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from A Round to Apple Inc.
June 18, 2017

Experience Counts… Then Trounces

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Market Snapshot

Indices Week YTD

“Work is theatre and every business is a stage.”

— Joseph Pine II & James Gilmore

This week Amazon announced that it will acquire Whole Foods in a transaction valued at $13.7 billion. Pundits quickly framed the deal as a shot in the arm for Amazon’s fledging grocery delivery business, “Amazon Fresh,” which has struggled to gain meaningful traction.

With Whole Foods, Amazon can plug into a network of 460 stores in prime urban locations that could double as distribution nodes. It also acquires a customer base with disposable income, a group of spenders willing to shop at a store dubbed “Whole Paycheck” for its high prices on grocery staples.

In a classic twist of corporate fate, two years ago, Whole Foods co-founder and former CEO John Mackey predicted that Amazon’s foray into groceries would be its “Waterloo,” asking, “What’s the one thing people want? Convenience. You can’t do that with distribution centers and trucks.”

But Amazon isn’t buying Whole Foods for the convenience factor. Jeff Bezos has been driving his digital disruption train over physical commerce for twenty three years, creating the fourth most valuable company in the World by wielding speed, price, and scale with ruthless effect. As Bezos has said, “Your margin is my opportunity.” If Amazon was aiming for convenience, it could have acquired a grocery store network far cheaper. The nearly $14 billion price tag implies a 35x price-to-earnings (P/E) multiple (trailing 12 months), compared to a 14.4 average for the S&P 500 Food Retail index.

In Whole Foods, Amazon is acquiring a business built on experience. Founded in 1978 in Austin, Texas, Whole Foods is best known for its organic foods, creating a brand based on healthy eating and fresh, local produce. While “grocery stores” like Safeway are soulless, the Whole Foods experience is theater… the theater of artisan wines and craft brewers… the theater of stylized display cases featuring only the freshest fruit or fresh-caught fish… the theater of featuring local farmers, bakers, and cheesemakers.

Sure, Whole Foods will unlock more avenues for Amazon to deliver physical goods to your doorstep. But it also makes Amazon a relevant player in a megatrend called the “Experience Economy” and that might be the most transformational aspect of the acquisition.


In their 1999 book The Experience Economy, Joseph Pine and James Gilmore argue that the entire history of global economic progress can be summarized in the evolution of the birthday cake:

As a vestige of the agrarian economy, mothers made birthday cakes from scratch, mixing farm commodities (flour, sugar, butter, and eggs) that together cost mere dimes. As the goods-based industrial economy advanced, moms paid a dollar or two to Betty Crocker for premixed ingredients. Later, when the service economy took hold, busy parents ordered cakes from the bakery or grocery store, which, at $10 or $15, cost ten times as much as the packaged ingredients. Now, in the time-starved 1990s, parents neither make the birthday cake nor even throw the party. Instead, they spend $100 or more to “outsource” the entire event to… [a] business that stages a memorable event for the kids—and often throws in the cake for free.

An “Experience” — a memorable event intentionally created for a consumer — is a distinct economic offering that has become more valuable as goods and services are commoditized.

In the 1960s, IBM’s slogan was “IBM Means Service,” and the computer manufacturer offered a broad range of services for customers that bought its hardware — from programming code to planning facilities and repairing devices.

Eventually, as hardware became commoditized, IBM could no longer afford to give its lavish services away for free. Services had inadvertently become the company’s most valuable offering. By 2000, IBM’s business had effectively flipped. It was buying its clients hardware to secure lucrative contracts to manage information systems.


Source: Harvard Business Review (“Welcome to the Experience Economy,” Pine and Gilmore, 1998)

Pine and Gilmore published their book in 1999, five years after Marc Andreessen co-founded Netscape, creating the Internet as we know it. Over the next 23 years — a period where Moore’s Law drove down the cost of computing, data storage, and broadband by 99% — internet access grew from 13.5 million people to 3.4 billion and smartphones went from science fiction to 2.6 billion users with 258 billion app downloads to date.

