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General Commentary
Feb. 28, 2016

Innovation Takes Flight

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Market Snapshot

Indices Week YTD
GSV 300 0.00% 53.10%
S&P 500 -0.20% 15.30%
Dow -0.50% 18.50%
NASDAQ -0.20% 25.40%
Russell 2000 -1.30% 8.70%
MSCI -0.10% 32.20%
Valuations P/E Fwd P/E/G
GSV 300 27.5x 0.7x
S&P 500 19.4x 2.6x
I-Rates Now YTD
10-Year Note 2.40% -2.00%
3-Month Bill 1.23% 141.20%
Sentiment - Current
Bull-Bear - 45.1-23.1
Put-Call - 1.16
Vix - 11.29
Inflation Now YTD
Gold $1276 10.70%
Oil $56.90 5.70%
Mutual Funds - Week
Fund Flows (bil) - $4.70
Growth-Value 00-09 09-Now
Growth -34% 244%
Value 87% 147%

The best way to predict the future is to create it.

— Abraham Lincoln

Frankly, I’m more concerned about two guys in a garage.

— Jeff Bezos, CEO, Amazon (reflecting on Amazon’s greatest competitive threats)

Earlier this month, on the 16th anniversary of its first flight, JetBlue announced the launch of JetBlue Technology Ventures in partnership with GSVlabs. The first initiative of its kind to be launched in Silicon Valley by a U.S. airline, JetBlue Technology Ventures will invest in, incubate and partner with early stage startups at the intersection of technology, travel and hospitality. (Disclosure: GSV owns shares in GSVlabs)

JetBlue has made a habit out of firsts. Founded in 2000 with the mission of bringing humanity back to air travel, it instantly became known for free satellite television at every seat. More recently, it was the first airline to launch free high-speed wireless Internet and streaming video inflight, and has installed next generation navigation systems in its fleet to improve the efficiency of flying.

What does JetBlue expect to find in Silicon Valley?

As Bonny Simi — an Olympian-turned-pilot-turned-airline-executive who is leading the initiative — observed, “The work being done today in the startup community will define travel for years to come.”

Source: JetBlue Technology Ventures

THE DISRUPTION ERA

Staying ahead of the innovation curve has never been more difficult for corporations. Over 72% of Fortune 500 CEOs indicate that, “the rapid pace of innovation,” is their biggest challenge and 90% believe they are too slow to market with new products.

At the same time, startups are flourishing thanks to powerful tailwinds that are rapidly transforming the world. In 2000, there were only 370 million people on the Internet (roughly 5% of the world population), no one had heard of a smartphone, broadband was a fantasy, and applications off of a platform had not been invented.

Today, the “digital tracks” have been laid, with three billion people on the Internet, two billion smartphones in the hands of Digital Natives, and 140 billion Apps having been downloaded from Apple and Google (Alphabet). (Disclosure: GSV owns shares in Apple and Alphabet)

These dynamics have paved the way for disruptive businesses to launch at lightening speeds. Companies like Uber, which is upending the transportation industry, and Airbnb, which is redefining the hotel industry, have gone from idea to “Billion Dollar Baby” seemingly overnight. (Please click HERE for a recent issue of A2Apple that explores these trends in detail).

Billion Dollar Babies

Source: Yahoo Finance, GSV Asset Management

When asked about his competition in an interview, Jeff Bezos responded, “Frankly I’m more concerned about 2 guys in a garage.” This broad sentiment has been expressed in a surge of corporate venture capital activity.

Resurgence of Corporate Venture Capital
Corporate Venture Capital Activity, 1995-2015

Source: PricewaterhouseCoopers, National Venture Capital Association

Corporate venture groups deployed over $7.5 billion in 905 deals in 2015, up from $1.4 billion in 2009 — a 33% CAGR. Today, corporate VC accounts for 13% of all venture capital dollars invested and 21% of all deals. Over, 50% of “Unicorns” are backed by a corporate VC.

THE NEW FUNDAMENTALS OF CORPORATE INNOVATION

1. UNENCUMBERED INNOVATION

In Google’s 2004 IPO letter, co-founders Larry Page and Sergey Brin highlighted a core management philosophy that has now become legendary:

We encourage our employees, in addition to their regular projects, to spend 20% of their time working on what they think will most benefit Google. This empowers them to be more creative and innovative. Many of our significant advances have happened in this manner.

