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General Commentary
May 21, 2017

NETwork Effects

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Market Snapshot

Indices Week YTD

Last week we hosted the eighth annual ASU GSV Summit in Salt Lake City, a gathering of leaders from across the global innovation economy with the mission of accelerating exponential ideas in education and talent. We welcomed over 3,500 attendees from 40 countries, including 800 speakers and 400 presenting companies.

We all remember the Periodic Table of Elements from Chemistry 101. There are 118 unique elements, but the magic happens when you combine them. Two Hydrogens and one Oxygen makes water. Sodium and Chlorine makes salt.

The Summit has its own unique blend of elements — including entrepreneurs, educators, investors, business leaders, technologists, and philanthropists — colliding and combining to create change. Steve Jobs once said that, “the Macintosh turned out so well because the people working on it were musicians, artists, poets and historians – who also happened to be excellent computer scientists.”

As I observed in my opening night speech, that’s the animating idea behind the ASU GSV Summit.

The key “elements” of the 2017 Summit included speakers like LinkedIn CEO Jeff Weiner, civil rights and education leader Marian Wright Edelman, current U.S. Secretary of Education Betsy DeVos and former Secretary Arne Duncan, leading venture capitalists Mike Maples, Joe Lonsdale and Tim Draper, legendary tennis player and education entrepreneur Andre Agassi, acclaimed author Michael Lewis, and many others.

Entrepreneurs, Business Leaders, Educators, Investors, Policymakers, Thought Leaders, and Philanthropists


This year we framed the Summit with the “gravitational shifts” that are shaping the future of education and talent. One key shift, which we’ve written about in recent weeks, is the acceleration of automation, digital disruption, and the global knowledge economy.

The rise of Amazon underscores this point. Amazon was launched in 1994 — the same year Marc Andreessen co-founded Netscape, effectively creating the Internet as we know it. Amazon started as a novel way to order books and it helped retailers like Target fulfill their fledgling online orders. At the time, Sears, once the most largest retailer in the world, had a $16 billion market value.

Today, Sears is worth $1 billion and it recently announced that it may have to file for bankruptcy to protect itself from creditors. Amazon is now worth over $450 billion. But it wasn’t just Sears that got steamrolled because it failed to capitalize on the digital tracks laid by companies like Netscape, and later Apple and Google.


Source: Yahoo Finance

*Peak Market Value 2006

As department stores hemorrhage market value, jobs are departing. In fact, retailers like Macy’s, Nordstrom, and JCPenney have shed over 100,000 jobs since October 2016.

To put that in perspective, that’s more than the total number of coal miners employed in the United States. The campaign trail rhetoric might evolve from the plight of the rust belt to the “fall of the mall” in 2020.

The good news is that the e-commerce sector has created 355,000 new jobs since 2007. But the bad news is that these new jobs are quickly being automated. Amazon already “employs” over 45,000 robots in its warehouses today. Chinese manufacturers, once famous for cheap labor, purchase over 90,000 industrial robots per year, a number that is projected to exceed 175,000 by 2020. All in all, there are over 350 million global manufacturing and warehouse workers whose jobs are vulnerable to automation.

Amazon’s digital assistant Alexa is a preview of what’s next. The company recently announced that Alexa now has over 12,000 distinct “skills” in her toolkit — up from 1,000 in June 2016. New “features” announced include whispering and pausing for emphasis. Soon, all jobs will be in play.

This isn’t the end of history. As sure as the sun rises in the East, automation will continue to eat jobs… but it doesn’t eat work. But increasingly, to participate in the future, people can no longer fill up their “knowledge tanks” until age 25 and then drive off through life. They will need to continuously learn from the moment they are born until the time they retire — if they ever retire at all.

But the problem is that until recently, higher education — the gateway to more lucrative, stable employment — has required people to drop out of life and take on massive debt. 

Average Annual Income Rises with Education Level

U.S. Unemployment by Education Level

Percentage of Jobs with High Automation Risk by Education Level

Source: U.S. Department of Commerce, Census Bureau, Arntz, Gregory, and Zierahn (2016) calculations based on the PIAAC 2012; “Artificial Intelligence, Automation, and the Economy” (White House, 2016), GSV Asset Management

Cost Increases since 1980: CPI, Medical, College

Source: U.S. Department of Commerce, Census Bureau, Arntz, Gregory, and Zierahn (2016) calculations based on the PIAAC 2012; “Artificial Intelligence, Automation, and the Economy” (White House, 2016), Bloomberg, College Board, GSV Asset Management


Network effects are created when every node added to a network creates exponential value, as opposed to linear value. The best network effects businesses are seamless and invisible.

