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General Commentary
Jan. 31, 2016

Pioneer Profiles: 23andMe

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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%

GSV’s Pioneer Summit, an annual gathering of 1,200+ innovation leaders who are building the Global Silicon Valley and changing the world for good, is focused on game-changing entrepreneurs and ideas.

Among our featured speakers was Anne Wojcicki (@annewoj23), the Co-Founder and CEO of the revolutionary personalized genetics company, 23andMe. In a segment called “The Future of Health and the Human Genome”, moderated by Katy Steinmetz, the San Francisco Bureau Chief of Time Magazine, Anne shared her perspective on how 23andMe is ushering in an age of personalized, consumer medicine.

Pioneer Profiles: 23andMe
Anne Wojcicki, Co-Founder + CEO, 23andMe (Left) Interviewed by Katy Steinmetz, San Francisco Bureau Chief, Time Magazine, at the 2015 GSV Pioneer Summit

Source: GSV Asset Management

23andMe was founded in 2006, on the heels of the Human Genome Project (HGP) — perhaps the greatest accomplishment in exploration history with the most profound implications. Unlike the outward voyages of discovery by adventurers like Lewis and Clark, Columbus, or the Apollo astronauts, the HGP’s mission was inward, with the audacious goal to map the entire genetic blueprint of human beings. Interest in gene exploration dates back nearly 200 years to Gregor Mendel, the father of modern genetics. But it wasn’t until the mid 1980s that technology and Moore’s Law made it possible to use software to sequence the over three billion genetic bases that make up the human body.

Unprecedented in terms of international collaboration and public-private partnerships, the Human Genome Project was launched in 1990 with the goal of mapping the entire human genome in what seemed like an unrealistic 15 years.

In April 2003, it was announced that the entire human genome had been mapped at a cost of $3.8 billion. Beyond scientific gains, the ROI was staggering. The Human Genome Project generated an economic impact of $796 billion from 1990 to 2010 alone.

Moore’s Law and the Megatrend of “Software Eating the World” are having a revolutionary impact on the cost for an individual to receive their own genetic map. In 2008, it cost $1 million dollars for a person to create a personalized gene map. By 2011, it was $100,000. In 2014, it cost $1,000 — less than a chest X-Ray — and today you can get a personal genetic report for less than $200.

Outpacing Moore’s Law: Rapid Decline of Cost to Sequence a Human Genome
Cost to Sequence a Human Genome, 2001-2014 (Log Scale)

Source: National Human Genome Research Institute

STATE OF PLAY

Anne Wojcicki co-founded 23andMe in 2006 after a decade on Wall Street as a health care analyst convinced her that the way we treat illness and create new drugs is fundamentally broken. Reflecting on the billions of dollars pharmaceutical companies pour into drug discovery in a recent Inc. interview, Anne remarked, “It just felt like there was this massive amount of waste.”

A chance encounter with Markus Stoffel, a leading molecular biologist at ETH Zurich, left her convinced that the key to creating a new health and medicine paradigm was to aggregate the World’s genetic data and discern patterns to prevent and combat diseases like Parkinson’s and Alzheimer’s. Big Data meets Big Pharma.

23andMe launched with a mail-order test kit that generated a detailed genetic report for $1,000. A simple saliva sample produced insights across nearly 200 categories — including risk factors for inherited diseases like cystic fibrosis, genetic traits like lactose intolerance, and various details about your genealogical history. By 2012, 23andMe had driven the price down to $99.

Emerging Personalized Genetics + Health Testing Companies

Source: Fusion, Crunchbase, GSV Asset Management

In 2013, Uncle Sam dealt 23andMe a potential death blow. The Food and Drug Administration ordered the company to stop marketing its flagship tests, deeming them unregulated medical devices. Regulators argued that consumers could misinterpret this health data, which had not been clinically validated, and take action based on a “false positive” result.

