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General Commentary
April 30, 2017

Next Up: Class of 2020

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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%

Some people feel the rain… others just get wet.

— Bob Dylan

At the ASU GSV Summit next week, we are gathering over 3,500 entrepreneurs, educators, business leaders, policymakers, and investors — as well as 350 game-changing presenting companies — with the mission of accelerating exponential ideas in education and talent.

As part of this summit, we will be looking at the “Gravitational Shifts” that are transforming the future of education and talent. One key shift is a phenomenon we call the “Class of 2020.”

Last fall, the class of 2020 showed up on college campuses across the United States. They don’t know what a Walkman is and would be shocked to learn that people used to smoke in bars. They were three-years-old during 9/11 and have spent more than 80% of their lives in a country at war.

If you go back 18 years, the class of 2020 shares its birthday with Google, which was launched in 1998. Today, there are over four trillion searches per year. This group grew up in a world where information is free and at your fingertips. For me, the is opposite of the world I grew up in when information was expensive and water was free. But this is just the beginning of how different the class of 2020 is than the world I grew up in.

Think how much things have changed.

Just a year before Google’s launch, Steve Jobs returned to Apple for a second tour with the goal of putting a personal computer in every home. The launch of the iPhone in 2007 ultimately put a super computer in every pocket.

For the class of 2020, the smartphone is just a phone… they expect it to be “smart” as they do with other technology. And that’s just table stakes. They want to access everything on demand — from transportation, to food, retail products, and media.

EMERGING MOBILE, ON-DEMAND SERVICES

Source: GSV Asset Management

(Disclosure: GSV owns shares in Enjoy and Chegg)

If you think about entertainment, services like Netflix, Hulu, and YouTube enable you to access anything you want to watch, whenever and however you want to watch it. It’s no wonder that the Class of 2020 thinks that going to a movie theater at a set time to buy overpriced popcorn and soda is ridiculous. Over the last decade, movie admissions per capita in the United States and Canada peaked at 4.4 in 2006 and 2007, dropping to 3.8 in 2016.

Not coincidentally, over 50% of the Class of 2020 thinks that online courses are as good or better than the classroom. It’s absurd to have to go to a commodity Econ 101 class on Thursday morning at 8:00AM if you can access it on demand.

Interestingly, while the Digital Natives of the Class of 2020 love technology, they have no recollection of the Dotcom Bubble. They were three-years-old when it burst. But what’s etched in their memory forever is their family, or friends of their family, losing a home to foreclosure during the financial crisis of 2007. 

Not surprisingly, a decade later, Millennial home ownership is down nearly 20%. They also have no memory of the AOL/Time Warner merger, the “worst merger of the century” and think that the AT&T/Time Warner merger is genius and conceptually gets you the most content for compelling value.

DotCom Bubble vs. Great Recession?
The Class of 2020 can’t remember the Dotcom bubble… but the home foreclosures and job losses of the Great Recession still ring fresh.

Source: GSV Asset Management
Decline in Millennial Home Ownership, 2007 vs. Today
Home Ownership Among People Aged 25-34

Source: Forbes

Also etched across the collective memory of the Class of 2020 is parents losing jobs they had for an entire career — and pensions along with it. Not surprisingly, the Department of Labor estimates that the latest crop of graduating Millennials will have over 15 lifetime careers — up from four in 2010. While a number of factors are driving this dynamic, including accelerating digital disruption and globalization, a simple aversion to career commitment has a lot to do with it.

Increasingly, many of these lifetime careers will be a part of the emerging “Gig Economy.” Anyone can become an entrepreneur in 60 seconds by monetizing their home, their car, or even their spare cash, by selling services through digital Peer-to-Peer Marketplaces like Uber, Lyft, and Airbnb. Currently, the Financial Times estimates that over 20% of Americans are employed as freelancers, up from 6% in 1989. The freelance marketplace Upwork pegs the number at 55 million part time workers in the United States. (Disclosure: GSV owns shares in Lyft).

Interestingly, as ride-sharing platforms have surged — Uber raced past two billion rides delivered in 2016 — the demand for car ownership among Millennials has plummeted. According to Bloomberg industry research, last year, more automobiles were sold to people aged 75 and older than 18-24-year-olds.

The precarious new dynamics in the auto industry drive home the disruptive and deeply intertwined elements of the Class of 2020. Powerful, ubiquitous mobile devices enable on-demand services and Peer-to-Peer Marketplaces. Broad demand for these services, in turn, has created widespread part-time work opportunities for a generation that is increasingly unlikely to commit to a single career. And sharing platforms have further reduced the need and desire to purchase physical assets, like houses or cars.

Understanding the Class of 2020, and the profound impact this generation is having on the World, is about thinking outside boundaries and connecting dots.

HOW MANY DOTS DO YOU SEE?
There are 12… Your brain just won’t let you see them all at once.

Source: Mashable

It is fitting that the most recent Nobel Prize for Literature was awarded to Bob Dylan. Now in the company of T.S. Eliot, Samuel Beckett, and Gabriel García Márquez, Dylan is the first musician to win the award. The Swedish Academy decided to think differently (It’s about time — even the Oxford Book of American Poetry included his song “Desolation Row,” in its 2006 edition, and Cambridge University Press released “The Cambridge Companion to Bob Dylan” in 2009).

Dylan once observed that, “Some people feel the rain… others just get wet.” He has also said that, “Colleges are like old-age homes, except for the fact that more people die in colleges,” which may be of particular interest to the Class of 2020.

Source: New York Times, GSV Asset Management

At the ASU GSV Summit we’re focused on “seeing the rain” when it comes to understanding the profound global transformations that are taking place — and the impact it will have on the future of education and talent. Looking at the Class of 2020 is a good place to start.