Facebook is a classic example. Every new member makes the experience more valuable for existing members and improves the platform’s data engine. Mark Zuckerberg has famously described this phenomenon as a “Social Graph.”

It has enabled Facebook to develop a new model for distributing information, recommendations, advertisements, and products. Instead of guessing what people want, Facebook can create a personalized experience for every user based on information gleaned from their network of relationships. As Facebook adds more and more people with more and more connections, the power of the platform grows exponentially.

We believe that network effects in education and talent connect people (supply side), learning opportunities, and employment (demand side). The issue is that only 35% of people have a college education while 65% of the jobs being created require one.


Source: GSV Asset Management

Effectively, we’re Networking Education and Talent to Work. NETwork effects are going to help a military veteran become a commercial banker by taking a Wharton course from Coursera…The college student that uses Chegg’s Student Graph to get a relevant internship… The mother who left the workforce to raise her family wants to get current, confident, and connected through Reboot… Companies like AT&T that are using tools like Udacity to re-tool their workforce of 100,000 people… The people across the African continent who are long on talent but short on opportunity that are learning how to code through Andela and finding employment with the most important technology companies in the World. (Disclosure: GSV owns shares in Coursera and Chegg)

Connecting Talent and Work through Innovative Education Platforms


Legendary tennis player Andre Agassi joined the Summit on the keynote stage in an interview with acclaimed sportscaster Ted Robinson, reflecting on the lessons he learned during his decorated tennis career and discussing the initiatives his foundation is undertaking in education.


Tennis Champion and Education Philanthropist/Entrepreneur Andre Agassi Interviewed by Sportscaster + Ted Robinson, the “Voice of the 49ers”

Source: GSV

This year’s Lifetime Achievement Award winner, civil rights leader and education advocate Marian Wright Edelman, argued that the United States will destroy its future if it it continues to neglect underserved children.


Source: GSV

Secretary of Education Betsy DeVos reflected on the current administration’s education priorities in an interview with Jeanne Allen (Founder & CEO of the Center for Education Reform), a leading champion of school choice and education reform.


U.S. Secretary of Education Betsy DeVos Interviewed by Jeanne Allen, Founder & CEO of the Center for Education Reform

Source: GSV

LinkedIn CEO Jeff Weiner, Year Up CEO Gerald Chertavian, and EverFi CEO Tom Davidson discussed the future of education and talent in a panel titled “All Roads Lead to LinkedIn”.


LinkedIn CEO Jeff Weiner with Year Up CEO Gerald Chertavian, Interviewed by EverFi CEO Tom Davidson

Source: GSV

Joe Lonsdale the founding partner of 8VC and co-founder of Palantir, discussed his vision for the future of work, big data, and smart enterprises. (Disclosure: GSV owns shares in Palantir)


Source: GSV

Midas List venture capitalists Tim Draper and Mike Maples discussed VC and accelerating innovation in education and talent in a fireside chat moderated by former TES Chairman and CEO Louise Rogers.


Venture Capitalists Tim Draper and Mike Maples interviewed by Louise Rogers

Source: GSV

Chegg CEO Dan Rosensweig explored the new fundamentals driving broad scale disruption across the higher education landscape. 


Source: GSV

Arne Duncan, the former Secretary of Education and now Managing Director at Emerson Collective, Don Graham, the Chairman of Graham Holdings and Jim Shelton, the President for Education at the Chan Zuckerberg Initiative discussed bridging D.C education and talent policy to emerging innovation.


Source: GSV

Other Highlights from the GSV team

  • Suzee Han moderates a panel on Global Millennials — what makes the future leaders of tomorrow tick? (view HERE)
  • Luben Pampoulov moderates a panel on mEDia — What implications do media models have for the future of learning? (view HERE)

All ASU GSV Summit Sessions

  • Keynotes (view HERE)
  • GSV Leaders Stage (view HERE)
  • Main Stage (view HERE)
  • Pre-K to 12 Program (view HERE)
  • Post-Secondary Program (view HERE)
  • The Future of Work is Now! (view HERE)
  • Venture + Growth Stage (view HERE)
  • Global Program (view HERE)
  • Special Programming (view HERE)


by Luben Pampoulov

Gates Are Open

The IPO window is currently wide open. Over the last 40 days, 30 IPOs hit the US public market, with the average performance up +22%. Year-to-date, 54 IPOs made a debut, and we are on pace to almost double the 39 listings from the first six months of 2016. What is even more encouraging is the spike in emerging growth (VC-backed, tech) IPOs. In the last 2.5 months, blockbuster listings included Snap, Mulesoft, Alteryx, Okta and Cloudera. (Disclosure: GSV owns shares in Snap).

