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Education Technology
March 6, 2016

Mind the Gap

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Market Snapshot

Indices Week YTD
GSV 300 1.80% 42.10%
S&P 500 0.70% 9.10%
Dow 0.60% 10.40%
NASDAQ 0.80% 16.40%
Russell 2000 1.40% 1.50%
MSCI P/E Fwd P/E/G
Valuations 25.8x 0.7x
GSV 300 17.6x 2.3x
S&P 500 Now YTD
I-Rates 2.17% -11.40%
10-Year Note 1.03% 102.00%
3-Month Bill - Current
Sentiment - 28.1-38.3
Bull-Bear - 0.97
Put-Call - 11.28
Vix Now YTD
Inflation $1 12.50%
Gold $47.86 -11.10%
Oil - Week
Mutual Funds - -$3.40
Fund Flows (bil) 00-09 09-Now
Growth-Value -34% 218%
Growth 87% 133%
Value

This week, IBM announced a partnership with Andela as part of its Big Data University initiative, which aims to train one million data scientists around the World in the next 10 years.

What’s fascinating is that Andela — launched by 2U Co-Founder Jeremy Johnson in 2014 — combines an unlikely source of talent with a new model of education. The company identifies high-potential, motivated talent in Africa, molds them into world-class software developers, and pairs them with companies as remote team members through freelance talent platforms like Upwork. (Disclosure: GSV owns shares in 2U and Upwork)

Andela’s model unlocks a virtuous circle. By targeting highly relevant skills in an untapped market, it can produce affordable, reliable technology talent to support the core operations of major corporations — an area of desperate need.

Revenue generated by corporate partnerships, in turn, enables Andela to pay students while they learn, and ultimately place them into full-time jobs when they complete the four-year program. The entire model is enabled by new technology fundamentals that empower people to connect and collaborate from any corner of the earth.

THE 100-YEAR GAP

Andela is an outlier in the heavily fragmented global Education and Talent industry, which has dramatically lagged key sectors of the World economy in producing game-changing ideas and scalable businesses. It is creating a technology-enabled platform that will be propelled by network effects. And it is providing a blueprint for the developing World — which has chronically lagged the developed world in education attainment and outcomes — to leapfrog into the 21st century.

According to research from the Brookings Institution, the developing world is about 100 years behind developed countries in educational attainment and achievement. You might think these gaps would have tightened significantly with the technological advancements and increased connectivity of the Internet Age.

Even After 100 Years, Developing Countries Lag Significantly in Educational Attainment
Average Years of Schooling, Developed vs. Developing Regions

Source: The Brookings Institution

But educational models have remained effectively unchanged for over a century — which has resulted in linear progress against one of the great challenges in our time. At current rates, for example, sub-Saharan Africa will have implemented complete lower-secondary education — a cornerstone of first World education standards — 95 years from today

Source: The Brookings Institution

In India, the number of private universities doubled from 2007 to 2012 in response to massive demand for higher education and a growing knowledge economy. But linear growth through brick-and-mortar models has been no match for demographics. According to research from the Parthenon Group, India is on track to have 40 million more college-uneducated adults in 2020 than today.

Indian Private Universities Double, 2007-2012
But India Is on Track to Have 40 Million More College-Uneducated Adults in 2020 than Today

Source: Parthenon Group 

THE AGE OF EXPONENTIAL IDEAS

In 1965, Gordon Moore predicted that the number of transistors on an integrated circuit would double every two years. The effect of “Moore’s Law” is that computing power has doubled (or, costs have been halved) every two years for the past 50 years. If the automobile industry would have had its own Moore’s Law, a Ford Taurus that cost $20,000 in 1990 would essentially be free and you’d throw it away after you drove it.

New Technology Fundamentals: Rapidly Declining Costs
Cost of Computing, Bandwidth, and Data Storage, 2000 vs. 2014

Source: Deloitte, GSV Asset Management

Interestingly, while Moore’s Law has been the foundation and catalyst behind the Technology Revolution, it’s not a physical or natural law… it was a conjecture. In other words, the “Law” that has transformed computing and society was really more of a vision of what could become. It was a force of will. Nonetheless, the belief in Moore’s Law allowed engineers and technologists to imagine a World where you could have a computer in your pocket, self-driving cars, and personalized medicine.