Huge “20% products” include Google News, Gmail, and even AdSense. In his recent book, Work Rules, Google’s SVP of People Operations, Laszlo Bock, writes that the concept is not technically something that gets formal management oversight. Googlers aren’t forced to work on additional projects and there are no written guidelines about it. Typically, employees who have an idea separate from their day job will focus 5-10% of their time on it, until it starts to demonstrate “impact.” At that point, it will take up more of their time — volunteers will typically join the effort until it blossoms into a full-fledged project.

Laszlo Bock writes that, “In some ways, the idea of ’20% time’ is more important than the reality of it.” The key lesson for corporations is that creating a culture of unencumbered innovation can yield tremendous advantages. It encourages lean startup thinking, without the burden of immediately figuring out how an opportunity fits within a business plan.

Increasingly, companies are launching dedicated “Innovation Labs” to catalyze moonshot thinking and new ideas. A recent study by Capgemini Consulting, entitled The Innovation Game, found that 38% of the World’s top 200 companies have set up dedicated initiatives — often physically located in major technology hubs — with the aim to identify and develop disruptive new technologies and business models. Walmart Labs, for example, was launched in 2011 to accelerate e-commerce and mobile technology capabilities for its parent. Today, it is credited with driving a 20% increase in online sales conversions for Walmart.

2. EMBRACE WHITE SPACE, INNOVATE BY DOING

Whether or not a company creates a dedicated Innovation Lab, the fundamental principle is that action is as important as ideas. Big companies often believe that a product should be perfect before it is put in front of customers. But startups are constantly iterating, learning through “beta launches” and recalibrating based on customer feedback.

A key tool many corporations are using to spark startup thinking and break through organizational inertia is the “Hackathon” — short, intense design and development sprints that present a specific challenge, and encourage teams to create working prototype solutions — often within 24 hours.

Fundamentals of an Effective “Hackathon”

Source: McKinsey, GSV Asset Management

Hackathons are less about designing new products and more about “hacking” away at old processes and ways of working. By giving management and others the ability to kick the tires of collaborative design practices, 24-hour hackathons can show that big organizations are capable of delivering breakthrough innovation at startup speed. That’s never been more critical: speed and agility are the key to leading the industries of the future.

3. SMALL BETS

More than 1,000 companies now have corporate venture arms, according to GCV Analytics, a nearly 80% increase over 2011, and that number continues to grow.

While Silicon Valley firms like Google Ventures and Intel Capital have led much of the deal activity in recent years, increasingly, large corporations from a variety of industries have accelerated their early investment activity.

Last May, for example, Caterpillar Ventures invested in Yard Club, a San Francisco-based startup that lets contractors rent idle equipment to each other. “When the efficiency of machines go up — if owners can rent machines to their partners — our sales of machines go down,” Caterpillar Ventures General Manager Michael Young observed in a recent interview. “If we don’t do it, someone else will.”

Top Corporate VCs
By Total Investments, 2010-2015

Source: CB Insights

4. BIG BETS

Mergers and Acquisitions around the World totaled over $4 trillion in 2015, which was $500 billion more than the $3.5 trillion in 2014. Technology companies continued to “roll up” the industry, with Facebook, Alphabet (Google), Microsoft, Oracle, and SAP accounting for over 50% of the activity. (Disclosure: GSV owns shares in Facebook and Alphabet)

The Big 8 of Tech M&A
Total M&A Transactions (536) + Disclosed Transaction Value ($129B), 2010-2015

Source: Capital IQ, GSV Asset Management

Facebook, effectively a desktop application when it went public in 2012, has completely reinvented itself into a powerful collection of mobile apps. It has built a monster network of nearly two billion people thanks to the home runs Mark Zuckerberg has hit with high risk venture bets on Instagram, WhatsApp, and Oculus.

Facebook Transformation by Acquisition
Key Facebook Acquisitions

Source: Facebook, GSV Asset Management

In just over a year, Google kickstarted the creation of a robotics innovation arm, acquiring eight promising robotics startups in 2013 alone. While the company has kept its plans close to the vest, the new technologies could be applied to everything from self-driving cars, to a much broader array of autonomous systems — including warehouse work, package delivery, or even elder care.