Looking ahead, we expect to see many more highly attractive, emerging growth IPOs hitting the public market. Airbnb, Didi, Dropbox, Spotify, Lyft, Palantir, Klarna, Warby Parker are all potential candidates over the next 6-12 months. (Disclosure: GSV owns shares in Dropbox, Lyft, Spotify, Palantir).

One company that will likely not make it out of the gates soon is Uber. Its management’s highly aggressive behavior from the past has come around like a boomerang: the Waymo case is now a criminal case; Uber’s image is deteriorating and users are switching to better brands; and talent is churning. Uber’s $69B valuation was largely based on its global dominance and its self-driving future. But neither premise has currently strong visibility, and it will be difficult to justify that valuation in the near term.

Airbnb has had a different approach; while similarly disruptive to its industry like Uber has been in Transportation, Brian Chesky and co. have played “nice” with authorities. That has helped them maintain a good image and grow the business. Last year, the company made its first profit on $1.7 billion of revenue, according to Bloomberg. Airbnb is projecting to do $2.8 billion of revenue and $450 million of EBITDA this year, according to the same source.

At its current $31 billion valuation, Airbnb “trades” at 11x 2017 P/S. We expect the company will continue to post strong top line growth at ~35% annually for the next three years. This will be driven by the core lodging business and also by its new “Experiences” vertical. We also expect operating leverage, and believe the company can achieve a 30%+ EBIT margin over the next three years. Applying these estimates to its current value show Airbnb is an attractive IPO candidate:

Airbnb Expectations

Source: 2017 numbers are according to Bloomberg, 2020 estimates are GSV internal

Dropbox’s management had previously talked about achieving key milestones before considering an IPO. After successfully hitting two milestones over the past year — they became free cash flow positive in mid 2016, and hit $1 billion in annual revenue run-rate in January — Dropbox also became EBIT profitable, as reported by CEO Drew Houston last month.

Dropbox’s valuation from its last equity financing was $10 billion. That was back in 2014, in the heyday of the private market “bubble” when “valuations were ahead of themselves.” But with the recent performance and key achievements, we expect Dropbox to be valued above those levels, should it decide to go public. Looking at the list of high growth SaaS comps, the median P/S multiple is at 10x. What is also interesting is there is only one company that is EBIT profitable.

Salesforce, with a 1% EBIT margin and “only” +27% revenue growth, gets a 7.6x P/S multiple. Reason for the high multiple (vis-a-vis its growth rate) is the premium applied to being profitable and having long term visibility. Looking at the comps’ medians, we could like see a profitable Dropbox trading at such levels, assuming its revenue growth rate support the thesis.

High-Growth SaaS Comps

Source: Yahoo Finance, MarketSmith

Another way to look at a the public market valuation is to plot the growth rate against the P/S multiple. The scatter plot shows those data points against each other, and the best-fit-line.

Another near term IPO candidate could be Spotify. The on-demand music leader recently re-negotiated two of its major label contracts — with Universal Music and Merlin — and is still negotiating those with Sony Music and Warner.

Spotify’s fundamental drivers seem to be strong, as evidenced by the accelerating growth in paid users. In March, Spotify announced it passed 50 million paid users, which was up from the 30 million it announced a year ago. Accordingly, we can expect revenue growth to be at similar levels. (Spotify had last reported $2.2 billion in revenue for 2015). With the leverage from the negotiated deals, we also expect to see improvements in gross and operating margins in the near-term, which should improve Spotify’s attractiveness to the public market.

Looking at New Media comps, there is a slightly different picture than that of the high-growth SaaS companies. Revenue growth rates are generally lower, profitability is typically higher, and P/S multiples are slightly lower. In our opinion, Spotify could be valued at a multiple near to that of Netflix. Both companies are leading platforms in their respective fields, both are showing strong user (and revenue) growth, and both have high engagement rates (time spent per user). Also, both have strong management teams and are consistently out-innovating their competitors.