So, in effect, Moore’s Law has become like gravity… inevitable. It ushered in an Internet Age that has evolved in three phases.

The first phase was the creation of the digital infrastructure upon which new businesses could be built. This was roughly 1995 to 2001, and the leaders were Netscape, AOL, and Cisco.

The second phase of the Internet Age was to build products off of the Internet Platform. Amazon, eBay, Google (Alphabet), Apple, Salesforce, and Facebook were all pioneers of this era. (Disclosure: GSV owns shares in Amazon, Alphabet, Apple, and Facebook)

The third phase, which is now upon us, is the transformation of crucial segments of society and the economy, such as Government, Healthcare, and Education. Each sector is beginning to utilize Internet capabilities and digital models more effectively to evolve for public good.

The Internet Transforms Key Sectors of the Economy + Society
Sector of the Economy/Society and Internet Impact by 2015

Source: KPCB

The same dynamics that have paved the way for disruptive global businesses to launch at lightening speeds — from Uber, which is upending the transportation industry, to Airbnb, which is redefining the hotel industry — are now propelling a new generation of education and talent companies.

“Weapons of Mass Instruction” — rapidly growing, scaled models with disruptive technology — are using the Digital Tracks that have been laid over the past 15 years to reach and impact massive audiences.

Weapons of Mass Instruction: Scaling Education

Source: Company Disclosures, New York Times, TechCrunch

INFLECTION POINT

Today, the Education and Talent market has reached an inflection point with strong parallels to the evolution of the Healthcare sector in the 1970s.

In 1970, Healthcare was a huge market — 8% of U.S. GDP — but a highly fragmented cottage industry, characterized by limited technology and uneven service. Skeptics questioned whether investors could make money in the sector and critics debated whether they should. From an investor’s standpoint, the sector was almost non-existent, with Healthcare companies representing less than 3% of capital markets.

Today, Healthcare is a much larger market, at over 18% of GDP, or $3 trillion. Spurred by significant capital investments, Healthcare has emerged as a sophisticated, technologically-advanced sector that represents over 16% of U.S. capital markets. The industry has rapidly consolidated and is global. In 1970 there were just four companies with a $1 billion or greater market value… today there are over 400 companies that surpass this marker.

Healthcare Industry, Then and Now

Source: GSV Asset Management, Capital IQ

Today, Education is a large industry at 9% of U.S. GDP, second only to Healthcare, and larger than Defense and Social Security combined. Skeptics question whether investors can make money in the sector and critics debate whether they should. While education is large in terms of overall money spent, it is a widely fragmented cottage industry, with very few large individual companies.

A major difference between Healthcare and Education is that if 50% of the patients died that entered a hospital, they would close the hospital. In Education, if 50% of kids drop out of a high school — to become the “living dead” — they bring in the next class. While the Education Industry has made important technology improvements over the past five years, when compared to what’s transpired in almost every other industry, it has much ground to gain.

As with Healthcare in the 1970s, talent is pouring into the industry, and there is more to come. Increased depth of professional management will catalyze solutions to massive problems and create large, scaled enterprises.

Education Industry, Now and 2025?

Source: GSV Asset Management, Capital IQ

Looking at capital markets, while Education represents 9% of GDP, it is just 0.4% of the U.S. Stock Market. There are only 11 Education companies with a market value of $1 billion or greater.

We believe the convergence that will take place between money spent in Education as a percent of GDP and proportional representation in the public markets will translate into the 12% of GDP and 4% of capital markets over the next 10 years. This represents a mind-blowing trillion dollar opportunity.

We look forward to convening key leaders from across the global innovation economy at the 7th Annual ASU GSV Summit (April 18-20) in San Diego to accelerate the transformation of the sector and to improve educational outcomes through exponential ideas.

We expect over 3,000 attendees, including a wide range of entrepreneurs, investors, foundation leaders, educators, policymakers, and CEOs of leading global companies. Keynote speakers include Bill Gates, Former U.S. Secretary of State Condoleezza Rice, General Stanley McChrystal, Khan Academy Founder Sal Khan, business strategy visionary Jim Collins, and many more.