In this interval, the Internet, and later smartphones, have transformed the way services are designed and delivered, from retail (e.g. Amazon and eBay) to transportation, (e.g. Uber and Lyft) to communication (e.g. Facebook and Snapchat). (Disclosure: GSV owns shares in Lyft and Snapchat)


Source: Harvard Business Review (“Welcome to the Experience Economy,” Pine and Gilmore, 1998)

Source: Company Disclosures, GSV Asset Management

As digital services with massive scale have created broad efficiencies and commoditization, the power of the Experience Economy is more relevant than it ever has been. It is the next competitive frontier.

Last year, Airbnb CEO Brian Chesky unveiled a service called “Trips,” which offers much more than a place to sleep. It’s a collection of over 500 private tours and tailored activities — from art classes to workouts and nightlife — available through the network.

Airbnb is not content to be a room broker. It’s going all in on experience.


Source: Airbnb


Seamless Integration: Digital Commerce + Delightful Experience

If you look at the world of physical stores, many compete on service — the customer experience — not just efficiency. For every Best Buy, there is an Apple store. For every Target, there’s a Nordstrom. The next wave of digital commerce will bring a renewed focus on combining efficiency with a superior personal experience.

Enjoy, co-founded by former Apple retail head Ron Johnson, is at the forefront of this trend. It’s a personal commerce platform built to revolutionize the way people buy and experience the World’s best technology products — from smartphones to wireless sound-systems and drones. The central feature of the company is hand-delivery of every item within 2-3 hours, including product set-up by an Enjoy expert. Effectively, Enjoy is Lyft-meets-Apple Genius Bar. (Disclosure: GSV owns share in Enjoy and Lyft)

The magic is in the experience Enjoy delivers. Efficient, on-demand delivery is table stakes. Enjoy experts meet customers at a time and place of their choosing, arriving early 97% of the time. Delivery is free and the product prices are the same or less than Amazon, Best Buy, or the Apple store. Enjoy’s NPS (Net Promoter Score) is the highest we’ve seen anywhere, indicating a customer who’s not only satisfied, but who’s an evangelist.

How does it work? Enjoy doesn’t build stores. It hires great people. Enjoy can deploy a team of highly trained, engaging product experts a lot less expensively than building a physical storefront. Effectively, it works off the same margins as a physical store, but with a different model. Ultimately, Enjoy is part of a trend that transcends the delivery market. It is focused on creating a delightful experience for people that make digital purchases. In this respect, popular, emerging consumer businesses like SoulCycle are kindred spirits.

Digital Commerce, Delightful Experience

There is nothing about what SoulCycle does that can be patented. The casual observer might even mistake it for a “spinning class.” But when you study SoulCycle, you realize that its monster success derives from doing a hundred little things better than anybody else.

First, SoulCycle is a digital commerce platform. You go on your phone. You pick your class, your bike, your instructor, and your session time. Mobile payments are fully integrated.

And then you show up and have a delightful experience. The bikes are specially designed for SoulCycle to develop your “core.” The program emphasizes every muscle in your body, so that after 45 minutes, you’re wiped. The instructors are trained to be both inspirational and aspirational. The music is perfectly choreographed. Despite the heavy sweat, SoulCycle studios sparkle and smell fresh. And there is plenty of cool SoulCycle swag, so you can proudly display that you’re a member of the tribe.

Like Enjoy, SoulCycle starts digitally, and ends with an experience you love. We see a new generation of businesses emerging that are creating advantages through both mobile and physical experiences.

Companies Delivering Products and Services that Begin with Digital Transaction and Conclude with a Delightful Experience

Source: GSV Asset Management, Yahoo Finance, Company Disclosures

Similarly, forward-thinking retailers are unlocking the power of a delightful customer experience around the digital purchasing process itself. As Tesla notes on its website, “Ordering your Tesla is just like any buying experience on the Internet. Simply choose your options, enter your contact information, and indicate your preferred delivery timing.”