Google Does The Robot
Key Google Acquisitions in Robotics

Source: GSV Asset Management

THE POWER OF AN INNOVATION ECOSYSTEM

The JetBlue – GSVlabs announcement was so exciting because it reflects how powerful it can be to align innovation — from entrepreneurs to large corporations — in a single ecosystem.

At the core of GSVlabs is a community of game-changing entrepreneurs focused on key verticals, including Big Data, Sustainability, Education Technology (EdTech), Entertainment, and Mobile. GSVlabs is home to over 160 startups, which raised $200 million in 2015.

GSVlabs
Global Innovation Platform in the Heart of Silicon Valley

Source: GSV Asset Management

As the access point to a startup ecosystem, major corporations like AT&T, Intel, IBM, and Intuit choose to partner with GSVlabs in order to launch new initiatives, identify talent, attack new markets, and propel new business models.

GSVlabs creates value through this virtuous circle, attracting and accelerating promising entrepreneurs, while providing targeted innovation services to forward thinking corporations.

GSVlabs Innovation Platform
Connecting Startups, Corporations, and Talent to Produce Game-Changing Innovation

  • Startups: GSVlabs attracts and accelerates talented entrepreneurs by offering high-value programming (e.g. Events, General + Sector-Specific Educational Resources, etc.), connectivity to leading corporations, and access to a network of relevant mentors and investors.
  • Corporations: GSVlabs offers end-to-end solutions for corporations seeking to jumpstart innovation initiatives, ranging from in-house Talent Development, to Idea Generation, Research & Development, and Corporate VC. Bespoke services include startup accelerators, innovation showcases, hackathons, workshops, and design thinking programs.
  • Talent: GSVlabs offers highly-relevant educational programming for entrepreneurs and corporations, as well as a broader network of job-seekers and professionals who would like to upgrade their skills. Core programs include:
      • Silicon Valley Data Academy (SVDA): Eight-week immersive training program to become an enterprise class data scientist or engineer launched in partnership with Silicon Valley Data Science, an elite consulting firm.
      • ReBoot: Accelerator that empowers women to restart their careers through immersive technology education and professional networking.

We expect that these complimentary initiatives will continue to drive network effects around innovation, accelerating the most promising entrepreneurs while engaging key global corporations. The power is in the ecosystem.

Despite Friday’s weakness, stocks rocked last week, with NASDAQ up 1.9%, the S&P 500 advancing 1.6%, and the GSV 300 up 0.7%. NASDAQ is now up nearly 10% from its February lows. Also interesting was the small cap Russell 2000, which surged 2.8% last week. The yield on the 10-Year Note blipped up 2 bips to 1.76%.

World Indices

Source: Yahoo Finance, GSViQ

While everybody is bemoaning the demise of China, with its economic growth “plummeting” to 6% — a rate most of the World would embrace in a heartbeat — top Chinese technology companies continued to put up stellar numbers. Baidu, Vipshop, and NetEase all reported results that beat analyst forecasts. People typically prefer to believe what they are told, rather than what they see with their own two eyes, which creates significant long term opportunity for investors in Chinese stocks. (Disclosure: GSV owns shares in Vipshop)

Leaders such as Salesforce and Palo Alto Networks reported great results last week, with their shares responding in kind, up 12% and 16%, respectively. Mark Zuckerberg declared virtual reality as the next big platform at the Mobile World Congress in Barcelona — totally not conflicted by Facebook’s Oculus acquisition. (Disclosure: GSV owns shares in Facebook)

Stocks are acting much better after starting the year as if the World was going to come to an end. A classic dynamic when conditions get overly BEARISH, stocks are climbing quietly. We will continue to focus on identifying and investing in the best growth companies in the World, believing we will be well rewarded over time.

Bubblin'

by Luben Pampoulov

Don’t Drive. Fly!

The future might be coming sooner than you think! In Luc Besson’s Fifth Element, Bruce Willis is a cab driver in the 23rd century. In that distant future, cities are over-crowded with huge sky scraperswith traffic that’s not only horizontal, but also vertical. Cars are flying around on different altitude levels, implying that intersections will have a third dimensional specification. In other words, the intersection of Broadway and 33rd will be something like “Broadway-33rd-25” (25 as in altitude level).

