spotify, Dropbox, Palantir, Lyft). 

Pioneer Notes

by Li Jiang

Humans Not Allowed

In 2015, computer scientist Jerry Kaplan wrote a book titled Humans Need Not Apply.

At that time, it provoked debate from technologists and policy makers alike about the rate in which technology may make humans obsolete.

Yet not even two years later, I propose that Jerry didn’t go far enough.

What if the headline of our future isn’t “Humans Need Not Apply” but “Humans Not Allowed”?

At least in saying Humans Need Not Apply, we leave the door ajar for people to make a choice, even if suboptimal, to hire humans to keep doing their jobs.

But what if people were just banned from doing certain jobs?

Here is a case in point. Drumroll please…

You knew I was going to pick Tesla.

On October 9, 2014, the company introduced Tesla Autopilot, a part of the $2,500 “Tech Package” option. Since then Tesla has released a number of hardware and software updates, most notably the “Hardware 2″ update in October 2016 that allows for fully autonomous operation (SAE Level 5).

Tesla, Elon, and the media announced several milestones for the number of miles driven by Tesla Autopilot throughout 2016 including [0]:

  • May 2016: 100 million miles
  • August 2016: 140 million miles
  • October 2016: 222 million miles
  • November 2016: 300 million miles

In this period, Tesla has seen 1 fatality so it has already surpassed the 1 fatality per 94 million miles driven average in the U.S.

Let’s Run The Math

Let’s assume that by January 1, 2017, Tesla had logged 400 million miles on Autopilot based on the data we have from 2016. The number of Autopilot miles added per day has been reported to be north of 1 million miles per day.

We know that Tesla delivered 50,580 cars in 2015 and 76,230 cars in 2016 for a total of 126,810 cars. Let’s conservatively estimate that there are 100,000 Autopilot vehicles in Tesla’s fleet.

I assume the average Autonomous Miles per car per day is roughly 12.5 miles, meaning Tesla is adding 1.25 million miles of Autopilot data per day.

Again, these assumptions are pretty conservative and Elon is going to tweet about how he disagrees with this.

But let’s play this out. The number of Autonomous Vehicles is going to increase dramatically as Tesla pushes to hit their 500,000 car production goal for 2018. The number of Autonomous Miles per car per day is likely to increase as well as people get more comfortable using it.

By March 31, 2017, I estimate Tesla is adding 1.75 million Autopilot Miles per day, with a total of 533 million autonomous miles driven.

I’ve assumed Tesla will deliver 185,000 vehicles in calendar year 2017 which is more than doubled its 2016 production. By the end of 2017, Tesla will be adding 4.76 million Autopilot Miles per day, with 1.37 BILLION cumulative Autopilot miles driven. If Tesla can be fatality free in 2017, it will be 14.5 TIMES safer than a human driver (1.37 billion over 94 million).

If Tesla comes close to its 500,000 vehicle goal in 2018 (I’ve assumed 405,000), it will be adding 14.4 million Autopilot Miles per day by 12/31/2018 with 4.61 BILLION cumulative Autopilot Miles driven.

See my model here.

So What?

If my model is “in the ballpark”, by the end of 2018, for every 6.5 days that goes by without a fatality for the Tesla Autopilot, it will be the equivalent of saving a life compared to human drivers.[1]

So with this data in hand, couldn’t Tesla present a persuasive argument to regulators that Autopilot should be legal in all states in the land? But let’s extrapolate this 1 more step.

I should add a note here to explain why Tesla is deploying partial autonomy now, rather than waiting until some point in the future. The most important reason is that, when used correctly, it is already significantly safer than a person driving by themselves and it would therefore be morally reprehensible to delay release simply for fear of bad press or some mercantile calculation of legal liability.
— Elon Musk

If Tesla could generate data that demonstrates Autopilot being 5x safer than the average human driver, or 10x safer, or 20x safer, could regulators in 2018/2019 decide that it would be “morally reprehensible” to actually let humans drive?

What about people with DUIs or other accident records? Would it be “morally reprehensible” to not require these drivers to purchase a self driving car if their financial circumstance allows for it. Would it be “morally reprehensible” to not require trucking fleets to use autonomous drivers instead?

