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General Commentary
May 13, 2018

GSV Capital First Quarter 2018 Results

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Market Snapshot

Indices Week YTD
GSV 300 -4.90% -8.50%
S&P 500 -4.10% 3.50%
Dow -4.20% 2.50%
NASDAQ -3.70% 8.60%
Russell 2000 -5.20% 0.70%
MSCI -4.10% -14.60%
Valuations P/E Fwd P/E/G
GSV 300 23.6x 0.4x
S&P 500 18.1x 1.2x
I-Rates Now YTD
10-Year Note 3.20% 31.30%
3-Month Bill 2.30% 64.00%
Sentiment - Current
Bull-Bear - 30.6-35.5
Put-Call - 1.2
Vix - 21.3
Inflation Now YTD
Gold $1221.60 -6.40%
Oil $71.51 19.00%
Mutual Funds - Week
Fund Flows (bil) - -$2.60
Growth-Value 00-09 09-Now
Growth -34% 271%
Value 87% 151%

On May 8, GSV Capital (NASDAQ: GSVC) announced its First Quarter 2018 financial results. Please click here for GSVC’s official press release, which captures detail reflected in the update below.

At the end of the first quarter, Net assets totaled approximately $211 million, or $9.99 per share. This is up from approximately $205 million, or $9.64 per share, at 2017 year end, and $196 million, or $8.83 per share at the same time last year. Successful IPOs from Dropbox and Spotify headlined strong first quarter momentum in the GSV Capital portfolio. (Disclosure: GSV owns shares in Dropbox and Spotify)

GSV CAPITAL FIRST QUARTER 2018 NAV
Net Assets of $221 million, or $9.99 per share, as of March 31, 2018

Source: GSV Capital

At the same time, we have continued to execute key initiatives to systematically enhance shareholder value.

  • In 2017, GSV Capital’s Board authorized a $10 million discretionary open-market share repurchase program through November 6, 2018. To date, we have repurchased approximately $6.2 million in shares of common stock under the program, including $1.2 million in the first quarter of 2018. We are pleased to announce today that our Board has authorized a $5 million expansion of the program to an aggregate of $15 million, which leaves $8.8 million for repurchases under the program.
  • A second noteworthy initiative announced on March 23 was the pricing of $40 million in aggregate principal amount of 4.75% Convertible Senior Notes due in 2023. We are thrilled to have the support of a group of world-class institutional investors and believe this instrument will create value in a few specific ways:
        • First, we intend to use the proceeds, as well additional cash on hand, to repurchase or pay at maturity GSV Capital’s $50 million of outstanding 5.25% Convertible Senior Notes, which mature on September 15, 2018. The new instrument, in other words, is effectively a $40 million extension at a 50 basis point discount. As of March 31, 2018, GSV Capital’s cash position was approximately $90 million.
        • By extension, the new instrument will create broader capacity for GSV Capital to make new portfolio investments in premier VC-backed technology companies with a line of site to an IPO or significant liquidity event. To frame the opportunity, CB Insights identifies 355 IPO pipeline companies today. This group has raised over $104 billion in aggregate and more than $75 billion since 2015.
        • The new note will also enable us to opportunistically make follow on investments in portfolio companies that continue to demonstrate strong growth fundamentals.
  • A third initiative is the implementation of comprehensive adjustments to GSV Capital’s advisory fee structure. On February 5, 2018, we announced that GSV Asset Management would forfeit $5 million of its previously accrued, but unearned incentive fee, which resulted in the addition of approximately 24 cents per share of NAV in the first quarter.
  • Finally, we continue to focus on prudent opportunities to reduce expenses. In the first quarter, for example, we lowered the operating costs incurred under GSV Capital’s administration agreement by 20% versus the same period last year.

On March 23, Dropbox, completed a successful IPO, trading up 40% for the day as investors embraced the fastest SaaS business to reach a $1 billion revenue run rate.

