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General Commentary
January 21, 2018

Global Growth: Reading Between the Headlines

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Market Snapshot

Indices Week YTD

This week, the royalty of international politics, business, and finance will make their annual pilgrimage to Davos for the 2018 World Economic Forum. The theme of the 48th annual meeting is “Creating a Shared Future in a Fractured World.”

With Donald Trump set to become the first U.S. president to attend Davos in two decades, it’s doubtful that the audience will be gaga for MAGA.

While 2017 was a rollercoaster if you read the headlines, it was a banner year for the global growth economy. The S&P 500 was up 19.4%, NASDAQ was up 28.2%, and the Dow Jones was up 25.1%. China’s SSE Composite Index was up 6.6%, Hong Kong’s Heng Seng has jumped 36.0%, and India’s Sensex was up 27.9%.


Source: Yahoo Finance, GSViQ

The most relevant index for Institutional Investors to date has been the S&P 500, which is a good proxy for broad Market dynamics. But with a 5% long term growth rate, it hardly reflects conditions or performance for fast growing companies.

The fact that the S&P 500 is solely a market cap weighted index is problematic in that a $100 Billion Market Cap Company has 100x the impact on the Index as a $1 Billion Market Cap Company… not realistic in that a portfolio manager who viewed two portfolio companies as being equally attractive would have 100x more of that company in their portfolio.

The most well-known index, the Dow Jones Industrial Average (DJIA), is created with an even more bizarre rationale in that it is weighted by share price. So in other words, if one stock was $30 per share and another was $300 per share, the $300 stock would have 10x the influence on the DJIA as the $30 stock.

The GSV 300, an index of the World’s 300 fastest growing public companies and a barometer for the broader Global growth economy, soared 57.1%.

The GSV 300, by contrast, is constructed using a systematic three-step process, which is summarized below: Screening, Ranking + Scoring, and Index Weightage. For a full description of the GSV 300 construction methodology, please click HERE.


The Definitive Barometer for the Global Growth Company Ecosystem

Source: GSV Asset Management
Tracking the GSV 300 P/E, Growth Rate, P/E/G, and P/S vs. Key Global Indices

Source: GSV Asset Management

Source: GSV Asset Management
Tracking the Performance the GSV 300 vs. Key Global Indices and Funds

Source: GSV Asset Management

GSV 300 Snapshot

The average market capitalization of GSV 300 constituent companies is $13.9 billion, with a median of $2.7 billion. The 10 largest companies account for 25% of the index. By comparison, the top five companies in the 2,500-company NASDAQ Composite — Apple, Microsoft, Amazon, Facebook, and Alphabet (Google) — account for approximately 30% of the index alone.

At 2017 Year End

Looking at the GSV 300 by geography, 35% of the index weightage comes from U.S. companies. India is the second-largest geography at 19%, followed by China at 18%. South Korea and the United Kingdom round out the top five, contributing 5% and 3%, respectively. By contrast, 95% of the S&P 500 and 85% of NASDAQ are represented by U.S. companies.

Countries of GSV 300 Constituent Companies as a Percentage of Index Weightage (through 2017)

Source: GSViQ

Countries of S&P 500 Constituent Companies as a Percentage of Index Weightage (through 2017)

Source: GSViQ
Countries of NASDAQ Constituent Companies as a Percentage of Index Weightage (through 2017)

Source: GSViQ

Performance & Valuation

For the fourth quarter, the GSV 300 rose 11%, with Indian companies driving the action, rising 11%. U.S. and Chinese companies were up 6% respectively. Segmented by GSV investment theme, “Social Mobile” companies rose 12%, “Cloud + Big Data” companies gained 8%, “Marketplaces” were up 5%, and “Sustainability” companies were flat. “Education“ companies declined by 3%.

Q4 2017 Performance of the GSV 300 by Country of Constituent Companies

Source: Yahoo Finance, GSViQ
Q4 2017 Performance of the GSV 300 by Industry of Constituent Companies

Source: Yahoo Finance, GSViQ

For the year, the GSV 300 was up a staggering 57%. While we’re certainly rooting for strong performance, our objective in launching the index was to create a scorecard that reflects what is actually going on in the World of growth stocks.