Forward

This is just one area where it feels like “oh that’s really far off”, but we are very close to the “tipping point” where we will have generated enough data to prove that machines are 2x, 5x, 10x, 20x safer than humans at performing a job. Whether it be driving, working in manufacturing, diagnosing diseases and subscribing treatments, each will reaching its own “tipping point” where reasonable people and regulators may be compelled to come to the inevitable conclusion of “Humans Not Allowed”.

Six I's: Growth Economy Update

Week ending November 12, 2017

Interest Rates Now Week Trend Comment
10-Year Note 2.4% 2.6% N USD is down 11% against the Euro in 2017
3-Month Bill 1.2% 4.2%
Spread Corp vs. Govt. 0.7% -
Spread Junk vs. Govt. 3.0% -
Euro vs. $ $1.17 -
Pound vs. $ $1.32 -
$ vs. Yuan Y6.64 -
$ vs. Yen ¥113.51 -
Valuations Now Month Trend Comment
CPI 246.8 0.5% + GDP Growth in Q3 was +3.0%
PPI 113.5 0.4%
Oil Price $56.90 4.2%
Gold Price $1276 0.4%
Corn Price $3.44 -0.6%
GDP (latest Q) 3.00% -
Indices P/E ttm Month Trend Comment
S&P 500 24.3x 2.5% + MSCI at attractive value
Small Caps - -1.1%
Value - -2.0%
Growth - -0.2%
MSCI Earnings Mkts. - 0.0%
S&P 500 Earnings Yield 5.15% -
Sentiment Current - Trend Comment
Bulls-Bears 45.1-23.1 - + Bullish sentiment
Put-Call 1.2 -
Vix 11.3 -
IPOs 2017 - Trend Comment
# of IPOs 136 - + 10 IPOs last week up +4% on average
Pricing Above Range 19% -
Pricing In Range 64% -
1-Day Pop (Avg.) 14% -
YTD Performance (Avg.) 31% -
Median Market Cap (M) $530 -
Inflows Week - Trend Comment
Mutual Fund Flows (B) $4.70 - + $18.4B inflows in last 4 weeks

Market Update

Week ending November 12, 2017

World Indices

America Index 11/12/2017 YTD Week
U.S. GSV 300 115.7 53.1% 0.0%
NYSE 12322.6 11.4% (0.4%)
Dow 23422.2 18.5% (0.5%)
NASDAQ 6750.9 25.4% (0.2%)
NASDAQ-100 6309.1 29.7% 0.2%
Russell 2000 1475.3 8.7% (1.3%)
S&P 500 2582.3 15.3% (0.2%)
Brazil Bovespa 72165.6 19.8% (2.4%)
Mexico IPC 48028.3 5.2% (1.0%)
Canada S&P TSX 16039.3 4.9% 0.1%
Euro-Asia Index 11/12/2017 YTD Week
China SSE 3432.7 10.6% 1.8%
Heng Seng 29120.9 32.4% 1.8%
Singapore Straits Times 3420.1 18.7% 1.1%
Indonesia JKSE 6021.8 13.7% (0.3%)
Japan Nikkei 225 22681.4 18.7% 0.6%
India Sensex 33314.6 25.1% (1.1%)
Russia RTS 2169.3 (2.8%) 4.2%
France CAC 40 5380.7 10.7% (2.5%)
Germany DAX 13127.5 14.3% (2.6%)
U.K. FTSE 100 7433.0 4.1% (1.7%)



U.S. Indices Snapshot

Valuation P/E Est. P/E/G Price/Sales
LTM NTM Growth LTM NTM LTM NTM
S&P 500 24.3x 19.4x 7.60% 3.2x 2.6x 2.4x 2.1x
NASDAQ 25.5x 17.6x 7.80% 3.3x 2.3x 2.7x 2.2x
Russell 2000 25.1x 17.7x 6.30% 4.0x 2.8x 1.9x 1.7x
GSV 300 54.1x 27.5x 38.60% 1.4x 0.7x 5.7x 4.0x

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