Today, the company trades at approximately $31, a gain of 48% from its listing price. As of March 31, 2018, GSV Capital held 874,990 shares of Dropbox at a fair value of $24 million, or approximately $27 per share. The Wall Street Journal reports that the median analyst price target for the company is currently $34, with a high of $40.

As we have communicated in the past, our intention is to monetize public positions at a time that will maximize shareholder value within 18 months of a portfolio company going public, or 12 months after any relevant lock-up has expired. We remain very bullish on the outlook for Dropbox.

In its S-1, Dropbox reported 2017 revenues of $1.1 billion, up from $604 million in 2015 – a 35% CAGR for the period. Gross Margins nearly doubled over that span, improving from 33% to 67%.

We believe that Dropbox is creating long term competitive advantages in the enterprise by unlocking powerful and disruptive network effects.

Dropbox reported more 11 million paying customers at the time of its filing, including 300,000 businesses and over half of the Fortune 500. Remarkably, over 90% of the company’s revenue originates from self-service channels – individuals who purchase a subscription through the app or website. Employees, in other words, want to use the technology they use at home.

Today, Dropbox has over 500 million users across 180 countries, including 100 million new users added since the beginning of 2017.

A second key development in the portfolio was Spotify’s successful direct listing on the New York Stock Exchange on April 3. As expected, the company opted to forgo a traditional IPO, which means there was no formal share offering, underwriters, or lock-up period for current investors.

Today, the company trades at approximately $157 per share following a 40-to-1 stock split announced before the listing. As of March 31, 2018, GSV Capital held 235,360 shares of Spotify at a fair value of $31 million, or approximately $132 per share.

Last week, a slew of leading investment banks initiated coverage of Spotify and issued price targets. Goldman Sachs, JP Morgan, Evercore, and Morgan Stanley all pegged the company at $190 per share. Bank of America Merrill Lynch came in at $195 and UBS set a price target of $200. The Wall Street Journal reports that Spotify’s median analyst price target is currently $180, with a high of $210.

We believe that Spotify continues to demonstrate significant upside potential based on strong operating fundamentals and growth initiatives. In its first earnings report last Wednesday, the company announced revenue and user growth that was in line with forecasts. As of first quarter end, Spotify reported over 75 million subscribers and 170 million users overall. By contrast, Apple Music reported just 40 million users on April 11.

Beyond the headline numbers, two key metrics stood out:

  • First, the average monthly premium churn rate hit a record low, falling below 5% for the first time.
  • Second, Gross Margin reached 25%, which surpassed Spotify’s most recent estimates. For context, Netflix operates with approximately 35% Gross Margin and we believe Spotify’s continued improvement in this area will be a catalyst for the stock.

In a third key development for the portfolio, GSVlabs announced on April 9th that it completed a Series B financing of approximately $7 million at a $25 million pre-money valuation. The round was led by outside investors. As of March 31, 2018, GSV Capital’s valuation for the company implied an enterprise value of approximately $18 million. (Disclosure: GSV owns shares in GSVlabs)

We’re also excited to report that in conjunction with the financing, GSVlabs announced the hiring of new CEO Nikhil Sinha to lead the platform’s global expansion.

Nikhil brings a unique blend of experience spanning venture capital, as well as executive roles in both the corporate and academic sectors. He’s an accomplished VC, he co-founded and successfully exited two technology companies, and more recently, he launched a major university in India. Nikhil is the Director Emeritus of the U.S.-India Business Council and a member of the Advisory Board of the Annenberg School for Communication at the University of Pennsylvania.

A final key portfolio development subsequent to first quarter end was the acquisition of General Assembly for $413 million by the European human resources and staffing firm Adecco. We are thrilled for the General Assembly team and believe Adecco, which serves over 100,000 businesses, can help meaningfully accelerate its expansion into the enterprise. (Disclosure: GSV owns shares in General Assembly)

GSV Capital initiated its position in General Assembly in 2014 and we believe the acquisition price aligns with our current valuation for the company. As of March 31, 2018, we held General Assembly at a fair value of $9.6 million against a cost basis of $6 million, which represents a return of approximately 60%.