Goodbye car dealerships and awkward, high-pressure sales experiences.

The Tesla ordering process begins in a virtual “Design Studio” where buyers customize the appearance of their future car and select various options. Price changes are transparent. Once the order is confirmed, a Tesla “Experience Specialist” follows up to answer any lingering questions you may have, as well as to discuss financing options, trading in your old car, installing charging equipment, and delivery day logistics.


Source: GSV Asset Management, Yahoo Finance, Bloomberg

Warby Parker has taken a relatively expensive product — glasses — cut out the middle men (distributors and licensors), and sold it directly to consumers online at a discount to traditional retailers. For $95, you can get a cool pair of glasses, including prescription lenses and shipping. And for every pair purchased, Warby Parker donates a pair to someone in need.

But the company has sold over one million pairs of glasses in just four years while holding off a slew of copycats because it is creating a powerful technology-based experience. The buying process includes recommendations based on face shape and style preferences. And then Warby sends you five frames to test out in a stylish box reminiscent of Apple’s packaging. And if you still need help deciding, you can post a picture of yourself using #warbyhometryon and the company will give you feedback. In May 2017, Warby Parker launched an app that lets users to check their prescription at home, without visiting a doctor or an optician.

From Digital to Physical

While Warby Parker is creating a superior digital experience, the company plans to open 25 retail locations in 2017, which will bring its total store count to 70. As co-founder and co–CEO Neil Blumenthal has observed, “I don’t think retail is dead. Mediocre retail experiences are dead.”

This highlights another key trend in the Experience Economy. Physical locations are an important platform to create an unique customer experience, and accordingly, brands like Warby Parker that were “born” on the Internet are turning the retail model upside-down by opening physical storefronts. Bonobos, the popular online clothing retailer that was acquired last week by Walmart for$310 million, has followed the same strategy.

”How” vs. “What”

In his signature book How, Dov Seidman makes the case that in an era of digital connectivity, increasing transparency, and global interdependence, “how” we do anything means everything.

There are three fundamental ways to drive human behavior. You can coerce, incentivize, or inspire. Coercion and incentives rely on external rewards (Carrots) and punishments (Sticks). But in an interconnected world, the limitations of Carrots and Sticks are quickly becoming clear. Rules cannot keep pace with technology innovation — a challenge that China has grappled with as it seeks to limit the ability of social networks to amplify political unrest.

Source: GSV Asset Management

On the other end of the spectrum, the return on incentives has declined as increasing connectivity and access to information enable people to find better “deals” elsewhere. It’s getting harder to buy loyalty.

Inspiration, Seidman argues, is the new difference-maker. Accordingly, a company’s ability to define and adhere to a sustainable value set is the key to creating commercial and strategic advantage.

According to research from PR powerhouse Edelman, U.S. consumers report that when quality and price are a wash in competing products, a company’s “social purpose” is the most important factor in their purchase decision. Nearly 44% of people were even willing to pay a premium for the products of companies that support a “good cause” and 62% indicate that they will not buy a brand if it fails to meet societal obligations.

Uber’s recent series of high-profile public missteps — culminating in the departure of CEO Travis Kalanick — coupled with Lyft’s gains in competitive market share is a case in point.

In a recent report published by Quartz, the number of U.S. consumers who said they would consider taking Lyft jumped to 9.6% in Q1 2017, up from 5.6% in Q4 2016. Uber fell to 14% from 18% in the same period. In January, Lyft announced that it delivered 163 million rides in 2016, more than tripling its 2015 total. It has launched in over 100 new cities in 2017 to date, and in March the company reported that its growth was accelerating in every market across the country.

While Uber has created a culture and brand focused on World domination, Lyft’s competitive advantage is its mission and its emphasis on creating a unique experience. Co-founders Logan Green (CEO) and John Zimmer (President) created the company with the goal to reduce traffic congestion and pollution while improving the quality of urban life.