One major difference is the margin and profitability profile. Netflix reported a 37% gross margin and a 10% operating margin in Q1’17. Spotify last reported a $194 million in net loss on $2.2 billion of revenue for 2015… So it will be imperative for Spotify to improve its margins in order to receive a P/S multiple of 6x or above. We believe that the recent label re-negotiations will bring a positive swing in that respect.

New Media comps

Source: Yahoo Finance, MarketSmith

We also see rising momentum in the private market, with several of the late stage private companies experiencing more demand than there is supply. This is a new trend that we did not see in most of 2016. Accordingly, we expect to see continued strong momentum in the IPO market. 

Pioneer Notes

by Li Jiang

How to Invent the Future I: class 9

CliffsNotes + commentary on Startup School

Class with Alan Kay.

I encourage everyone to watch the full lecture (58 mins, link at end of this post), but if you are just curious or want a 5 minute refresher, here we go:


If you want to make money, don’t bother with a startup, create an industry because then you get trillions instead of billions — not going incrementally from the present but carving out an entirely new area.

You want to invent, not innovate. To do that you need to escape the tyranny of the present. If you work off of the present, you work will be incremental.

“School is the best place ever invented to keep you from thinking about something important for more than a few minutes.”
— Marvin Minsky

Picasso said “Learn the rules like a pro, so you can break them like an artist.”

You have to learn everything and find a way to forget it so you can have your own ideas.

Xerox PARC 1973, we created the Xerox Alto, an early computer. We made 2,000 of these. It led to the development of the Mac. We had 25 researchers in 5 years develop the first modern personal computer, graphical user interface, desktop publishing, WYSIWYG (what you see is what you get), object oriented programing, laser printer, fonts & postscript, Ethernet, peer-to-peer and client server, and the Internet.

Cost: $10–12m / year.
Return: $40 trillion total.

“Real” Xerox PARC ended in 1983 when they fired Bob Taylor. If large companies were rational, then startups shouldn’t exist.

Since then, it’s been extraction but almost complete lack of curiosity and interest in the processes that produced them.

The world is different now. Read “The Dream Machine”. There had been a long continuity that led to PARC. The Manhattan Project, MIT Radar Project, MIT Whirlwind Project brought scientists and engineers to work together.

Ivan Sutherland created graphical sketches on computers in one year because he didn’t think it was hard; he was just working on the problem.

J.C.R. Licklider “Lick” was the leader of the ARPA and he developed 16

1. Picking an idea worth dedicating your life if necessary.

2. Forget about goals; focus on visions.

3. Fund people, not projects.

4. Only fund the very best people.

5. It’s a research community, not a research project.

6. Fund problem finding, not just problem solving. Figure out what the actual problem is.

7. Milestones not deadlines.

8. Baseball not golf. If you strike out, you don’t cry. Batting .300 is great.

9. You can’t think inside the Beltway (Washington D.C.)! There’s too much noise.

10. It’s about shaping computer stuff to human ends per the vision.

11. If you can make your own tools, HW and SW, then you must! Otherwise you are working on some other vendor’s product.

12. Software drives the hardware, rather than vice versa.

13. Make enough of the inventions so that more than the inventors can use them. PARC, whatever you did, you have to make over 100 of them.

14. Argue for clarity, not to win.

15. Develop people for the long term. Grad schools admitted students who were interesting, but didn’t make judgment on them until a few years down the road.

16. The reaching is the reward.

“You miss 100% of the shots you don’t take.”
“A good hockey player goes to where the puck is; a great one goes to where the puck will be!”
— Wayne Gretzky

Escaping the Present

  1. “Cosmic goodness intuition” — start with an intuition about what products might exist and would be useful.
  2. “Identify favorable exponentials” — see if there are fundamental shifts in technology that would enable your intuition.
  3. Take the cosmic intuition out 30 years. Extrapolate what 30 years of the shift might be. For example, 30 years of Moore’s Law would create 32,000 times more computing power (if doubling every 2 years).
  4. Can we say “it would be ridiculous if we didn’t have this” after 30 years.
  5. Now, bring that 30 year future idea back to 10–15 years out. Can something be done now to reach that 10–15 year version?
  6. At this point you can just pay money. If you pay a lot of money now, you can get the commodity computer of 10, 15 years in the future.
  7. You make a bunch of them and intertwine them, i.e. run the software.
  8. Experiment with software applications to design products.

Watch the full video HERE.

Market Update

Week ending May 21, 2017

World Indices

U.S. Indices Snapshot

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