Additionally, please click HERE to download 2020 Vision: A History of the Future, GSV’s aspirational vision for how to address society’s greatest challenge — ensuring that everyone has an equal opportunity to participate in the future. With over 100 company case studies, leader profiles, and market data, 2020 Vision offers comprehensive analysis and insights into the state of human capital and education innovation.

Stocks rallied upwards for the third week in a row, with NASDAQ advancing 2.8%, the S&P 500 up 2.7%, and the GSV 300 rising 5.0%. Small cap stocks, in particular, did well with the Russell 2000 up 4.3% for the week. The 10-Year Note yield was up 11 bips to 1.7%.

World Indices

Source: Yahoo Finance, GSViQ

Employment numbers were excellent, with 214,000 jobs created in February, far better than analyst estimates. On the flip side, the IBD/TIPP Optimism Index fell in March, hitting its lowest level since last November.

IDC projected that smartphone sales will slow in 2016 materially, with iPhone shipments expected to be basically flat and Android phone shipments rising over 7%. Part of this slowing down is an inevitably maturing market, accentuated by China, the World’s leading smartphone buyer.

Stocks have an uncanny knack for doing the opposite of what people expect. With pessimism reaching extremes early this year, stocks have quietly climbed the “Wall of Worry.” We continue to be optimistic on the outlook for our favorite growth stocks and will add to our positions and be opportunistically involved with the Market.

Bubblin'

by Luben Pampoulov

Bubblin’ In Emerging Markets

Ride sharing, in most parts of the World, is known as getting into someone’s car for a ride. But in a few select countries, ride sharing is predominantly done on motorbikes. Countries like Thailand, Vietnam, India and Indonesia have significantly more motorbikes than cars on their streets. The reason is simple — most of the population there cannot afford a car, hence the motorbike is the way of transport.

The Daily Commute

In Indonesia for example, approximately 80% of urban transportation is on motorbikes, with ~80 million motorbikes sold annually. Getting around on a 2-wheeler is also to a huge advantage when driving in Jakarta, the World’s worst city in terms of traffic. Traffic can be so bad that getting from point A to point B by taxi ends up taking longer than just walking…something that I experienced last week.

It is no surprise then that the leading ride sharing service in Indonesia is Go-Jek, the company that started as a motorbike peer-to-peer ride sharing service, which has now evolved to be a gigantic logistics company with additional services including Go-send, Go-eat, Go-box, Go-mart, Go-busway, Go-tix, Go-massage, Go-glam, and Go-clean. In its short five years of existence, Go-jek has already become in Indonesia what Uber is still aspiring to be someday — a superior logistics platform.

The Streets of Jakarta

Trying to replicate Go-Jek’s success in Indonesia, Uber and Ola launched their own bike services in India last week. Ola, which operates in over 100 cities is going head-to-head against Uber which is currently available in 26 Indian cities. The week before, Uber also launched its bike service in Thailand. Clearly, the race is on.

Another emerging space is heating up fast too. While business messaging disruptor Slack is reportedly raising a new round at a $4 billion valuation, Facebook’s WhatsApp launched its own file sharing tool that could be a first step into the business communication space. The 1+ billion WhatsApp users can now share and see PDF files and pull from third party apps such as Dropbox, iCloud or Quip. And Dropbox itself launched its a collaboration tool, Dropbox Paper, late last year, which could very well also include a messaging option soon. (Disclosure: GSV owns share of Facebook, Dropbox).

And lastly one that’s moving fast — Snapchat users now passed 8 billion video views per day! This is on par with Facebook, but amazingly with only a fraction of Facebook’s daily active user base. Snapchat is quickly positioning itself as a leader in the mobile video space, driven by the surging popularity of its Story and Live Story function. 

Pioneer Notes

by Li Jiang

Hooked on Slack

Why do some products take off while other seemingly promising startups wither after gaining some initial traction?

That is the central question that Hooked answered for me. Hooked, co-authored by Nir Eyal and Ryan Hoover, is a brisk yet potent read on the crucial process and framework for building products that users engage with as habits.

Central to Hooked is a four-part framework that includes 1) trigger, 2) action, 3) variable reward, and 4) investment.

