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General Commentary
September 24, 2017

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Market Snapshot

Indices Week YTD
GSV 300 1.80% 42.10%
S&P 500 0.70% 9.10%
Dow 0.60% 10.40%
NASDAQ 0.80% 16.40%
Russell 2000 1.40% 1.50%
MSCI P/E Fwd P/E/G
Valuations 25.8x 0.7x
GSV 300 17.6x 2.3x
S&P 500 Now YTD
I-Rates 2.17% -11.40%
10-Year Note 1.03% 102.00%
3-Month Bill - Current
Sentiment - 28.1-38.3
Bull-Bear - 0.97
Put-Call - 11.28
Vix Now YTD
Inflation $1 12.50%
Gold $47.86 -11.10%
Oil - Week
Mutual Funds - -$3.40
Fund Flows (bil) 00-09 09-Now
Growth-Value -34% 218%
Growth 87% 133%
Value

Weather forecast for tonight: Dark.

— George Carlin

I don’t pay attention to the weather reports because they’re often wrong and some general observation can prepare me for the day ahead. If it’s raining outside, I’ll grab an umbrella. If it’s 40 degrees, I’ll wear a coat.

But if I want to schedule a ski vacation in Colorado, I’ll plan it for March. If I want to go waterskiing in Minnesota, I’ll do it in July, and if I want to watch the cherry blossoms in Washington, D.C., I’ll arrange my trip for April.

While day-to-day weather is random, the seasons are predictable. Similarly, understanding demographics gives investors a more predictable view to the future. But when it comes to demographics, things aren’t always what they seem.

We’ve seen alarming headlines about overpopulation for more than a century and for good reason. If you simply extrapolated the 4x increase from 1900 to 2000, global population would be approximately 25 billion by the end of the century. Obviously, such a boom would likely cause chaos, impacting everything from food to energy, pollution and infrastructure.

But the fact is that the world’s population growth rate is now half of what it was 40 years ago. After peaking at a 2.1% annual population increase in the 1970s, growth hit the brakes.

It took roughly 13 years to welcome the 7 billionth member of the human race in 2012. That’s one year longer than it took to add the 6 billionth member, the first time in human history that this interval has expanded.

PROJECTED GLOBAL POPULATION (BILLIONS)
At the current pace, the world’s population will start falling in less than 50 years.

Source: United Nations Department of Economic and Social Affairs, GSV Asset Management

THE GREAT DECLINE: GLOBAL FERTILITY

The force behind the impending population drop is a declining Global Fertility Rate — the number of children an average woman is likely to have during her childbearing years (conventionally defined as 15-49).

Population growth (or loss) is dictated by the interplay of Fertility Rates and Replacement Rates — the average number of children per woman that need to be born to maintain current population levels. In developed countries, the Replacement Rate is essentially 2.0… Two parents are replaced by two children. Since child mortality is higher in developing countries, the replacement rate needs to be higher to maintain population status quo.

KEY TERMS: POPULATION GROWTH (OR DECLINE)

Source: OZY Media, GSV Asset Management

In 1950, the global fertility rate averaged about five children per woman. Today, the global average is less than 2.5.

In the 1970s, only 24 countries had fertility rates of 2.1 or less, all of them rich. Today this club has grown to over 90 countries, spanning every continent. Between 1950 and 2000 the average fertility rate in developing countries fell by half, from six to three. Europe went from baby boom to bust over the same period, with fertility rates falling at the same rate to 1.4.

To make an obvious point, carry the math forward and your population is extinguished.

BYE BYE BABY: DECLINING GLOBAL FERTILITY RATE
Fertility Rate = Births Per Woman

Source: World Bank

As fertility falls, countries initially benefit from a saturation of working-aged adults, a phenomenon known as a “Demographic Dividend.” But eventually, this benefit reverses as a top-heavy retired population decreases productive output and imposes disproportionate government service demands on a smaller workforce.

In Japan, for example, there are more adult diapers sold than baby diapers per year. With a fertility rate of 1.46, the country’s population projections are dire.

JAPAN’S UPSIDE DOWN DIAPER MARKET
In 2016, there were more adult diapers sold than baby diapers in Japan.