Scene from The Fifth Element

This past week, I had a very interesting meeting which reminded me of that movie. And after a 90 minute discussion, I was blown away and felt that the future might be coming much sooner than in the year 2200.

One of today’s big societal problems is traffic. It is getting worse, and it creates enormous problems for individuals and the environment. Whether you live in Silicon Valley, LA, Beijing, Jakarta or Paris, traffic is worsening every year! What used to be a 40 minute commute in the Bay Area five years ago, is now a 70 minute commute.

One solution to the problem would be to apply ride sharing at full scale. In Los Angeles, there are 1.1 passengers per car, on average… This implies that every 10th car has two passengers. Increasing that ratio to just 1.5, would already have a strong positive impact on LA’s traffic. Having two passengers per car on overage will eliminate traffic altogether…

But the other hand, a much bigger solution is to apply the futuristic idea from the Fifth Element and have vertical highways with flying “cars.” Up until a week ago, I would have thought this could be something that might happen in 20-30 years from now, but now I think we might be just a step away from that revolution.

As drones are taking off, it will make enormous sense to have drone-vehicles used for transportation. There are two major companies, both based in China, that are making fast progress in the drone industry — DJI and EHang.

DJI produces camera drones and quadcopters and is largely focused on selling drones with high-quality cameras. The company is 10-years old, has raised $105 million from Sequoia and Accel, and is now valued at $10 billion.

EHang meanwhile was launched just two years ago as an Indiegogo project, and was able to secure $850,000 in just a month. It launched its initial product in November 2014, and its Ghost drone won the CES 2015 Top Pick Award. To date, EHang has raised $52 million from GGV, Zhen Fund, and GP Capital.

The Ghost drone sells for $600 at a basic level or for $800 with a camera holder included, and it is directly controlled from a smartphone app. The drone is equipped with sensors and mapping software that enable it to navigate securely around buildings and other standing objects.

At this year’s CES, EHang made a huge announcement with its autonomous helicopter drone, the EHang 184 (see video)! That drone, could be the real breakthrough for the future of transportation, and it could become the predecessor to Bruce Willis’ taxi cab in the year 2200… The drone is 100% clean as it is battery powered, it is fully autonomous and controlled through the smartphone app, and it can carry one passenger up to 10 miles, to start with. Obviously, that range will increase dramatically with improvements in technology and due to Moore’s Law.

The EHang 184

What starts to be really attractive is to apply EHang’s futuristic drone with ride sharing services. Imagine opening your Lyft app and having the premium option for the “drone ride.” Not only will there be no traffic, but it will fly a straight air line to the destination… Getting from Palo Alto to SF will be a 15 minute flight rather than a an hour ride. (Disclosure: GSV owns shares in Lyft)

Clearly, there will be huge regulatory and safety hurdles that will need to be overcome, but given the pace of innovation and the rapidly growing issues with traffic and pollution, this could happen much sooner than we thought.

We think the global drone market is preparing for a huge boom, with many prospective startups trying to secure the pole position. DJI is currently the leader, but EHang is starting to be extremely attractive as it is innovating itself ahead of the competition.

Watch out and watch up!

Pioneer Notes

by Li Jiang

How to Thrive in “The Industries of The Future”

What are the industries of the future? This is just one of the questions that Alec Ross’ recent NYT bestseller “The Industries of The Future” attempts to answer.

As someone who lives, eats, breathes Silicon Valley and have invested in some of the companies named in the book, I found myself nodding often to its passages. There’s a radical revolution coming on a scale we have never seen before in human history. To thrive in the world of tomorrow, people will have do nothing short of operate by completely different frameworks.

Rather than fully summarize the incredible details that’s in the book — it is certainly worth reading in full — I wanted to share three foundational takeaways as we think about our future:

What are the industries of the future?

In Ross’ tour de force book, he covers robotics, genomics, blockchain, cybersecurity, and big data as some of the technologies that will not only transform every existing industry but create many new ones in the process.

Through very specific projects and companies, he points to waves of innovation that are designed to make the world more efficient by reducing the friction to trade, travel and talent exchange.

While the mantra of the real estate industry is “location, location, location”, the organizing principle of the industries of the future is “open, open, open”. The most innovative organizations and countries are those that promote democratic building of ideas with participation from a diverse pool of talent.

