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General Commentary
April 3, 2016

If You Can’t Measure it, You Can’t Manage It

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Market Snapshot

Indices Week YTD

To the casual observer, it might seem that Markets had a “ho-hum” first quarter, with the Blue Chip barometer S&P 500 up 1.4%. Annualize that and you get a roughly 6% return — below the historic 10% overall return for stocks but respectable in essentially a zero percent interest rate environment.

What that lucky person would have missed was the heavy dose of volatility Market participants received — a frightening drop of 9% from January 1st to February 11th, followed by a 10% rise through the end of March.

While the net result was a roller coaster ride that ended up at the same spot it started, investors in stocks got to experience the air going out of their stomachs and the thrill of climbing up the rails, expecting a drop at any second.

Moreover, while the market cap weighted S&P 500 is the best proxy for what’s going on with large, traditional, U.S.-based businesses, it wasn’t too reflective of the broader global constellation of listed companies. For example, China’s main index was off 16.5% for the quarter, India was down 4.5%, Germany’s DAX declined 7.4%, and Japan’s Nikkei 225 was down 12.1%.

In growth land, NASDAQ finished the first quarter off 3%. Our own GSV 300 — made up of the 300 fastest growing companies in the World — was down a whopping 15% for the quarter.

It makes sense that in an environment where people are scared about everything from ISIS to the Presidential Election, “safe” stocks such as Kraft Heinz sell at a P/E of 21.1x despite negative growth. “Conventional Wisdom” knows that whatever goes on, people still need to eat. And Warren Buffett is the best investor of all time, so it can’t be bad to saddle up with him during this bumpy ride.

Forget the fact that people aren’t eating the unhealthy junk Kraft Heinz is making and are increasingly going to Whole Foods and Trader Joe’s — ketchup is where you go when you are afraid of what’s next. When investors believe there might not be a future, they don’t invest in “futures”, which is what growth stocks are.

Source: Business Insider

One might naturally expect us to be upset that GSV 300 had such brutal performance, but actually, we are pleased that we have created a scorecard that reflects what is actually going on in the World of growth stocks. Constituents are selected through a systematic process described below — they’re not handpicked — and the result doesn’t look at all like the indexes that people typically use to analyze growth companies and growth investors.

The most relevant index for Institutional Investors is 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.

Given GSV’s passion, obsession and vocation of growth stock investing, and the dearth of focused, tailored information and insight, we’ve decided to adopt the wise saying, “If you want something done right, do it yourself.”

The GSV 300 Global Growth Index
The Definitive Barometer for the Global Growth Company Ecosystem

In 2015, GSV launched the GSV 300 Index, which we believe is the best representation of what is truly going on with growth companies, their valuations, and performance. It is an index of 300 of the World’s fastest growing companies, selected systematically based on key fundamentals, including revenue and earnings growth, geography, valuation metrics, and market capitalization.

GSV 300 Snapshot

The GSV 300 Index is constructed using a 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.

GSV 300 Methodology Summary

Looking at the GSV 300 by geography, 43% of the index weightage comes from U.S. companies. China is the second-largest geography at 20%, followed by India at 13%, and South Korea at 8%. By contrast, 95% of the S&P 500 and 85% of NASDAQ are represented by U.S. companies. 

GSV 300 Breakdown by Country

Countries of GSV 300 Constituent Companies as a Percentage of Index Weightage

Source: GSViQ

S&P 500 Breakdown by Country

Countries of S&P 500 Constituent Companies as a Percentage of Index Weightage

Source: GSViQ

NASDAQ Breakdown by Country

Countries of NASDAQ Constituent Companies as a Percentage of Index Weightage

Source: GSViQ

Performance & Valuation

While the overall index was down by 15% for the quarter, a look at the geographic breakout indicates that the movement was largely driven by U.S. and Chinese companies, which were down 17% and 14%, respectively. India, by contrast, was only down 4%, while other geographies were flat.

GSV 300 Performance by Country
Q1 2016 Performance of the GSV 300 by Country of Constituent Companies

Source: Yahoo Finance, GSViQ

Segmented by GSV investment theme, the most significant downward movement was among “Cloud + Big Data” businesses, which were off 17%, and “Social/Mobile” businesses, which fell 21%. Much like the broader Market volatility, we expect these themes to rebound as broader growth confidence returns.