The T. Rowe Price New Horizons Fund, for example, has pursued a strategy of investing in small, high-growth companies since 1961. While it is actively managed, Peter Lynch observed in Beating the Street that the fund is, “as close as you’ll get to a barometer of what is happening to emerging growth stocks.”

Since small companies are expected to grow at a faster rate than large companies, they usually sell at a higher P/E than larger companies. Logic might suggest, therefore, that the P/E of the New Horizons Fund would be higher than that of the S&P 500 at all times.

This isn’t always the case, and at times when it isn’t, the New Horizons Fund can be a smoke signal for an undervalued or overheated growth economy. Over the last 50 years, for example, the New Horizons P/E has risen to double that of the S&P 500 only four times.

GSV 300 Valuation Metrics vs. Key Indices (12/31/17)

Source: Capital IQ, GSViQ

Currently, the GSV 300 has a P/E (forward) of 26.1, or 1.4x greater than the S&P 500. Our thesis is that at over 2x, it’s a warning signal for growth stocks, and at under 1.2x, it’s a buying opportunity. We’ll monitor this trend, as well as the relationships of other key valuation metrics, to determine patterns over time.

GSV 300 P/E VS. S&P 500
GSV 300 P/E as a Multiple of the S&P 500

Source: GSViQ, Thomson Reuters
GSV 300 P/E/G VS. S&P 500
GSV 300 P/E/G as a Multiple of the S&P 500

Source: GSViQ, Thomson Reuters
GSV 300 P/s VS. S&P 500
GSV 300 P/S as a Multiple of the S&P 500

Source: GSViQ, Thomson Reuters


The Stock Market reflects the confidence investors have in the future, and the IPO market is an even more acute indicator. If investors are pessimistic, new issues shut down. If investors are optimistic, they treat IPOs like fresh oxygen that they can’t get enough of.

On a relative basis, the IPO market sprang to life in 2017, with 153 companies going public and raising a combined $32.1 billion in proceeds. Compare that to 2016, when only 102 companies listed and IPO proceeds were a paltry $18.8 billion. In the past 15 years, there has been an average of 108 IPOs annually, down from the decade of the 90s, which had an average of 406 IPOs annually.

Number of IPOs and IPO Proceeds by Year, 2012-2017

Source: Renaissance Capital, GSV Asset Management

In March 2017, Snap, the parent of Snapchat, raised $3.4 billion. It was the largest IPO of a U.S. company since Facebook, which raised $16 billion in 2012, and the largest overall since Alibaba, which raised $25 billion in 2014. Reportedly 10-times oversubscribed, it was greeted by eager investors, pricing above the range and popping 44%. Since its IPO, Snap’s market value has fallen to $17 billion as the company faces stiff competition from Facebook’s Instagram. In November, Tencent took a 12% stake in Snap.

IPOs coming out of the Middle Kingdom picked up in 2017, with 16 Chinese companies listing in the United States including Best Logistics, search engine Sogou, and China Literature. In 2018, we expect to see more blockbuster IPOs from China, including DiDi and Xiaomi.

Also of note, seven Chinese education companies went public abroad including: Wisdom Education International Holdings (Hong Kong), Yuhua Education Group (Hong Kong), Minsheng Education Group (Hong Kong), Bright Scholar (NYSE); RYB Education (NYSE), RISE Education (NYSE), and Four Seasons (NYSE).

IPOS: 2017 vs. 2016

Source: GSViQ, GSV Asset Management

While we were pleased to see improving IPO activity in 2017, the recent trend points to a broader opportunity for the best names to break through an IPO backlog that has been building over the last fifteen years.

New Fundamentals Have Led to an IPO Backlog that Has Been Building for 15+ Years

Source: GSV Asset Management
Disclosure: GSV owns shares in Lyft

In 2016, Vice Media CEO Shane Smith indicated that he was in discussions with major banks about taking his $4 billion company public. That year, WeWork CEO Adam Neumann remarked in an interview that, “we’re not afraid to go public.” WeWork is now valued at $20 billion following a $4.4 billion financing led by SoftBank in August.