Bubblin'

by Luben Pampoulov

Gates Are Open

The IPO window is currently wide open. Last week alone, nine IPOs hit the US public market, with the average performance up +10%. Year-to-date, 44 IPOs made a debut, a number already higher than the 39 IPOs from the first half of 2016. What is even more encouraging is the spike in emerging growth (VC-backed tech) IPOs. In the last two month, we saw back-to-back blockbuster listings including 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. While we are sceptic of Uber being one of those, a list of other top names are well positioned, in our opinion; Airbnb, Didi, Dropbox, Spotify, Lyft, Palantir, Klarna, or Warby Parker could all be potential IPOs over the next 12 months. (Disclosure: GSV owns shares in Dropbox, Lyft, Spotify, Palantir).

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 this January — Dropbox has is now also EBIT profitable, as reported by CEO Drew Houston last week.

Dropbox’s valuation from its last equity financing was at $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 could likely see Dropbox being valued above those levels. Looking at the list of high growth SaaS comps, the median P/S multiple is at 10.5x. What is also interesting is there is only one company with EBIT profitability.

Salesforce, with a 1% EBIT margin and “only” +27% revenue growth, still gets a P/S multiple of 7.3x. Part of it is the premium applied to being profitable. Looking at the comps’ medians, it could be possible to 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 potential public market valuation is to plot the growth rate against the P/S multiple. The scatter plot shows those data points against each other.

Another 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 paying 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 new deals, we can 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, we see 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 the leading platforms in their respective fields, both are showing strong users (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.

The one major difference is in margins and profitability. 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 to improve its margins in order to receive a P/S multiple of 5x 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

Pioneer Notes

by Li Jiang

Reimagining The Human Brain: Elon Musk Style

CliffsNotes + commentary on Neuralink

LJ: Tim Urban of Wait But Why published a tour de force post on Neuralink recently and I wanted to really understand his ideas without preconceived notions.

To really think about Neuralink, throw out your biases, really try to zoom very far out, and then zoom very close in.

Part 1: The Human Colossus

Humanity has seen a handful of events that has allowed us to get to where we are today. Spoken language, writing, and the printing press were game-changers because they allowed each generation to build upon the knowledge of prior generations.

With books, computers and the Internet, humanity began to communicate as a whole, thus allowing the collaboration that has led to the modern world.

To understand the grand plan for Neuralink, we need to understand the brain, then brain-machine interfaces (BMIs), then get into the “Wizard Era”, then finally Neuralink.

Part 2: The Brain

The brain is the most complex know object in the universe. It has 100 billion neurons.

Neural networks transmit information like transistors in computers — it has 1s and 0s, on and off.

But unlike computer transistors, the brain’s neurons are constantly changing.

This is called neuroplasticity. It’s neurons ability to change and optimize for the evolving world.

We understand the very micro-scale of neurons firing, and the macro-sacle of how the brain overall works as the decision-maker for our bodies but not all the stuff in between. Neuroplasticity make it hard to learn about the brain because the same word or image will not create the exact same neuron firing patterns.

Part 3: Brain-Machine Interfaces

When it comes to our brains, we still interact and talk like we did 50,000 years ago. There’s still the same process of inputting and outputting of information from our brains.

Neurons are small, but we know how to split an atom.

Each neuron has connection with as many as 10,000 other neurons. There are 20 billion neurons in the cortex alone so that means 20 trillion connections. The voltage of neuron could be changing as many as hundreds of times per second.

All of that complexity makes BMIs hard to build.

Current BMIs are limited, but they can do some cool things. For example, motor cortex neuron firing can train computers on actual movements. BMIs allow people to use their brains to play video games, move a motor arm to let them drink coffee, fly a f-35 fighter jet in a simulation, etc.

Also devices exists to help hearing or sight impaired, or stimulation products that can help people with Parkinson’s or other pains.

What exists today are indirect products. Now onto the future.

Part 4: Neuralink’s Challenge

Elon has a formula to not only work on innovation, but catalyze an entire industry.

He believe that in the next 4 years, Neuralink will create BMI products to help people with severe brain injuries.

Major hurdle 1 is bandwidth. There have never been more than a few hundred electrodes in a human brain at once, but we need 1 million simultaneously recorded neurons to really get accuracy to change the world. If we double every 18 months, we’ll get to a million recorded neurons in 2034. 17 years is not bad, but currently it’s only doubling every 7.4 years which means we get to a million recorded neurons by 2100.

Major hurdle 2 is implantation. Need to find a non-invasive way to implant BMIs. There are a ton of other challenges too.

LJ: even for a post of this length, it doesn’t have many answers. Most readers will get a good sense of the overall mission of Neuralink and why the team is pursuing it, but don’t expect to know how all of this will work, not for a few years anyway.

Part 5: The Wizard Era

Writing, typing, reading, hearing, seeing are so slow. In fact, human input and output is 3,000 times slower than an USB.

The BMI era will be gradual and you’ll be used to seeing these devices over time. Just like how today no one bats an eye at Lasik surgery or pacemakers anymore.

The possibilities are incredible. You can think thoughts and direct them to anyone else with the BMI device.

I think we are about 8 to 10 years away from this being usable by people with no disability … It is important to note that this depends heavily on regulatory approval timing and how well our devices work on people with disabilities.
— Elon Musk

Part 6: The Great Merger

AI is likely inevitable.

What humans can do is to be AI.

Elon envisions a world where AI really could be of the people, by the people, for the people.

The only way to do that is to have AI be plugged directly into the human brain and that is the ultimate master plan for Neuralink.

Read the full post HERE.

Market Update

Week ending April 30, 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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