The acquisition was announced on April 16 during the 9th annual ASU GSV Summit, which attracted over 4,000 attendees from 40 countries, as well as 450 presenting companies. Notable keynotes included former U.S. and Mexican presidents George W. Bush and Vicente Fox, Angela Duckworth who authored the bestseller Grit, education activists Matthew McConaughey and John Legend, and many others.

The New York Times has described the Summit as a “must attend” event for investors in the education and talent sector and we believe it creates key advantages for GSV Capital. Not only is the Summit an engine for unique deal flow, it is a platform to promote and connect major portfolio companies like General Assembly, Course Hero, and Coursera. Please click HERE to access a video library from the event. (Disclosure: GSV owns shares in Course Hero and Coursera)

Turning to a broader review of the portfolio, GSV Capital’s top five positions as of March 31, 2018 were Palantir, Spotify, Dropbox, Coursera, and GSVlabs. These positions account for approximately 59% of the total portfolio at fair value, excluding treasuries. Our top 10 positions account for 83% of the portfolio. (Disclosure: GSV owns shares in Palantir)

GSV CAPITAL TOP FIVE POSITIONS
Top Five Positions = 59% of Total Portfolio (Excluding Treasuries) at Fair Value as of 3/31/18

Source: GSV Capital

By comparison, as of March 31, 2017, GSV Capital’s top five positions accounted for just 39% of the portfolio at fair value, excluding treasuries. The top 10 positions accounted for 60%.

This reflects our continued strategy of increasing the size per position in our investment portfolio. As a result of this objective, as of March 31, 2018, there were 29 companies in our portfolio, compared with 39 a year earlier.

Looking ahead we believe that the GSV Capital portfolio is well positioned against a strong environment for leading venture-backed companies.

There have been 65 U.S. IPOs in 2018 according to Renaissance Capital and our research affiliate, GSViQ, a 28% increase over the same period last year. To date, 19% of companies have priced above range and 61% have priced in range, which is consistent with a healthy IPO market.

2018 IPO ENVIRONMENT

Source: Renaissance Capital, GSV Asset Management

Total IPO proceeds stand at $19.3 billion to date, a 28% year over year increase. To illustrate what a meaningful change this represents, IPO proceeds for the entire year in 2016 were only $18.8 billion.

The strong IPO market has been matched by robust VC investment activity to date. According to KPMG’s Q1 Venture Pulse report, VCs invested a record $28.2 billion in U.S. companies across nearly 1,700 deals in the first quarter of 2018 as global investments topped $49 billion.

We believe these trends bode well for top GSV Capital names, including Palantir and Lyft, which continue to be popular IPO candidates. (Disclosure: GSV owns shares in Lyft)

On March 14, Lyft announced that it received a $200 million investment from the global auto parts manufacturer Magna, an extension of the Alphabet-led Series H financing announced in October 2017. Lyft is now valued at $11.7 billion.

According to reports from Bloomberg, Lyft entered 2018 controlling approximately one third of the U.S. ridesharing market, up more than 60% year over year, and we believe it’s gained more ground to date. The company reportedly generated well over $1 billion in net revenue in 2017 – the amount of money it captures after paying drivers – more than doubling 2016 performance. As of March 31, 2018, Lyft was GSV Capital’s 7th largest position at a fair value of $12.2 million.

GSV Capital’s annual investor day is scheduled for Wednesday, May 30th, from 1:00pm to 5:00pm PT at GSVlabs in Silicon Valley. The event will feature presentations from portfolio company CEOs and we will share our perspective on the key trends driving the global growth economy. Please register to attend HERE. It will also be live streamed, which you can access from our website as well.