At the Wall Street Journal’s Global Technology Conference, Palantir CEO Alex Karp suggested that the company had prepared itself should it decide to go public in 2017 or 2018. Creating liquidity opportunities for employees was one of the motivations. (Disclosure: GSV owns shares in Palantir)

In February, Karp predicted that the company would be breakeven by the end of 2017, noting that Palantir’s cash burn rate has decreased by approximately 60% versus 2016. Palantir’s operations in the UK are profitable today, as European revenue has roughly tripled over the past three years.

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, corporate customers now represent over half of its revenue. Key clients include Airbus, AXA, Merck, BP, Deutsche Bank, and GlaxoSmithKline.

While Uber and Lyft continue their rapid growth, China’s DiDi Chuxing may be an IPO candidate to watch in 2018 now that it has absorbed Uber China. At $56 billion, DiDi is the World’s most valuable private company and it now completes over 25 million rides per day with a network of 21 million drivers.

The list of IPO candidates goes on.


Source: GSV Asset Management, Crunchbase, Wall Street Journal
Disclosure: GSV owns shares in Dropbox, Lyft, Palantir, Spotify
*Spotify has indicated that it will pursue a direct listing, as opposed to a traditional IPO

In the first week of 2018, Spotify — the World leading music streaming platform which now counts well over 140 million users and 70 million paying subscribers across 60 international markets — filed to go public on the New York Stock Exchange in a direct listing. Unlike an IPO, a direct listing forgoes underwriters, lockups, and the typical infusion of capital associated with a traditional public offering. (Disclosure: GSV owns shares in Spotify)

To date, it has raised over $1.6 billion from a syndicate of investors including Accel Partners, Technology Crossover Ventures, and Goldman Sachs. Other IPO candidates such as Airbnb and Palantir, will be watching Spotify’s direct listing closely, as that might turn out to be a more attractive choice.

The company’s long-term 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’re engaging with a broader range of content. It’s a double play.

Just one week after Spotify filed, Dropbox confidentially filed to go public. One year ago, Dropbox became the fastest Software-as-a-Service business to reach the $1 billion revenue run-rate milestone, according to its CEO Drew Houston. It hit the mark in eight years, beating SaaS leaders like Salesforce and Workday. (Disclosure: GSV owns shares in Dropbox)

Impressively, Drew Houston announced in April that the company had become profitable on an EBITDA basis. This follows a June 2016 announcement that Dropbox had achieved positive free cash flow. Today, Dropbox likely counts over 600 million users and 300,000 business customers – including a majority of Fortune 500 companies. Rarely have we seen a business operate with this combination of growth, profitability, and scale.


by Luben Pampoulov

AI-ifying Media

AI is transforming media. Increasingly more companies are shifting to apply Artificial Intelligence-powered technology in order to stay relevant and to grow. Netflix and Spotify were the pioneers when they began to recommend what to watch and listen. Both have managed to fend off competition which includes Apple, Amazon and Google.

Now, a series of newcomers are doing the same. Whether it’s news apps, music services, or video streaming, companies across the entire media spectrum are applying AI to help users successfully navigate in the “digital information ocean.”

What’s interesting is that AI success stories are increasingly a global trend, rather than originating from Silicon Valley. While Netflix is the Valley’s poster-child, Facebook’s AI is certainly not a success; fake news and political propaganda have been playing into users’ newsfeed for a while. In music, Swedish Spotify has consistently outperformed Apple Music, mostly due to its superior AI-recommendation engine.

Today there is new AI-wave re-shaping media, and that one is “Made in China.” Ever heard of Toutiao, or Kuaishou? Not many outside of China know these names, but within the the People’s Republic, they are two of the most popular media apps.