Trigger

Products have internal and external triggers. Internal triggers are driven by intrinsic desires such as the human need to socialize. External triggers are by design and are features built into a product to prompt users to engage. The most common of which on mobile devices is the notification system.

Action

Action is simply a standard response once the trigger gets users engaged. Habits are induced and facilitated by both the ease of performing the action and psychological motivation to do it.

Variable Reward

A variable reward is the result users receive after performing the action. The reward is variable because it lets users gain some fulfillment yet leaves them wanting more. The more action you take, the more reward you receive.

Investment

Investment can come in the form of time, data, effort, social capital or money that users put into the product.

Using the Hooked framework, I assessed Slack, led by Stewart Butterfield, which this week was reportedly seeking a new funding round of $150–300 million at a $4 billion valuation:

Slack Internal Trigger: 8/10

Slack has a natural internal trigger. And it’s a powerful one. People are social and they have a need to communicate both formally for work and informally for the social endorphins. While powerful, the temptation to check your work communications isn’t quite on the same level of checking in on all of your friends, imho.

Slack External Trigger: 10/10

Slack has a native app for desktop, tablet and phone which hugely extend their coverage compared to cloud and browser only products. Slack sends standard notifications and a fairly vanilla set of prompts that most tech products have. It’s most powerful external trigger is the network effects that it benefits from. As one influencer or a small part of a team starts using the platform, they can often convert the entire team to Slack.

Slack Action: 9/10

Slack is supremely simple and robust to use for its core purpose of messaging. The barrier to that action is almost unnoticeable for digital workers. Couple that ease with a high psychological motivation to be responsive to other people on your team and you have a strong combo for taking action.

Slack Variable Reward: 9/10

The simplest reward in Slack is seeing a response, getting back a file that you really wanted, or discovering a funny gif that your colleague sent. The variable reward kicks in as you continue the conversation and find new rewards as users respond back and forth. It’s an unending positive loop.

Slack Investment: 10/10

Most active users put a huge investment into Slack. Not only do they spend enormous amount of time on it, but they put their knowledge and data into every conversation. What makes companies like Oracle structurally sticky is what makes Slack de facto sticky. Soon, an entire company’s life is run on this platform.

Once you go Slack, you never go back.

Overall: 46/50

The sky is the limit for Slack in large part because it has mastered the Hooked model and is now a habit for over 2 million people and growing rapidly.

Market Update

Week ending March 6, 2016

World Indices

America Index 9/20/2017 YTD Week
U.S. GSV 300 107.4 42.1% 1.8%
NYSE 11812.0 6.8% 1.0%
Dow 21813.7 10.4% 0.6%
NASDAQ 6265.6 16.4% 0.8%
NASDAQ-100 5822.5 19.7% 0.5%
Russell 2000 1377.5 1.5% 1.4%
S&P 500 2443.1 9.1% 0.7%
Brazil Bovespa 71073.7 18.0% 3.4%
Mexico IPC 51373.2 12.6% 0.6%
Canada S&P TSX 15056.0 (1.5%) 0.7%
Euro-Asia Index 9/20/2017 YTD Week
China SSE 3331.5 7.3% 1.9%
Heng Seng 27848.2 26.6% 3.0%
Singapore Straits Times 3259.6 13.1% 0.2%
Indonesia JKSE 5915.4 11.7% 0.4%
Japan Nikkei 225 19452.6 1.8% (0.1%)
India Sensex 31596.1 18.7% 0.2%
Russia RTS 1979.1 (11.4%) 2.5%
France CAC 40 5104.3 5.0% (0.2%)
Germany DAX 12167.9 6.0% 0.0%
U.K. FTSE 100 7401.5 3.6% 1.1%



U.S. Indices Snapshot

Valuation P/E Est. P/E/G Price/Sales
LTM NTM Growth LTM NTM LTM NTM
S&P 500 24.2x 17.6x 7.60% 3.2x 2.3x 2.4x 2.1x
NASDAQ 25.2x 17.5x 7.90% 3.2x 2.2x 2.6x 2.2x
Russell 2000 24.7x 17.6x 6.30% 3.9x 2.8x 1.9x 1.6x
GSV 300 50.6x 25.8x 38.40% 1.3x 0.7x 5.5x 4.0x

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