Zimmer — who not coincidentally graduated top of his class from Cornell University’s School of Hotel Administration — was the brainchild behind a brand that encouraged passengers to sit in the front seat and “fist bump” drivers at the beginning of each ride. Lyft has always been about more than getting to your destination quickly, which is table stakes. A recent ad campaign sums up the contrast with Uber perfectly.

Mind, Body, Soul

A related megatrend creating huge opportunities is a phenomenon we call “Mind, Body, Soul” — businesses with a value proposition and customer experience at the intersection of healthy living and mental and spiritual well-being. Here again, SoulCycle is a leader, combining a fitness experience with the mindfulness of meditation in a consumer brand people love.

Aspiration, a digital financial services platform launched in 2013, won’t make you fit, but it’s a bank with a soul. It donates 10% of revenue to economic development charities and has an entire section of its website devoted to financial education. But what truly differentiates Aspiration from its peers is a “Pay What is Fair” model. Investors and account holders can pay the company as much or as little as they want—even if that amount is zero. (Disclosure: GSV owns shares in Aspiration)

Co-Founder and CEO Andrei Cherny — a former speech writer for President Bill Clinton (one of the youngest in history), Naval Reserve Officer, and longtime consumer advocate — has observed that Aspiration is “taking the entire business model of Wall Street and turning it on its head.” He’s making a bet that consumers will choose a bank that enables them to “do well” while “doing good.” It helps that Aspiration has gone directly to digital without physical infrastructure, meaning that the marginal cost of serving each customer is low. Interestingly, the company has found that its customers tend to pay the same or more than the fees for comparable services from traditional financial services providers. Over 90% of users pay a fee.


Source: Crunchbase, Company Disclosures, GSV Asset Management

In April 2017, Aspiration launched Aspiration Impact Measurement, or “AIM,” a feature that enables its account holders to determine a “Sustainability Score” for their purchases. Each month, Aspiration’s mobile banking app tracks spending patterns and offers a social impact report based on purchases from different companies. The first key metric is how a company treats its employees. The second is how it treats the planet. “In this day and age, money talks,” Cherny observed when AIM was announced. “Imagine weaponizing that consumer sentiment and putting it in your pocket.”


Augmented and virtual reality will lead to a new crop of “experience” businesses that will use the technology to bring virtual experiences into the real world. When Pokemon Go launched last Summer, it was the starting gun that signaled that Virtual Reality was here to stay. In its first two months, Pokemon Go was downloaded 500 million times and was the fastest game to reach $500 million in revenue.

The game — which allows you to capture, train, and trade virtual creatures on your smartphone that “appear” in the real world — has quickly put our physical and digital realities in the blender. It has sent people into streets and parks, onto beaches, and even into cemeteries, in pursuit of Pokémon. You can find “Poke Stops” — hubs where the creatures abound — at the 9/11 memorial in New York City, in schools and churches, and everywhere in between. In O’Fallon, Missouri, a group of teenagers used the app to carry out armed robberies, employing the game’s geolocation feature to anticipate the location of unwitting victims.

A Syrian gamer uses the Pokémon Go application on his mobile to catch a Pokemon amidst the rubble in the besieged rebel-controlled town of Douma, Syria

Source: Bloomberg Technology, Getty Images

As the CEO of the game’s creator, Niantic Labs, observed in an interview with CB Insights, “There’s of course this fantastical Pokémon element, but really it’s enhancing your experience of going out for walk or doing something with friends. I think AR is something that can be with us all the time, that we can use during the day and in everything, from commerce to entertainment to social interactions.”

Physical retailers are already venturing in the VR/AR realm, seeking to use the technology to enhance the retail experience. This January, Google announced partnerships with Gap and BMW, deploying its app Tango to create virtual showrooms.


Source: BMW

With BMW, Google is developing an app that displays BMW vehicles on smartphone screens, allowing shoppers to walk around superimposed vehicles, placing it to look life-size at their homes, and also conceptualize what their new vehicle could look like in different colors and trims. To some users who demoed the app, the virtual car on a phone screen was so lifelike that users ducked and lifted their legs to “step” inside the vehicle.