Source: The Tokyo Times

By 2050, developed countries will have twice as many old people as young ones. And as the demographic tidal waves begin to make landfall, developed countries are no longer turning a blind eye on their population dynamics.

DO IT FOR DENMARK?
“Creative” Solutions Implemented by Developed Countries to Bolster Fertility Rates

Source: GSV Asset Management

It’s why China quietly reversed the “one-child policy” in late 2015. The draconian measure to promote population stability was initiated in 1979. But China’s fertility rate has dropped to 1.57. By 2050, the result will be a Chinese population of 349 million people over the age 65— larger than the entire United States. The country will scramble to replace desperately needed productivity — the engine of GDP growth — as people cycle out of the workforce.

The number of women giving birth in the United States has been declining for years and in 2017, hit an all-time low. The decline is especially striking because the number of women in their prime childbearing years — 20 to 39 — has been growing steadily since 2007.

DECLINING U.S. FERTILITY RATES

Source: CDC, Desert News

The question is, why? There are a few answers. In scary times, parents are reluctant to bring babies into the World. The second is that women are becoming a driving force in all aspects of society and are choosing to have kids later or not at all.

BATTLE OF THE SEXES

On September 20, 1973 — 44 years ago this week — more than 50 million people watched Billie Jean King destroy 55-year-old Bobby Riggs in three sets at the Houston Astrodome in what was called the “Battle of the Sexes”. This followed Helen Reddy’s 1972 number-one hit “I am a Woman”, both events inspiring to the women’s movement. Three years later, Margaret Thatcher would ascend to leadership of the UK’s Conservative Party, beginning a 15-year stretch as a geo-political power broker.

While there are many factors correlated to decreasing fertility rates, with increased opportunity comes the increased opportunity cost of having a child.

In the United States, for example, women with one or more years of college have sharply lower lifetime fertility rates than less educated women. Broader global gains in postsecondary education enrollment by women have also corresponded with declining fertility rates.

PERCENTAGE OF WOMEN IN COLLEGE & FERTILITY RATE

Source: OECD, World Economic Forum
*Post-secondary enrollment percentages are calculated by dividing the total number of enrolled female students over the total population of eligible college-ready females. As older populations, that don’t traditionally fall into the college-ready age bracket, enroll in college courses, this skews the percentages such that the percentages could exceed 100%.
**Constituent Countries
***2015
****1976

A related factor in declining fertility rates, particularly in the developed world, is the desire to have children later in life. According to a 2015 study from the Pew Research Center, 41% of women claim that the best strategy to reaching a top job is to have children after achieving career success.

In the United States, for example, child bearing among women aged 30 and over has risen significantly over the last three decades. The number of women giving birth past the age of 45 has been increasingly steadily for decades.

This trend is playing out in the Silicon Valley arms race to lure the top talent. Facebook, Google and Apple offer egg freezing and IVF as a benefit for female employees who choose to delay motherhood. Covering an estimated $20,000 worth of medical services, this is a big ticket benefit. Companies such as Carrot and Progyny provide a suite of fertility benefits for employers, making it seamless for startups to add fertility services as a benefit. The “delayed baby benny” makes perks like massages at your desk seem relatively pedestrian.

Fertility has grown to be a $4 billion industry in the United States, but egg freezing still makes up only a tiny percentage of it. Extend Fertility is working to bring down the price of the procedure to attract a broader segment of the population. Atlanta-based startup Prelude provides couples proactive fertility care to allow women and couples to have more active control over the timing of their pregnancy. The company offers services such as egg and sperm freezing, genetic testing, and embryo control at affordable rates with transparent costs.

EMERGING FERTILITY STARTUPS

Source: Crunchbase, GSV Asset Management

DECLINING FERTILITY, EMERGING OPPORTUNITY

A quick reaction to long term drop in babies born per year might be to forecast the decline of childcare products and services. In reality, the opposite is true.

France, for example, has found a way to mitigate the pace of fertility declines by heavily financing services that reduce the opportunity cost of having children. French citizens receive subsidized day care for children, starting at two months. Fees are on a sliding scale based on family income. In 2006, the United Kingdom instituted a 10-year plan to make child care more accessible and more affordable for all parents. The Netherlands launched a similar strategy in 2005. More countries, including the United States, will follow suit.