While many would have wilted, Anne Wojcicki played offense. Rule number one for startups is not to run out of money. With its popular product sidelined, 23andMe partnered with pharmaceutical companies like Genentech and Pfizer, trading access to its DNA database in exchange for upfront payments and a cut of revenue from new drugs developed using it. At the same time, it worked with the FDA to get an approved genetic test back on the market.

In late 2015, with the required Federal approvals in hand, 23andMe relaunched its genetic reporting service targeting four categories: ancestry, wellness, traits, and carrier status. With over one million customers and a $115 million Series E financing in October 2015 that valued the company at $1.1 billion, 23andMe is once again pushing the boundaries of personalized medicine.

THREE TRENDS TO WATCH

1. Personal, Predictive Medicine

The fact that everybody can and should have their own genetic profile has profound implications to the future of medicine and human life. This isn’t science fiction.

Instead of the normal reactive treatments patients receive under “modern medicine,” genetic mapping unlocks the potential for personalized prescriptions that could mean taking a new or modified drug, changing your diet or fitness routine, or any other combination of treatments that are tailored to your specific needs.

“You” = 23 Pairs of Chromosomes

Source: 23andMe

The first key impact is prevention. Today, over half of 23andMe customers learn something from their test results that is “medically meaningful” — from a disease risk to a dietary trait. Understanding risks and health conditions enables people to take preventative measures, and as tests continue to improve, health and wellness service providers will be better equipped to help people avoid or stave off risk.

The second key impact is personalized medicine. Big Pharma companies are eager to purchase 23andMe data because it unlocks insights about how various drugs and treatments impact people across a variety of genetic profiles. As pharmaceutical R&D increasingly integrates massive genetic datasets, it will enable the development of tailored drugs that are more effective for sub-populations, or that minimize the risks of adverse reactions.

A benign example is Benadryl, which makes some children sleepy and others hyperactive. In the future, parents will be able to pick the Benadryl “flavor” that doesn’t make their kids bounce off the wall.

23andMe is attacking this opportunity head on, recently announcing the addition of former Genentech research chief Richard Scheller, who will lead an in-house research TEAM focused on the discovery and development of new therapeutics. Look out Big Pharma.

2. The Age of Consumer Health

Beyond the tangible implications for prevention and personalized medicine, 23andMe’s genetic testing services are ushering in a much broader paradigm shift. As Anne Wojcicki observed at the Pioneer Summit, “What I’m most excited about is this consumer-health revolution. Consumers are standing up and saying they want to take control.”

Welcome to You
23andMe, Personalized Genetics in a Box

Source: Fusion

The rise of fitness trackers like Fitbit underscore a massive public interest in taking ownership of health and wellness, instead of navigating an arcane healthcare system with opaque processes, elusive personal records, and ambiguous outcomes. 23andMe takes this concept a step further by allowing consumers to determine game-changing insights about their medical profile without going to a doctor or specialist.

The net result will be increasingly consumer-directed healthcare, with service providers becoming more accountable to empowered patients who demand timely, preventative, and personalized treatment.

This trend is consistent with a generational shift we are seeing in the very definition of a “healthy” life.

For Millennials, “healthy” doesn’t just mean “not sick.” It means a daily commitment to eating right and exercising. This mindset stands in stark contrast with that of prior generations, who care less about lifestyle and more about simply avoiding bad health outcomes.

For Millennials, Health = Lifestyle

Source: Brookings Institution, Goldman Sachs, Nielsen

3. Big Data, Smart Medicine

23andMe has assembled the World’s largest database of genetics and phenotypic data, which the company will begin aggressively mining as part of its recently-announced in-house therapeutics research strategy.

In recent years, leading technology companies have also turned their attention to genetics, using Big Data to make healthcare smarter. IBM, for example, has been on a healthcare and genetics buying spree. In 2015 it acquired Explorys, a company spun out of the Cleveland Clinic with access to the anonymized health records of over 50 million people, and Phytel, which has access to population health management data. Big Blue could be sitting on one of the largest, most comprehensive health and genetic databases in the World.