Amazon is also reportedly looking to use augmented reality technology to sell furniture and appliances, allowing people to see how sofas, desks, ovens and more look in their homes before they even purchase the item.


by Luben Pampoulov

Bike Rides

A new ride-sharing economy is booming, and it’s all Made in China. Bike sharing is now the fastest growing vertical of the Sharing Economy, with over $1.6 billion of capital raised in just over the last 18 months, and by just two companies — Mobike and Ofo.

While it’s not a new concept — city bike sharing services exist for over 10 years in Paris, London, Milan and other major cities — this new wave is app-driven; users can find a bike, unlock it, pay for it and use the GPS all within the app. Unlocking is simple — users scan the bike’s QR code, and off they go. Once done, they indicate the ride is complete and the bike locks itself automatically.

Bikes often provide “last mile” transportation, such as going from the subway to the office. They also provide a faster way of transposition, especially due of the ever-increasing traffic problems in big cities. However, the surging popularity also creates a new problem — parking. The new bike sharing services do not have designated parking stations and can be dropped off anywhere. A bike locks automatically until the next user comes to unlock it.

Poorly parked bikes are increasingly creating issues in Chinese cities. Therefore, city officials will need to work with service providers to create efficient parking logistics in order to keep cities organized.


The leader in the Bike-sharing space is Shanghai-based Mobike. Famous for its orange wheeled bicycles, Mobike has more than 5 million bikes and claims over 25 million rides per day. It operates in over 100 cities in China, and in Singapore. Mobike is now expanding into the UK and launching a pilot service for 1,000 bikes in Manchester and Salford. At the beginning of the year, Mobike was available in just over 10 cities, and by the end of the year, CEO Davis Wang expects to be in over 200 cities.

Mobikes are considered higher-end “vehicles” in comparison to Ofo’s bikes — its major competitor in China. They cost $440 to build, have built-in GPS trackers, and look like they might be from the local SoulCycle… Mobikes rent for about 2 yuan per hour ($0.30).

Last week, Mobike announced it raised $600 million in new capital from existing investors Tencent, Sequoia, TPG, and Hillhouse Capital. Bank of Communications and Industrial and Commercial Bank of China, as well as Farallon Capital, became new investors in the company. While the valuation was not disclosed, it is rumored to be in the multi-billions.

Mobike’s biggest competitor is Haidan-based Ofo. The company has raised over $650 million to date, and is currently looking to raise a new round at a $3 billion valuation. Ofo’s existing investors include Didi, Ant Financial, Coatue, Atomico, Ctrip and CITIC PE.

Ofo bikes are much cheaper in comparison to Mobike — both price-wise and visually. The manufacturing cost is only about $35, and they rent for 1 yuan per hour. Ofo might have better margins currently, and according to its 25-year old founder Dai Wei, it was making money last year. But the heated competition and the rising expansion efforts will likely put it back in the red. Similarly to Didi vs. Uber, the Mobike vs. Ofo race will be one based on aggressive expansion and funding.

Ofo (Yellow) and Mobike (Orange)

At 20 million rides per day, Ofo is trailing slightly behind Mobike, but it is also becoming a key channel to promote its investor — Ant Financial’s mobile payment service Alipay. Similarly, Tencent allows “Mobikers” to pay via Wechat’s popular payment service Wechat Pay.

Source: Based on latest news reports

There is also a third bike sharing service called Bluegogo. It operates mainly in Shenzhen, and uses a slightly different subscription model; user pay an annual $99 fee, and then pay $0.99 per ride. Bluegogo’s investors include Zhen Fund, Sinnovation and Black Hole Capital, and to date the Tianjin-based startup has raised $89 million.

