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October 29, 2017

Lyft Off

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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%

Last week Alphabet announced that it was leading a $1 billion financing for Lyft that values the company at $11 billion. (Disclosure: GSV owns shares in Lyft)

Noteworthy? Sure. But first consider a few points of context in no particular order.

In May, Lyft announced a partnership with Waymo — an autonomous vehicle developer spun out of Google — to bring self-driving cars to market through its ridesharing network. So there’s some continuity here.

But Alphabet is also a major shareholder in Uber, which is now valued at over $68 billion. Waymo, incidentally, is currently seeking about $2.6 billion from Uber in a claim that the company stole trade secrets in conjunction with the hiring of a former Waymo employee.

And then there is China’s Didi Chuxing. The world’s largest ridesharing platform by volume and second-most-valuable private company has backed both Lyft and Uber, as well as every other notable ridesharing platform across Southeast Asia.

What’s happening here? Let’s rewind.

STATE OF PLAY

Sometimes the “early bird gets the turd.”

Carey International was Uber before Travis Kalanick was born. Listed on NASDAQ in what seems like a century ago, Carey created a black car network spanning 1,000 cities around the globe. Effectively it was a brand, an “800” number, and a scheduling service. Sound familiar?

UBER VS. CAREY INTERNATIONAL

Uber doesn’t own any of the cars in its network. The drivers are independent. Carey should have been Uber, but they lacked the imagination to see the impact that smartphones could have on their business. Carey launched its first app in 2014 — five years after Uber had taken the world by storm.

The ridesharing industry has taken shape rapidly across a few key phases, catalyzed by the launch of the iPhone in 2007. Beyond its groundbreaking hardware, the iPhone ushered in an “app economy” that enabled transformative new software applications to go from idea to millions of customers seemingly in the blink of an eye.

In many ways, ridesharing is the original “Killer App.”

In the old model, you literally “catch” a cab. You stand on the edge of the street, put your hand up in the air while competing with other would-be riders, and pray for a car to swerve to a stop in front of you. Taxi drivers, meanwhile, troll around blindly for fares, relying on dead reckoning and luck to find passengers.

In the new world, with the click of a button, your ride appears where you want it, when you want it. You don’t need physical money — or even a credit card for that matter — to pay your driver. It’s all in the app.

And a transparent review process ensures that drivers treat their customers well. The better the service, the higher the star rating a driver receives — which in turn translates into a higher likelihood of being connected with riders. Similarly, passengers that consistently demonstrate bad behavior — from no-shows to disorderly conduct — can be removed from a ride sharing platform based on driver feedback.

Just how “killer” are ridesharing apps? Uber has completed over five billion rides since it launched in 2009. Didi completes an estimated 40 million rides per day. Lyft, Uber, Didi, Ola (India), Grab (Southeast Asia), and Go-Jek (Indonesia) have raised a combined $40 billion and are collectively valued at over $140 billion.

Investment Activity

Since 2015, investors have poured over $10 billion per year into ridesharing companies. Uber, the most valuable startup in the world, was last valued at $68 billion and has raised over $11.5 billion. Chinese behemoth Didi, the second-most-valuable Unicorn ($50 billion), has actually out-raised Uber, bringing in approximately $15.7 billion.

GLOBAL RIDE SHARING ANNUAL FINANCING TREND

Source: CB Insights

Globally, a crop of newly-minted ridesharing Unicorns have emerged in key geographies around the world as entrepreneurs and investors have eagerly reaped the rewards of a “rapid follower” strategy — as opposed to the classic first-mover advantage.

In many cases, investors are playing the field. Softbank, for example, has invested over $6 billion into Didi, Grab, Ola, and Brazil’s 99. It is currently seeking a $10 billion investment in Uber.

TOP FUNDED RIDESHARING COMPANIES

Source: Crunchbase, Company Disclosures, Bloomberg, Wall Street Journal, GSV Asset Management

KEY TRENDS TO WATCH

1. Winner Take Some?

Technology in general, and the Internet in particular, is all about disproportionate gains to the leader in a category. It’s often a winner-takes-all game.