GSV 300 Performance by GSV Investment Theme
Q1 2016 Performance of the GSV 300 by Industry of Constituent Companies

Source: Yahoo Finance, GSViQ

But beyond performance, we believe that the GSV 300 offers important insights about global growth companies.

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 Q1 Valuation Metrics
GSV 300 Valuation Metrics vs. Key Indices (As of March 31, 2016)

Currently, the GSV 300 has a P/E of 25x, 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, Q1 2016

Source: GSViQ, Capital IQ

GSV 300 P/E/G VS. S&P 500
GSV 300 P/E/G as a Multiple of the S&P 500, Q1 2016

Source: GSViQ, Capital IQ
GSV 300 P/s VS. S&P 500
GSV 300 P/S as a Multiple of the S&P 500, Q1 2016

Source: GSViQ, Capital IQ


The eight IPOs for the first quarter was the worst since the Great Recession of 2009. Given the volatility in the Market and poor performance of many new issues in 2015, it’s not a shock that there were few companies who wanted to stick their toe in the water. Given the recent improved performance of stocks, coupled with the more challenging Private Market, we expect to see an uptick in activity in the near future.

Q1 IPO Snapshot

Source: GSViQ

Last week, the Market continued its upward march in March from the depths of despair in January, with NASDAQ up 3.0%, the S&P 500 up 1.8%, and the GSV 300 advancing 2.7%. The Ten-Year Note yield was 1.8%.

World Indices

Source: Yahoo Finance, GSViQ

With the first quarter volatility, and Mr. Market predictably behaving unpredictably, everybody knew that bond yields had nowhere to go but up. So, of course, yields went down, with the total return for bonds in the first quarter nearly 7%. Gold is the sexier version of putting your money under the mattress, but the hide-your-money strategy was up 16% for the first quarter.

Employment growth for March was a respectable 215,000 new jobs, but unemployment went from 4.9% to 5.0%. Why? Because more people started actually looking for jobs again.

Tesla continued to defy convention and announced that it had pre-ordered 180K of its new Model 3 cars in the first 48 hours.  It seems like the public likes the much lower $35K starting price and 215 miles per charge. To put some perspective on that achievement, Tesla created about $7.5 billion of backlog in two days for a car that won’t be delivered for 18 months. (Disclosure: GSV owns shares in Tesla)

Bucking the trend, where a “flat” round is the new “up” round, Slack raised $200 million at a $3.8 billion valuation. Slack — which we analyze extensively in our recent A2Apple edition Slack Attack — has grown its users base from 500,000 in 2015 to 2.7 million. Early investor Accel predicts that by 2020, all organizations would be using a Slack-like product — preferably Slack.

SEC Commissioner Mary Jo White is unimpressed by recent vintages of highly valued private companies and came out to Silicon Valley last week to convert the faithful to unbelievers. We will see how that goes.

We remain BULLISH on the outlook for growth stocks despite the Market’s current adoration for more pedestrian companies. Over time, growth drives enterprise value and we believe that owning the strongest growers is the way to create superior long term returns.


by Luben Pampoulov

Emerging Leaders

Lyft is going back to its roots, and introduced its carpooling service Lyft Carpool which matches commuters with drivers going the same route. Lyft’s predecessor Zimride was exactly that service. Lyft Carpool is different than Lyft Line as drivers of the new service have their predetermined route and know they will drive from A to B at a specific time during the day. Such a service already exists in Europe — called Blablacar — and has become quite popular all over the continent, and especially in Russia. However, Blablacar is used for inter-city travel, so it allows a passenger to catch a ride with someone going from Paris to Amsterdam, for example. (Disclosure: GSV owns shares in Lyft)

Lyft Carpool is yet another innovative service that will hopefully help improve traffic and solve some of the associated problems. It launched in the Bay Area last week, and will possibly also launch in other popular areas in the U.S. soon.

In regards to cost, “Drivers on Lyft Carpool would only be able to recover the cost of operating their vehicle,” said Emily Castor, Lyft’s Director of Transportation Policy. “The mileage reimbursement rate is mandated by the IRS at 54 cents a mile. They will be able to earn up to $10, but they won’t be able to profit from their participation.”

Music streaming leader Spotify announced a $1 billion debt financing, but more importantly, it also announced its launch in Indonesia – a country of 238 million with a very young demographic profile where 29% of the population is below the age of 18. Indonesia is a large new opportunity, but attracting new users will also have its difficulties: connectivity is poor, with 4G coverage being spotty; Indonesian’s purchasing power is also just a fraction of other countries, and getting a plan will not be for many (despite the monthly subscription there being just $3.74). (Disclosure: GSV owns shares in Spotify)

Spotify has now captured almost every important geography, with the exception of Japan and India — two locations they might enter soon as well.