We are still in “1994 Internet” days for these industries. For the rest of this decade and into the 2020s, we will experience the global impact that robotics, genomics, blockchain, cybersecurity and data will have on society.

What is humanity’s role in this future?

A simplistic way of looking at our future can be summed up in a rhetorical question, “Either the robot is telling the human what to do or the human is telling the robot what to do — which side of the equation do you want to be on?” But the true implications are much more complex.

It’s true that unlike computers, our brains are not doubling in capacity every 18 months. So humanity’s best bet is not to try to compete with machines in brute force memorization or computation.

With genetic information at our finger tips, the prospect of “Playing God” isn’t merely possible but will become a moral challenge on a daily basis. Individuals will make important choices about our relationships with machines while leaders of companies and countries confront ongoing challenges with cybersecurity, blockchain systems and massive data infrastructure.

In a future in which machines are supposedly outpacing humans at almost every career, human judgment will be more critical than ever to ensure our own privacy, safety, and the very things — humor, love, delight — that make us human.

How can you participate in this future?

“All roads lead to Rome” was the refrain used not only to describe the physical roads that lead to the ancient Roman capital, but the financial tributes that would pour into the heart of the expansive empire.

Today, our Rome is Silicon Valley. Not only do talent flock to this small peninsula at an unprecedented rate, but financial returns funnels into the hands of global corporations based out of Silicon Valley. Boutique hotels have ceded way to Airbnb; local cab services are being replaced by Uber; daily communications and photo sharing happening all around the world pay a toll to Facebook. Even as every major city in the world jockey to become the next Silicon Valley, its populace is happily handing their money or time over to Silicon Valley based companies.

Silicon Valley will almost certainly continue inventing many industries of the future. Rather than copy it, other cities can hope to focus on their own areas of expertise and build different industries. The world would be better off for Detroit to become drone valley, for Boston to become health valley, for Paris to become fashion valley and so on.

Ross devotes his final message to the most important job many individuals will have in their lives: parenting. Parents must prepare their children to operating in the industries of the future. Core to that is learning the languages of the future: technical languages, computer languages, and foreign languages.

For individuals, companies, and countries, the classic observation from Charles Darwin will become an imperative in the coming years as we all look to participate in the industries of the future:

“It is not the strongest of the species that survives, nor the most intelligent, but the one most adaptable to change.”

Market Update

Week ending Feb. 28. 2016

World Indices

America Index 11/12/2017 YTD Week
U.S. GSV 300 115.7 53.1% 0.0%
NYSE 12322.6 11.4% (0.4%)
Dow 23422.2 18.5% (0.5%)
NASDAQ 6750.9 25.4% (0.2%)
NASDAQ-100 6309.1 29.7% 0.2%
Russell 2000 1475.3 8.7% (1.3%)
S&P 500 2582.3 15.3% (0.2%)
Brazil Bovespa 72165.6 19.8% (2.4%)
Mexico IPC 48028.3 5.2% (1.0%)
Canada S&P TSX 16039.3 4.9% 0.1%
Euro-Asia Index 11/12/2017 YTD Week
China SSE 3432.7 10.6% 1.8%
Heng Seng 29120.9 32.4% 1.8%
Singapore Straits Times 3420.1 18.7% 1.1%
Indonesia JKSE 6021.8 13.7% (0.3%)
Japan Nikkei 225 22681.4 18.7% 0.6%
India Sensex 33314.6 25.1% (1.1%)
Russia RTS 2169.3 (2.8%) 4.2%
France CAC 40 5380.7 10.7% (2.5%)
Germany DAX 13127.5 14.3% (2.6%)
U.K. FTSE 100 7433.0 4.1% (1.7%)



U.S. Indices Snapshot

Valuation P/E Est. P/E/G Price/Sales
LTM NTM Growth LTM NTM LTM NTM
S&P 500 24.3x 19.4x 7.60% 3.2x 2.6x 2.4x 2.1x
NASDAQ 25.5x 17.6x 7.80% 3.3x 2.3x 2.7x 2.2x
Russell 2000 25.1x 17.7x 6.30% 4.0x 2.8x 1.9x 1.7x
GSV 300 54.1x 27.5x 38.60% 1.4x 0.7x 5.7x 4.0x

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