The digital tracks that have been laid over the last 25 years have paved the way for technology startups to create dominant positions in a variety of categories, including Facebook (Communication), Alphabet (Search), Amazon (E-Commerce), and Airbnb (Hospitality).

At one point it appeared that Uber was positioned to run away with the global ridesharing industry. But today, a “winner-takes-some” picture is emerging, driven by local regulatory and competitive dynamics, as well as aggressive investor appetite to back the global “copycats.”

The rise of China’s Didi is instructive. Founded in 2012 — three years behind Uber — Didi managed to capture over 80% of the Chinese ridesharing market by 2015 while raising over $800 million from a global syndicate of growth investors, including Temasek, Tencent, and DST. That year alone, the company announced that it had completed 1.4 billion rides. Around that same time, Uber announced it completed its one-billionth since inception.

DIDI DAILY RIDE VOLUME

Source: Company Disclosures, GSV Asset Management Estimates

Fast forward to August 2016 and Uber capitulated in its conquest for the Middle Kingdom, selling its China operation to Didi after burning an estimated $1 billion per year to compete in the market.

Today, Didi is thinking global, raising an astonishing $5.5 billion in April to fund its growth. But instead of “landing and expanding,” Didi is strategically partnering with — and aggressively investing in — regional ride-sharing companies.

To date, Didi has backed Lyft (United States), Uber (in conjunction with its acquisition of Uber China), Careem (Middle East), 99Taxis (Brazil), Ola (India), Taxify (Europe), and Grab (Southeast Asia).

DIDI’S GLOBAL EXPANSION

Source: Forbes

2. Brands Still Matter

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.

U.S. CONSUMER PRFERENCE: UBER VS LYFT
Percentage of U.S. Consumers Indicating They Would Use Uber, Lyft

Source: Quartz

In a 2017 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 encourages 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.

Last week’s announcement that Alphabet’s Capital G investment arm led a $1 billion round in Lyft further signals a potentially seismic shift in the global ridesharing market. Google had previously invested $363 million into Uber in 2013 at a time when Uber was approximately 8x larger than Lyft. Fast forward to October 2017, and Lyft commands approximately 35% of the U.S. ridesharing market.

3. Autonomous Vehicles

A third key trend is the convergence of ridesharing with autonomous vehicles. While projections on the pace of autonomous vehicle adoption vary, Lyft founder John Zimmer offered a helpful analogy in a recent blog post:

Remember when cell phone coverage transitioned from 3G to 4G? The 4G networks were slowly rolled out, first covering only the largest cities and eventually growing to cover larger and larger portions of suburban areas. This ensures that people are always covered, one way or another. If you spend most of your time in a place that’s only covered by 3G or even 2G, you still have a network to rely on. But as soon as you step into a spot with 4G coverage, you automatically get to try it. Just wait for the upcoming launch of 5G. Future 5G networks won’t be introduced to the world by new companies, they will be rolled out on top of the largest existing networks around the world.

The introduction of autonomous vehicles will follow the same pattern, until its the backbone of mobility.

THE WIRELESS MARKET: A MODEL FOR THE EVOLUTION AUTONOMOUS VEHICLES
Global Connections by Technology (Millions): 2G, 3G, 4G

Source: GSMA Intelligence

AUTONOMOUS VEHICLES: PATH TO ADOPTION

Source: Lyft

As it has increasingly become clear that self-driving cars are within our grasp, everyone it taking notice.

For automakers, it’s a matter of survival. The combination of ubiquitous ride-sharing platforms with self-driving cars calls into question the need to buy a car. It’s why you’ve seen GM invest $500 million in Lyft in a long-term partnership to deploy a network of autonomous vehicles. Ford has announced that it will create a fleet of self-driving cars by 2021 in a shared network. Tesla’s cars are already outfitted with “Autopilot.” The list goes on.

For technology companies like Alphabet (Google), Baidu, Microsoft, and Apple, cars could be the next great computing platform. Baidu has partnered with the chipmaker nVidia to create an autonomous driving and navigation platform for use by third parties in 2018.