At the same time, forward-thinking corporations are increasingly recognizing that providing superior childcare services and benefits is a powerful tool to recruit working mothers.

Today, only 7% of U.S. companies offer on-site childcare. But over one third of those recognized on Fortune’s Best Companies to Work For list do. Alphabet even offers preferred parking spots for parents with children in tow, and has added high chairs to company cafes.

Bright Horizons, a pioneer in this field, has demonstrated that childcare services can be delivered with high efficiency by partnering with corporations to provide this benefit as an integrated component of an office building.

THE RISE OF BRIGHT HORIZONS
Bright Horizons Drives the Evolution of Corporate Childcare in the United States

Source: Bright Horizons, GSV Asset Management

BRIGHT HORIZONS STOCK PERFORMANCE, 2013-2017

Source: Yahoo Finance

We expect to see continued growth in this category as it evolves from a cottage industry to include scaled enterprises and business models. In 2015, Partners Group acquired KinderCare Learning Centers from Knowledge Universe for an estimated $1.5 billion. Care.com, a caregiver marketplace and network which was backed by a syndicate of leading VCs — including IVP, NEA, and Matrix Partners — went public in 2014.

WHAT’S NEXT

Startups focused on babies and parenting have gained increasing investor interest as demographic and digital megatrends collide to create commercial opportunities. It won’t come as a surprised that the two largest deals towards “Baby Tech” startups in 2016 went to Chinese companies. Online parenting platform BabyTree raised a massive $448 million round, while baby product sales platform Mia.com completed a $150 million Series D financing.

BABY + CHILDREN TECH YEARLY FINANCING, 2013-2016 ($M)

Source: CB Insights

As consumer food preferences continue to shift to organic and sustainably-sourced products, a new crop of startups like the Los Angeles-based Yumi are capitalizing on the trend. Yumi curates weekly packages of healthy baby meals, crafted by leading chefs. Other startups providing similar services include Thistle, Little Spoon and Raised Real.

EMERGING CHILD + BABY STARTUPS

Source: Crunchbase, GSV Asset Management

Mia.com (Beijing, China), Beibei (Hangzhou, China), Lamabang (Shenzhen, China) and FirstCry (Pune, India) are massive e-commerce marketplaces for baby goods, each raising over $100 million of venture funding. As existing e-commerce platforms like Alibaba and Amazon expand their product line to include more home and baby goods, these companies will become appetizing acquisition targets.

San Francisco-based Tueo Health is empowering families to better manage pediatric asthma through a mattress sensor that gathers and analyzes daily data, and provides targeted guidance and education to parents. Tueo has proven that the measures from the sensor can predict asthma symptoms and is starting a clinical study this Fall to show that the actionable insights from this data improve asthma control.

Bubblin'

by Luben Pampoulov

Smart Logistics

While Uber is having a logistical nightmare after losing its London license, others in the logistics space are experiencing a revolution.

Freight logistics startup Flexport completed a new $110 million financing at a $910 million valuation. Flexport offers an innovative approach to tracking shipments and freights. The company calls itself the “freight forwarder for the Internet age” and offers an app- and web-based service with real-time visibility on shipments. They also call themselves a “people-driven service extended through software,” and help customers in the process of shipping a product from A to B, by air or by sea. Without Flexport, the alternatives require tedious processes that include phone calling, faxing, physical paper documentation, etc.

The Flexport Experience

Source: Flexport

The San Francisco-based company has been on many investors’ watchlist, including ours, and has managed to emerge as THE innovator of freight shipping and logistics. All the existing companies in that space are old, and are therefore slow to innovate: “There are 25 freight forwarders that each do more than $1 billion in revenue a year,” Flexport’s CEO Ryan Petersen explains, “and none of them was founded after Netscape.”

Ryan has had shipping embedded in his DNA. Earlier in his career he started ImportGenius, a startup specialized on scanning and selling shipping manifest data on imports. Prior to that he was buying scooters from China and selling them online. It is no surprise that Ryan received early backing from some of the top VCs, including Google Ventures, DST, Founders Fund, Y Combinator and First Round Capital.