Bubblin'

by Luben Pampoulov

Call The Doctor

We were an early investor in ZocDoc — the online booking platform for doctor appointments. When we made our investment in 2011, ZocDoc was an innovative startup with strong early momentum. Our thesis was that ZocDoc had a disruptive business that was “organizing the chaos” of finding the right doctor or dentist, and was helping with appointments scheduling. But two years later we had an opportunity to sell, and we exited our position (at a profit).

While we could have held for longer, we identified a few fundamental flags and decided otherwise. We no longer had visibility that management was able to scale the company to become a billion-plus dollar business — which was the longer-term goal. While the big market opportunity remained, the business was going sideways.

Meanwhile, my good friend Stan Niox-Chateau was preparing to launch the French version of ZocDoc — called Doctolib. While starting a few years behind, Stan was very effective on executing against the opportunity in France, and has grown Doctolib significantly — they are on pace to overtake ZocDoc in size. With a similar model, doctors pay a monthly fee to be on Doctolib, which significantly improves their schedules and results in fewer cancelations. For users, it is an easy way to find and schedule an appointment, without having to wait for days.

Doctolib is backed by Accel, Kerala, Eurazeo and Bpifrance, and has the potential to become one of Europe’s next unicorns.

Meanwhile further East, Tencent’s WeDoctor is aiming to organize the doctor booking chaos in China, and has already amassed over 2,700 hospitals, 220,000 doctors, 15,000 pharmacies and 27M monthly active users to its platform. Last week, WeDoctor raised a $500 million round at a $5.5 billion valuation.

Back in the U.S., a new doctor booking platform is gaining strong momentum. In less than a year, San Francisco-based Solv has become the number one online destination for patients seeking same-day care. Whether searching for a doctor, pediatrician, dermatologist or chiropractor, Solv allows users to book from their phone and to get an appoint within hours. The early momentum is strong, as evidenced by over 1.5 million visits so far.

What’s also appealing is that Solv allows users to pay directly through the app, which is a novel approach compared to ZocDoc and others. This could prove to be a significant competitive advantage over time.

Solv’s Co-founder and CEO is Heather Mirjahangir Fernandez, who previously served as senior vice president and general manager of business services at Trulia. Solv’s other Co-founder, and the company’s CTO, is Daniele Farnedi, who was previously the CTO at Trulia.

Last week, Solv announced it raised $17 million from Greylock, with participation from existing investor Benchmark.

Certainly, on-demand doctor booking platforms are seeing strong adoption all around the World. We have Doctolib high on our watch-list, and are adding Solv and and WeDoctor as well. 

Pioneer Notes

by Li Jiang

What I Learned From Reading Every Google Founders’ Letter

Google is not a conventional company. We do not intend to become one.

Those two sentences in Google’s 2004 Founders’ IPO Letter introduced the company to the public (investor) world.

From its unconventional dutch-auction IPO, to giving employees 20% time to explore any interest related to Google, to balloon-beaming Internet projects, Google, and now Alphabet, has been anything but conventional.

I read every one of Larry and Sergey’s Founders’ Letters dating back to its 2004 IPO and here’s what I learned:

Google, in beta (1998)

1/ It’s search, stupid

Why did Google succeed and endure in the Internet battlefield when almost all other startups have faded into distant memory?

They had a key insight that almost everyone in the world disagreed with! When everyone thought “search” was done (played out) by Yahoo, Altavista, Lycos, Excite, etc., Google realized that it was very much “early days” in this Megatrend that was at the very core of raison d’être of the Internet.

Search remains the heart of Google. — 2006

Here’s what most people misunderstood, search isn’t just about finding websites, it’s getting the right information you need exactly when you need it the most.

I expect our search engine to become much “smarter” in the coming decade. — 2008

Even as Google has grown into a behemoth, they never took their eyes off the prize in search.

When we started Google most people thought search was a solved problem and that there was no money to be made apart from some banner advertising. — 2012

As the world moves increasingly digital, the core business value (and profit center) of Google is becoming increasingly stronger as they build even stronger network effects into their search business. With the proliferation of ubiquitous computing in both the form factor (mobile) and method of access to knowledge (voice, AI), search is poised to start a new chapter of growth.