Snapchat just made a huge move into becoming a larger and even more important communication platform. Last week, the LA-based company launched a new version of its app, allowing users to call (audio or video) friends at any time. Previously, video calls were only possible when both users were in the app at the same time. The new Snapchat also added fun stickers, and the ability to send pictures from your camera roll…

Snapchat continues to gain ground against other communication apps, which is evidenced by the hyper growth of daily video views — now standing at over 8 billion per day, up from 2 billion per day in May last year. With over 100 million daily active users, this implies that Snapchatters are watching about 7-8 times more videos per day as Facebookians. Quite impressive.

Snapchat Daily Video Views (Billion)

Source: Company announcements and news reports

Pioneer Notes

by Li Jiang

Startups forget that Teamwork Wins Championships

The number of “leadership” books written every year could fill the Library of Alexandria. While a few books are classics and foundational, most of these books are quickly becoming the “diet of the week”.

Perhaps there’s good reason for this. In our current “cult of the founder” mentality in Silicon Valley, the narrative has been so focused on a strong founder who becomes the tenacious CEO who leads his/her startup to greatness.

But once you get over the surface narrative, in every case, it took a great team of people to build the great companies. Even in the cases of iconic founders:

Steve Jobs needed Steve Wozniak and a group of business leaders to build Apple. Facebook had 5 co-founders. Bill Gates needed Paul Allen and later Steve Ballmer to complement him. Even beyond the founding moment, these companies built great teams as they scaled.

3 of Facebook’s 5 co-founders — Dustin Moskovitz, Chris Hughes, Mark Zuckerberg

When compared to “leadership”, books about teamwork are few and far in between. The world should pay much more attention to teamwork and there are two principles of teamwork that turns a collection of great individuals into a great team:

First, think about any decision from the other person’s perspective.

Whether you are the CEO or a PM or just a member of a team, it’s easy to make decisions based on all the information inside your head. Each person has a different set of information. Team friction almost always happens because of this type of information asymmetry. What might be an obvious decision to the PM might be seen as totally undesirable to the engineering team based on the different information they have.

Ben Horowitz gave me a great example once when speaking about Bill Campbell. His company at the time, Loudcloud, was making a major announcement and he was planning to go to New York to make the joint announcement. However, his board member and coach, Bill Campbell, convinced him to stay at the office saying, “within 30 seconds of the announcement, everyone on the team will want to know where they stand, and whether they will still have a job.” This convinced Ben to look at the decision from the perspective of his team and made the decision to stay back obvious. (Chairman Marc Andreessen went to the announcement instead).

Second, take extreme ownership.

In almost any difficult situation, it’s easy to blame someone else on the team. But the real source of problem is often again information asymmetry. You may have asked someone on your team to take a certain action and they didn’t take that action. It’s easy to say “well, why didn’t this person do what I asked them to do.”

Instead of doing that, ask yourself some basic questions:

Did I communicate the importance of this action? Was this action in the best interest of the team, and clearly communicated that way? Did I explain this in a way that could be understood and implemented by this person in the time allotted?

Once you ask some of these basic questions, often times it becomes obvious where the communicate gap occurred. Most people’s default is to find fault in anyone else except themselves, so you have to fight that default to truly have a brutally honest assessment of your own actions first.

If someone on your team didn’t do what you expected, take extreme ownership of the problem and figure out what you could have done differently in that situation to ensure that the job got done by your team.

Navy SEALs Jocko Willink and Leif Babin published a book on Extreme Ownership in which they emphasized the importance of taking extreme ownership. In their line of work, placing blame and finding excuses will get you killed. Taking extreme ownership, prioritizing and acting is the only way to achieve the ultimate mission of the team.

Talent wins games; teamwork wins championships

There’s a reason why when investors meet a startup that has a collection of talented people, both who haven’t worked together before, usually pass on investing in that startup. Both in starting a company and growing a company, working as a team is the real secret to leadership.

When everyone buys into the two simple principles of thinking about decisions from the other person’s perspective and taking extreme ownership of any problem, a group of talented individuals become a unbreakable team, a team that can win under any circumstance.

Talent builds features; teamwork builds companies.

Market Update

Week ending April 3, 2016

World Indices

U.S. Indices Snapshot

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