Technology Leaders Turn to Genetics

Source: MIT Technology Review, Fusion, GSV Asset Management

Apple is collaborating with U.S. researchers to catalyze the creation of apps that will collect and apply user DNA to provide health insights and medical services. The apps will be based on Apple’s ResearchKit software platform, which launched in 2015. Alphabet (Google) launched Google Genomics for researchers to store and share genomic data, with the aim to accelerate key research breakthroughs and organize the World’s genomic data. (Disclosure: GSV owns shares in Apple and Alphabet)

WHAT’S NEXT

In her closing remarks, Anne observed that as Silicon Valley turns its attention to health, wellness, and medicine, the pace of innovation will continue to accelerate. Part of the interest has been driven by economic opportunity. The healthcare and pharmaceutical industries in many ways resemble the early days of the Internet. The Market has been dominated by large incumbents and inefficient services and opportunity for innovative technology-enabled solutions abounds.

But more importantly, Silicon Valley has always been about solving BIG problems. As entrepreneurs and engineers have grown up, health matters more. And caring for parents in their later years brings many of these challenges into sharper focus. We’re excited to track companies like 23andMe as they invent the future of health and personalized medicine.

Stocks finished January better than they started, with the Dow rising 2.3% for the week, the S&P 500 advancing 1.7%, and NASDAQ gaining 0.5%. Even with solid gains over the past two weeks, January was brutal, with the S&P 500 down 5.1%, NASDAQ off 7.9%, and the GSV 300 falling 19.2%. Oil prices bounced from the bottom last week and the 10-Year Note yield finished at 1.92%.

World Indices

Source: Yahoo Finance, GSViQ

The Fed decided to do nothing in its monthly meeting. Anemic GDP growth of 0.7% for the 4th Quarter and an extremely shaky Market were undoubtedly reasons for the inaction.

Facebook continued to be a monster with 4th Quarter sales up over 50%, fueled by momentum in mobile. For the week, Facebook rose nearly 15% and now has a market cap of $319 billion. Another positive last week was the continued resurgence of Microsoft, which beat analyst views, sending the stock up over 5%. Microsoft has gone from your desktop operating system to your cloud service provider. (Disclosure: GSV owns shares in Facebook)

Speaking of cloud services, on the not-so-sunny side of earnings results, Amazon missed analyst estimates, putting the brakes on what had been an acceleration story. Apple also disappointed investors, despite reporting nearly $20 billion of earnings, which was a new profit record. eBay reported mixed results, which prompted a 12% decline in its stock. (Disclosure: GSV owns shares in Amazon and Apple)

There is no question that we are in an environment that is fraught with anxiousness. The slightest hint of bad news is treated like a catastrophe. While it takes a strong stomach to be proactive, history has shown that it is times like these that provide long term investors with the greatest opportunities. We are focusing on fundamentals and look at the Market volatility as our friend.

Bubblin'

by Luben Pampoulov

From Another Galaxy

Facebook is a $317 billion company, it has a population of 1.6 billion, and it is the 6th largest company in the World…and it just had a killer +52% revenue growth quarter. The only other company that’s been able to have such a stunning quarter at mega scale was Apple in March 2012 when it reported +59% revenue growth at a $580 billion market cap. (Disclosure: GSV owns shares in Facebook, Apple)

Such a growth rate is typically seen in emerging growth companies that fall in the $200 million to $2 billion market cap range. Finding such high growth rates at such large size is extremely rare, and Facebook should maybe be the only true unicorn in today’s tech World. Maybe Zuck should be taking more time off…

Clearly, everything at Facebook is working perfectly well, and Zuckerberg has had an incredible hit rate with acquiring the most important businesses that help Facebook maintain its Monopoly in the Social Media space. WhatsApp is almost at a billion users, and it has replaced SMS and phone calling throughout the World. Instagram is close to half a billion users and has become the go-to app for pictures, videos, and possibly soon e-commerce.

Oculus just unwrapped its Rift, and expectations are it will sell over 5 million units in 2016. Zuckerberg has said Oculus will need to sell 50-100 million units over the first couple of years for it to be a success. We shall see how soon they will hit that number, but the race is now on!