AUTONOMOUS VEHICLES: SIGNPOSTS ON THE HIGHWAY
Key Milestones: Autonomous Vehicles, Public Transportation & Consumer Services

Source: GSV Asset Management, McKinsey, Company Disclosures, Bloomberg, New York Times

Ride-sharing platforms are the third leg of the stool. Interestingly, despite high-profile announcements and partnerships from Uber and Lyft, the lesser known nuTonomy was the first to get a network of on-demand, self-driving vehicles on the road.

In September 2016, the four-year-old MIT spinout launched a taxi fleet in Singapore’s One North district, and later partnered with Grab to offer self-driving rides in the entire city. Over the past year, nuTonomy has piloted deployments in the United Kingdom and United States (including a partnership with Lyft).

This week automotive supplier Delphi acquired nuTonomy for $450 million.

WHAT’S NEXT: BIKE-SHARING

Bike-sharing services are not a novel concept and have been in existence in major metropolitan areas for the past decade. But just as Uber lapped Carey Limousine, an emerging group of bike-sharing startups are achieving massive scale — and serious investors.

These companies are capitalizing on apps that enable users to easily locate, unlock, use and return bikes with the touch of a finger.

MOBIKE (ORANGE) VS OFO (YELLOW)

Source: Quartz

Today, bike-sharing is the fastest growing segment of the Sharing Economy, with over $1.9 billion of capital raised in 2017 alone… by two companies… in China… Mobike and Ofo. In June, Mobike raised $600 million from Tencent, Sequoia Capital, TPG, and Hillhouse.

Not to be outdone, Ofo raised $700 million from Alibaba, DST Hony Capital, CITIC and Didi Chuxing less than a month later. The companies are reportedly valued at $3 billion apiece.

Its not a surprise that Shanghai-based Mobike and Beijing-based Ofo are early leaders in bike-sharing. Mobike currently records over 25 million rides daily. Ofo tops 20 million.

What differs between the two services comes down to the experience. Mobikes are considered to be higher-end “vehicles,” costing $440 to build. They have built-in GPS trackers, look like they belong in a SoulCycle class, and cost two yuan an hour to rent.

Ofo’s bikes feel much cheaper, because, well, at $35 to build, they are. With no added bells and whistles, Ofo’s bikes rent for half the price.

LEADING BIKE SHARING STARTUPS

Source: CB Insights, Crunchbase, GSV Asset Management

Across the pond, California based LimeBike’s bright green bikes are flooding the streets of the United States. Founded in 2017, LimeBike has raised $62 million at a $225 million valuation from investors including Andreessen Horowitz, DCM Ventures, GGV, IDG, and Coatue.

Officially launched on the University of North Carolina-Greenboro’s campus, the company now operates in a dozen markets — ranging from large metropolitan cities like Seattle and Washington D.C. to college campuses such as Arkansas State University. 

Bubblin'

by Luben Pampoulov

Copy Me to Copy You

Earlier this decade, Uber and Lyft rallied to create what became the booming ride sharing economy in the U.S. The taxi industry was suddenly severely damaged, while the industry itself expanded. The convenience of in-app payment, getting a ride on your finger tap, and transparency on quality, created the new World of peer-to-peer ride-sharing. (Disclosure: GSV owns shares in Lyft).

Soon enough, companies around the World began to copy the concept in order to win at home. Most notably, China saw two ride sharing services emerge, Didi Dache and Kuaidi Dache, and immediately the battle between the two was on. Both raised large, back-to-back rounds, trying to capture as much market size, as fast as possible. In just three years time, both were billion dollar companies, backed by many of the most powerful financial institutions in the World.

When Uber launched in China in 2014, the two companies quickly reacted and merged to become Didi, creating a very powerful competitor to Uber — then valued at $41 billion. In just over one year time, Uber capitulated and sold its Chinese business to Didi. Today, Didi is worth $50 billion, and is doing more rides per day in China, than Uber does around the World.

Enter the bike sharing economy, and the global landscape is essentially flipped. Modern bike sharing services initially launched in China. First came Ofo in 2014, and then Mobike in 2015. These services were highly disruptive to the existing model that was present in the U.S. and Europe, as they allowed users to pick and drop bikes at any location. No docking stations, and no wallets needed — everything is in the app.