We are a million miles away from creating the search engine of my dreams. — 2013

Takeaway: find a powerful trend that you think is true but most people don’t. Being contrarian and right is where you will find the most outsized outlier opportunities.

2/ A is for Alphabet

Larry and Sergey mixes a very long term perspective on the business and infinite creative ways to accomplish their objectives.

But a long perspective, like that of a human lifespan, is useful in assessing year by year developments. — 2004

Many manager work top down where they look for each department to make their numbers every quarter. Google’s long term perspective allowed them to not look at quarterly ups and downs but to approach the world from a long form button-up approach. They are able to focus on areas of technology that are both important and difficult and develop original solutions for those areas.

Finding important technological areas where progress is currently slow, but could be made fast, is what Google is all about. — 2009

With the creation of Alphabet as the higher level corporate parent for Google, X, GV, CapitalG, Calico, etc., Larry and Sergey were able to focus on devoting the right amount of resources to new frontiers.

Happiness is a healthy disregard for the impossible. — 2012

Takeaway: stop trying to only earn an incrementally higher paycheck, but focus on your core life goals and build value from those core ideas.

3/ Let a thousand flowers bloom

Larry and Sergey created a behemoth on a single really valuable insight — the PageRank algorithm that ranked websites on relevance based on how many other webpages were linking to it.

Continuous Innovation, Not Instant Perfection. — 2005

But they knew early on that even the most powerful algorithm to organize the more important technology in our lifetimes (the Internet) was not sufficient. From the beginning, Google gave their team members the ability to work on projects outside of search in a 70–20–10 format. Seventy percent of time was spent on core projects, 20% of time was spent on new tangentially related projects and 10% on moonshot ideas. Gmail and many of the tools we find indispensable was a 20% time project.

They also created the financial incentive mechanism to reward the very best new projects through the Founders’ Award Program, where people who created the most new value by taking risks were rewarded with millions of dollars as if they were successful founders.

We’ve let a thousand flowers bloom; now we want to put together a coherent bouquet. — 2012

But one of the biggest innovation Larry and Sergey made was to appoint Sundar Pichai as the CEO of Google in 2015. This gave one of their key leaders a chance to drive Google even faster while freeing up their time and mental bandwidth to focus on new bets for Alphabet.

We will move from mobile first to an AI first world. —Sundar Pichai, 2015

Takeaway: if you don’t make lots of small and smart bets along the way, you might not live long enough to make the big bets.

4/ Culture eats strategy for breakfast

While Hollywood had some fun at the expense of Google in the movie The Internship, Larry and Sergey never took the culture of Google for granted.

Our employees, who have named themselves Googlers, are everything. — IPO (2004)

Larry was reviewing every hire even in 2007 when there were 17,000 people at Google. Let that sink in for a moment.

Sergey and I are certain we would not meet the quality bar to be hired as engineers at Google today. — 2005

There are a thousand little things that drove Google’s culture, but their north star was established early on to use the core technology to impact people globally, all around the world. Google has always been driven by a powerful mix of ambition, idealism, and intellect.

We may do things that we believe have a positive impact on the world, even if the near term financial returns are not obvious. — IPO (2004)


So a child in an Internet cafe in a developing nation can use the same online tools as the wealthiest person in the world. — 2008


Takeaway: culture is not an afterthought. The bigger you grow your organization, the more important it is to get the culture right from the beginning. You can’t go back and re-engineer culture.

5/ If you can’t beat them, buy them!

When Google bought Youtube in 2006, Eric Schmidt established an independent operating structure for Youtube to continue to operate in a separate office.

What we think of Google and Alphabet today has been a collection of acquisitions (Google Earth, Android, Nest, and many more).

Google’s formula for successful acquisitions have involved being willing to pay up, letting companies retain independence, and focusing on creating revenue side synergy through data and users.