Others to watch out for include Sony’s PlayStation VR, HTC’s Vive, Google Cardboard, and Microsoft’s HoloLense. Chip maker Nvidia is also well positioned after Oculus recommended Nvidia’s GTX 970 graphics card as a supporting systems for the 2016 Oculus Rift. (Disclosure: GSV owns shares in Google)

Being Literally In The Game

While the first VR use cases are in Gaming and Sports, there will be many more areas that will start to adopt the new technology. Imagine “attending” a Stanford class lecture while in your pajamas, or a doctor “standing” inside a patient’s brain to prepare for a surgery. One of my favorite movies, Deja Vu, features Denzel Washington who plays a cop. In one of the scenes he wears a VR headset and sees a crime scene that happened a few days earlier…

Clearly, the opportunities for Virtual Reality will be big. Facebook is once again well positioned by owning the leader in that space, Oculus. And Reality might be finally catching up with Hollywood. 

Pioneer Notes

by Li Jiang

What Growth Rate Does Your Startup Need to Hit?

When I went to visit my friend in SOMA last week, he told me that his startup had recently moved to a new office. I remember the first time I visited, the company had a few desks in a shared space with other startups.

Imagine my surprise when I walked off the elevator to see an entire floor of a building filled with employees busily going about their day. The place was bustling with activity like a grand bazaar.

When we talked more, he told me that his company had been growing 25% a quarter for the past 24 quarters, and I thought to myself was “that’s pretty solid”.

Then 2 seconds later I realized that A) the company hasn’t even been around for 24 quarters and B) what he actually said was that they were growing 25% a month for the past 24 months. I couldn’t believe my ears. I blurbed out loud, “that’s ‘holy f–k’ growth.”

You hear the phrase “killing it” everywhere in Silicon Valley — at coffee shops, on the Caltrain, and even on your digital feeds.

Translation for anyone outside of the Silicon Valley verbiage bubble, it’s a statement meant to convey how well a startup is doing and how quickly they are growing users, revenue, and/or employees.

But like most sayings in Silicon Valley, this one is overused and meaningless (read: annoying) because there’s really no generally accepted definition of what “killing it” means. What it really means is a state when a startup has found its product-market fit and is in a period of hyper growth.

Rule of 10

I define hyper growth using the Rule of 10. A startup is in hyper growth if it is:

My definition of a specific addressable market is a bottom-up analysis of the specific type of users / customers who would use the product multiplied by how much revenue you can generate per user / customer. The specific addressable market is not some gigantic number you found in an IDC or Gartner report that talks about how big the entire industry is.

Here’s the full chart of what these growth rates would imply on an annual basis.

While not every company is optimizing for growth at all times, the Rule of 10 is a good framework for thinking about any company that’s in commercialization. And startups can’t grow at the same rate forever, so stage is important to understand. A seed stage startup growing at 100% a year is solid but not justification enough for a big party, but Facebook today growing at 100% a year (hypothetically) would be eye popping. To be really interesting for venture capitalists who shoot for outlier outcomes, a company has to be in the ballpark of the Rule of 10 rate.

If you are an early stage company and growing at 5-7% a week, that’s still very impressive so use the Rule of 10 as a good guide but not a black and white line.

My friend’s company has been growing 25% a month for 24 months. Even if (hypothetically) the first month the company had $5,000 of revenue, it would now be on a $10.2 million run rate. That’s the power of compounding growth. Grow another 6 months, $38.8 million run rate and grow at 25% for another 12 months from today and the company will be on a $147.9 million run rate. Yeah, that’s why it’s on “holy f–k” growth trajectory.

Hyper growth requires significant work on building a great product that people love but once you reach this threshold, all manners of options in accessing capital and further growth are at your fingertips.

If you hit the Rule of 10, instead of trying to figure out how you are going to raise money, you’ll be busier trying to dodge the money that investors will be throwing at your startup.

If your startup fits the Rule of 10, my email is Li [at] gsvam [dot] com. Wink wink

Market Update

Week ending Jan. 31, 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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