In a recent interview, Ryan Petersen said the company expects to do $500 million in gross revenue this year. Flexport typically collects a 15% “take rate” on transactions, therefore should finish the year with about $75 million in net revenue. At a $910 million valuation, that’s 12x 2017 price-to-sales. We estimate Flexport’s business is currently growing at or above 100% with significant recurring revenue, which justifies the valuation.

Needless to say – the market opportunity is enormous: about 15% of the Global GDP is trade activities, and the other 85% relies on it. We are keeping Flexport high on our priority list.

Meanwhile across the Pacific, Alibaba-backed Best had its IPO on the NYSE this week. Best is a smart supply chain service provider that tracks and also ships freight.

Over the last twelve months, the company did $2 billion in revenue, growing at an impressive +144%, and it is about to turn profitable with the latest quarterly EBIT margin at -4%. In the second quarter, Best fulfilled 44 million orders and had 917 million in parcel volume.

Best priced its IPO at a $4 billion market cap, and its stock traded up 20% last week. Early private investors include CDH, Alibaba, and China Renaissance.

Source: Best F-1 filing

Pioneer Notes

by Li Jiang

“What’s Hot?”

I often get the question:

“What’s hot?”

People want to know from me what are the trends worth paying attention to or the types of companies that investors are looking to invest in. But the truth is:

I’m trying really hard to figure out what’s NOT hot.

If you want to know what’s hot, just go read the headlines of the your usual suspect tech publications. Those are the areas that many people are trying to get into, prices are high, and noise level is high (i.e. every startup is using machine learning and blockchain to solve for X).

The Peter Thiel (yes, cringe) question is informative:

“Tell me something that you think is true, that almost nobody agrees with you on.”

When Ryan Petersen and Anthony Chen were getting started building Flexport, their 1st product was a checklist for companies to clear U.S. customs. I thought to myself “what the heck is this little widget useful for?” Don’t let the Halloween costumes fool you, but this team built a company from $0 to $500M in revenue in 4 years and just raised a $110M round at $910M valuation. You could say they are “bringing sexy back” to the logistics industry.

Early Flexport team

As my friend Jed Somers and FlowCommand told me this weekend, there are numerous industries where it’s hard to find information on the Internet but are extremely valuable and ripe for new technology and frameworks to transform.

So instead of “what’s hot?”, my question is:

“What’s something nobody thinks is valuable today, but will be in a year or two?”

If you are working on something that answers this question, please hit me up.

Market Update

Week ending September 24, 2017

World Indices

America Index 10/16/2017 YTD Week
U.S. GSV 300 107.4 42.1% 1.8%
NYSE 11812.0 6.8% 1.0%
Dow 21813.7 10.4% 0.6%
NASDAQ 6265.6 16.4% 0.8%
NASDAQ-100 5822.5 19.7% 0.5%
Russell 2000 1377.5 1.5% 1.4%
S&P 500 2443.1 9.1% 0.7%
Brazil Bovespa 71073.7 18.0% 3.4%
Mexico IPC 51373.2 12.6% 0.6%
Canada S&P TSX 15056.0 (1.5%) 0.7%
Euro-Asia Index 10/16/2017 YTD Week
China SSE 3331.5 7.3% 1.9%
Heng Seng 27848.2 26.6% 3.0%
Singapore Straits Times 3259.6 13.1% 0.2%
Indonesia JKSE 5915.4 11.7% 0.4%
Japan Nikkei 225 19452.6 1.8% (0.1%)
India Sensex 31596.1 18.7% 0.2%
Russia RTS 1979.1 (11.4%) 2.5%
France CAC 40 5104.3 5.0% (0.2%)
Germany DAX 12167.9 6.0% 0.0%
U.K. FTSE 100 7401.5 3.6% 1.1%



U.S. Indices Snapshot

Valuation P/E Est. P/E/G Price/Sales
LTM NTM Growth LTM NTM LTM NTM
S&P 500 24.2x 17.6x 7.60% 3.2x 2.3x 2.4x 2.1x
NASDAQ 25.2x 17.5x 7.90% 3.2x 2.2x 2.6x 2.2x
Russell 2000 24.7x 17.6x 6.30% 3.9x 2.8x 1.9x 1.6x
GSV 300 50.6x 25.8x 38.40% 1.3x 0.7x 5.5x 4.0x

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