Toutiao is a reading app that suggests articles based on your reading and browsing history. In its five years of existence, the app has grown to well over 120 million daily active users who now spent a mind blowing 74 minutes per day on the app — higher than Wechat, Facebook, Instagram, Snap, Twitter, Pinterest…

The way Toutiao works is as follow: once a user downloads the app, it uses machine learning algorithms to constantly monitor his/her behavior, and accordingly fine-tunes the contents that are being served thereafter. The more often the user comes to the app, the more accurate Toutiao recommends relevant content…

Toutiao is a media property within ByteDance — China’s emerging new media platform that is currently raising a new round at a $30 billion valuation. In its wide portfolio of media properties, ByteDance also owns a dating app, a video streaming app, Toutioa, and — the highly popular lip-syncing app it acquired for $1 billion last year. ByteDance was on track to generate $2.5 billion in revenue in 2017, and according to many experts, it has one of the most advanced AI technologies in the World.

Similarly, Kuaishou is a fast-growing Chinese social media app, focused on video broadcasting. Initially started as a picture sharing app, Kuaishou had reached 400 million users. But then the company decided to pivot to video and live broadcasting, and is now attracting over 100 million daily active users, up from 50 million in March 2017. On the app, users upload 10 million videos every day, up from 5 million back in March.

Here again, at the core of Kuaishou’s success is its focus and reliance on artificial intelligence — it uses AI to recommend and place videos into users’ scrolling feeds.

Kuaishou is backed by Tencent, and is currently raising a new $1 billion round at a $17 billion valuation. Its competitors include public companies Momo and YY, which are both already surpassed in size. Momo has 94 million monthly active users, an YY has 73 million monthly active users. Kuaishou is at 100M daily active users, implying its monthly active users are much higher than that.

What is interesting is that the majority of users are from China’s lower tier cities and rural areas. This is partly because of the viral spread of Jackass-type of clips that drove the initial interest to the app. Users are filming self-injuring pranks ranging from eating strange things, drinking too much alcohol, jumping into icy rivers, or putting fireworks in one’s own crotch… Hence, the app grew a stronger audience in rural China.

Pioneer Notes

by Li Jiang

6 Articles You Must Read Before Fundraising For Your Startup

Fundraising for many founders falls somewhere between going to the dentist and taking a dump. It’s somewhere between a painful experience (dentist) and just a necessary annoyance (dump).

But it probably doesn’t have to be that way if you are prepared to tell a compelling narrative, run an efficient process, and target and find the best long-term partner for your company.

Here are 6 resources you should use before setting off on your Seed or Series A raise:

1. Justin Kan, Atrium — The Founder’s Guide to Raising a Series A Venture Financing

Justin focuses on Series A but the lessons are largely transferrable to Seed rounds as well. This is a great guide that outlines how to run an overall efficient fundraising process and what are all the steps you need to complete to save yourself time and headache.

2. Sarah Guo, Greylock — What do I look for in a pitch?

Sarah creates a fairly comprehensive and systematic guide on the key things she/her firm looks for in a startup. The post hits on a lot of tactics and is a great distillation of the most important things you need to convince your (potential) VC backers.

3. Ash Rust, Sterling Road — Seed Fundraising — How to Build a Deck

Ash’s post, and the rest of his series, is a down to earth and specific guide on how to build a deck. There’s no fluff in this post and this serves as a good reminder for founders to not try to write an encyclopedia about their companies, but hit the highlights to get a meeting, and then a term sheet.

4. Reid Hoffman, Greylock — LinkedIn’s Series B Pitch to Greylock

This long, and timeless, guide from Reid Hoffman breaks from conventional wisdom on a number of fronts, including how you should start your pitch — with an investment thesis.

I highly recommend taking time to deeply read and understand the great nuggets in his essay. There’s a ton of substance here. While the slides themselves look very spartan, the narrative is powerful.

5. Geoff Ralston, YC — A Guide to Seed Fundraising

Geoff’s guide is an “all in one” that helps you check all the boxes of a seed round. While you don’t need to read every piece when starting it, it’s a great guide to reference at any point of your fundraising journey.

6. Li Jiang, GSV — 8 Questions I Ask Every Startup

Any good post wouldn’t be complete without your own contribution to the field. I previously wrote about the 8 questions I ask every startup. While there are always new questions, I think every startup will face a core list of tough questions which I did my best to capture in this post here. Enjoy!

Market Update

Week ending January 21, 2018

World Indices

U.S. Indices Snapshot

Valuation P/E Est. P/E/G Price/Sales