Today, Ofo and Mobike are each billion dollar businesses, growing multiple times year-over-year, and expanding quickly into new countries. Some of the first international expansions were in Southeast Asia, but over the past few months, both launched in the U.S.

When it comes to bike services, the American market has been asleep. In the past 10 years, the only popular service has been city-bikes with docking stations. But those are outdated, and getting disrupted by the dock-less bikes. That’s why the popularity of Ofo and Mobike in particular has been skyrocketing.

But one local startup has set its sights to win the U.S. market. San Mateo-based LimeBike launched in early 2017, and is now available in several large cities including SF, Dallas, Miami, and it targets to be available in 40 cities by the end of the year. “We’re trying to open one market every week, and our goal for this year is 70,000 to 100,000 bikes,” said LimeBike’s CEO Toby Sun. “We want to have 4,000 or 5,000 bikes per city.”

At $1 per half hour, LimeBike’s pricing is on par with competitors Mobike, Spin and Bluegogo. Its future success will be dependent by the quality of the service and by management’s aggressive expansion. Similar to how Lyft and Uber managed to grow into mega platforms, bike sharing services will need a lot of capital and will need to be quick in maneuvering. With Mobike and Ofo already stepping foot in the U.S., LimeBike will need to be smart about its expansion, even smarter about the brand (think Lyft).

A big vote of confidence came last week with the announcement of LimeBike raising $50 million at a $225 million valuation from Coatue, A16Z and GGV Capital. Notably, both A16Z and Coatue are also early backers in Lyft, while GGV was early in Didi. Needless to say, all of those investment firms understand the competitive dynamics in the ride sharing economy very well.

We see a huge opportunity in the emerging bike-sharing economy, and have LimeBike, Mobike and Ofo very high on our watchlist. 

Pioneer Notes

by Li Jiang

An Innovator’s Dilemma

Professor Clay Christensen at Harvard Business School is probably most well known for his book “The Innovator’s Dilemma”, so much so that The Economist named it as one of the six most important books about business ever written.

Woah.

Recently, I was fortunate to read one of his other books, “How Will You Measure Your Life?” It was profound for me. Christensen offers no easy answers, only a framework to help each of us evaluate what matters to us and how to pursue those things in our lives. This has become the book that I recommend and give to all of my colleague and friends.

You Are What You Do, Not What You Say You Do.

Many companies have elaborate and sophisticated strategies and value statements, yet they never reach those aspirations. Many organizations aim for the same high level of success. What differentiates the companies that do and the companies that don’t climb to their summit?

It’s what they do, not what they say they do that matters. This happens to all of us personally. If we say that our family and friends are our biggest priorities, does our daily decisions reflect that? It’s easy to think that your friends and family will support you if you spend more time at work because they love you and want you to succeed. But if you make small daily decisions that prioritize your career or something else rather than your family and friends, that debt adds up over time.

In this case, your life strategy is the accumulation of small decisions you make every day rather than the stated strategy you lay out. Make sure that the small daily decisions you make reflect what your life strategy is. That matters way more than what you say your strategy is.

Decide What You Stand For. And Then Stand For It All The Time.

One of the people in Christensen’s Harvard Business School class was Jeff Skilling, the former CEO of Enron, caught and jailed in one of the biggest business fraud cases in recent memory.

Clay questioned how a well meaning person could end up in jail. Certainly no one’s life strategy is to end up in jail. So how did it happen to someone who was smart and very capable?

In the book, Christensen observed that the unintended consequences happen as a result of an accumulation of decisions. Once you decide to break the rule “just this once”, it becomes very easy to make that choice over and over again until it escalates into a major ethical and legal problem. To borrow his point, “life is just one unending stream of extenuating circumstances.” If someone is willing to break their commitment “just this once” for an extenuating circumstance, it justifies any number of breaches.

Christensen never concludes with exactly what you should believe in and commit to, but that you commit to someone and do it 100% of the time.

Clay Christensen has taken his years of learning and distilled it down into a short book that was at the same time simple in principle yet profound in its depth. It provoked my thinking and gave me the opportunity to reflect on whether my intentions and actions were truly aligned. I highly recommend this book to anyone who believes she is still a student, which includes everyone because we are all students of life.

Market Update

Week ending October 29, 2017

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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