In the U.S., one of the first smart-bike-sharing-services is Limebike. Based out of San Carlos, Limebike recently raised a $12 million Series A round led by Andreessen Horowitz. While it has a head start at home, it might soon find itself fighting against the big gorillas Mobike and Ofo, as both have indicated interest to enter the U.S.

We believe that Mobike is currently best positioned as it is going for a big marketshare in and outside of China. It will have enough money to spend and to pursue that strategy in the near future, and its investors have deep pockets to fund further expansion needs. Its higher-end, unique looking bikes might turn out to be a strong advantage for the company’s branding efforts. However, Ofo is also one to watch as it is backed by key Chinese leaders Didi, Alibaba, and CITIC.

Pioneer Notes

by Li Jiang

The Master Algorithm

How the Quest for the Ultimate Learning Machine Will Remake Our World

I wouldn’t do Professor Pedro Domingos justice by trying to describe his entire book in this blog post, but I did want to share one core thought as I reflect on his book.

The Master Algorithm: How the Quest for the Ultimate Learning Machine Will Remake Our World

In the world’s top research labs and universities, the race is on to invent the ultimate learning algorithm: one…

Domingos’ core argument is that machine learning needs an unifying theorem, not unlike the Standard Model in physics or the Central Dogma in biology. He takes readers through a historical tour of artificial intelligence and machine learning and breaks down the five main schools of machine learning (below). But he argues that each has its limitations and the main goal for current researchers should be to discover/create “The Master Algorithm” that has the ability to learn any concept aka act as a general purpose learner.

As with any great book, it leads to more questions than answers. My main question, as it can be applied to startups, is this:

What’s the speed at which machine learning is improving?

Why is this an important question?

For the past several decades, the category defining companies from Intel to to Apple to Google to Facebook have benefited from 2 core unifying theories of technology.

First, Moore’s Law created the underlying framework for the speed at which computing power increases (doubling every two years or so) that has directly enabled a generation of products. Products that were at first bulky and expensive, such as room-sized mainframes, were able to ride Moore’s Law and become smaller and cheap, leading to mass products like phones and smart watches.

Second, Metcalfe’s Law governed the value of a network of users (n(n − 1)/2) that has enabled a generation of Internet services to effectively serve the majority of the world’s Internet population. As more users join a network, their value grow exponentially while costs generally grow linearly.

So now the question is…is there a third “Law” that governs the speed of improvement of machine learning.

In Lee Kai-Fu’s (李开复) commencement speech at Columbia, he gives hints at this.

In speaking about his investments in now publicly listed Meitu and two other AI investments, he notes that in all three cases, the AI technology underlying the startups went from essentially not useful to essentially indispensable.

The three software companies I mentioned earlier, when they were first launched: often made people uglier, lost millions in bad loans, and thought I was some talk show celebrity. But given time and much more data, their self-learning made them dramatically better than people. Not only are they better, they don’t get tired nor emotional. They don’t go on strike, and they are infinitely scalable. With hardware, software, and networking costs coming down, all they cost is electricity.

In god we trust, all others bring data…

If we look at the ImageNet Challenge, AI image recognition technology has improved 10X from 2010 to 2016, catalyzed by the introduction of deep learning methods in 2012.

On the backs of this “Law” of machine learning improvement, we’ll see a Cambrian explosion of new products and services that fits Kai-Fu’s description of products that are at first flawed, but with time and data, become essential and, for all practical purposes, perfect.

Questions, not answers

The ImageNet Challenge and image recognition is just one narrow application of AI so it doesn’t give us enough to say what the “Law” of machine learning improvement is. I can’t say AI is doubling in intelligence every 18 to 24 months or that AI gets exponentially better by a factor of n(n − 1)/2 with each data point.

But I do think that “Law” exists and I can’t wait for someone in the AI field to articulate (or solve) it.

Because understanding the speed at which artificial intelligence is getting more intelligent will allow us to understand the third major foundational wave, in addition to Moore’s and Metcalfe’s Law, that will bring us into the Age of AI.

Market Update

Week ending June 18, 2017

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