Takeaway: life isn’t always a competition. Teaming up with the right people can be a huge multiplier.

6/ Zip zag

We do not plan to give earning guidance in the traditional sense. — IPO (2004)

Good riddance, I wish all public companies moved to this model. Sure there may be some penalties in the short term, but it would do people who act like owners, as oppose to speculators, a lot of good.

But this is just one example of Google’s defiance of Wall Street. Google also led the way in creating dual class ownership structure so that the founding team could make long term decisions without fearing overly aggressive activism that tries to optimize for short term stock appreciation.

This is just one of many small examples of Google deciding to do things their own way as a public company.

Takeaway: think for yourself, don’t do something even if literally everyone else expects you to.

Since the two co-founders take turn writing each year’s letter, you get a sense of their individual stories.

7/ Larry

When Larry was young, he read about the life of Nikola Tesla — a brilliant inventor who died penniless because he could not commercialize or take advantage of many of his own inventions.

That caution tale has stuck with Larry for his entire life. When Larry came back as CEO in 2011, he focused the company towards increasing its speed and execution.

I’ve pushed hard to increase our velocity, improve our execution, and focus on the big bets that will make a difference in the world. — 2012

Takeaway: it doesn’t matter how smart or inventive you are, the world doesn’t care and isn’t fair. Focus on execution and getting results.

8/ Sergey

As an immigrant, I was particularly touched by Sergey’s 2010 letter. Like Sergey’s parents taking great risks to move their family out of the Soviet Union, my parents similarly faced great uncertainty coming to America.

It never ceases to amaze me that when I was born (in 1987), the Berlin Wall and the Iron Curtain were still up and the Internet didn’t exist yet. Fast forward 29.5 years and we are on a runaway freight train towards our inevitable science fiction future.

What is still science fiction today will have worldwide impact almost overnight. — 2010

Takeaway: we live in the most exciting time in human history and change is only accelerating globally. We can’t wait to prepare for change to happen, we must evolve now.

Market Update

Week ending May 13, 2018

World Indices

America Index 10/14/2018 YTD Week
U.S. GSV 300 108.6 -8.50% -4.90%
NYSE 12439.4 -2.90% -4.30%
Dow 25340.0 2.50% -4.20%
NASDAQ 7496.9 8.60% -3.70%
NASDAQ-100 7157.2 11.90% -3.30%
Russell 2000 1546.7 0.70% -5.20%
S&P 500 2767.1 3.50% -4.10%
Brazil Bovespa 82921.1 8.50% 0.70%
Mexico IPC 47444.1 -3.90% -1.30%
Canada S&P TSX 15414.3 -4.90% -3.30%
Euro-Asia Index 10/14/2018 YTD Week
China SSE 2606.9 -21.20% -7.60%
Heng Seng 25801.5 -13.80% -2.90%
Singapore Straits Times 3069.2 -9.80% -4.40%
Indonesia JKSE 5756.5 -9.40% 0.40%
Japan Nikkei 225 22694.7 -0.30% -4.60%
India Sensex 34733.6 2.00% 1.00%
Russia RTS 1141.4 -1.10% -1.60%
France CAC 40 5096.0 -4.10% -4.90%
Germany DAX 11523.8 -10.80% -4.90%
U.K. FTSE 100 6995.9 -9.00% -4.40%



U.S. Indices Snapshot

Valuation P/E Est. P/E/G Price/Sales
LTM NTM Growth LTM NTM LTM NTM
S&P 500 24.4x 18.1x 15.10% 1.6x 1.2x 2.5x 2.3x
NASDAQ 26.0x 21.8x 17.00% 1.5x 1.3x 3.1x 2.7x
Russell 2000 58.7x 27.3x 6.30% 9.3x 4.3x 2.7x 2.5x
GSV 300 37.0x 23.6x 57.80% 0.6x 0.4x 6.5x 4.2x

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