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General Commentary
October 9, 2016

Risky Business

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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%

Yes, risk-taking is inherently failure-prone. Otherwise, it would be called sure-thing-taking.

— Jim McMahon (Former Chicago Bears Quarterback, Super Bowl XX Champion)

You can only lose 1X your money and you can only lose once. But you can make 50X or 100X your money… so play for the big upside.

— Vinod Khosla

Some may think that startups are a new phenomenon, but in fact, they’re as old as time. A young Italian entrepreneur named Christopher Columbus had this harebrained idea that it could be faster and easier to reach China and India by heading West across the Atlantic versus the land and ocean routes that were being used going East.

Columbus first pitched his idea to King John II of Portugal in 1485, who was intrigued by the notion as Constantinople had fallen to the Ottoman Empire, making land travel to the Silk Road perilous. Travel by boat around Africa’s Cape of Good Hope was thought to be almost impossible.

Despite the appeal, King John’s advisors voted the deal down saying the assumptions were insane.

Columbus went down Santiago Road (the inspiration behind Sand Hill Road ☺ ) to see venture capitalist Queen Isabella of Spain. She thought Columbus had a “big idea” but wasn’t sold on the execution and ultimately passed due to an unfavorable “risk – reward ” calculation.

Like any good entrepreneur, Columbus didn’t take the first “no” as a final answer and went back to King John II of Portugal in 1488. As luck would have it, Columbus lost his first mover’s advantage to Bartolomeu Dias who had made it around the Cape of Good Hope of Africa, so King John sent Columbus packing for the second time. 

Christopher Columbus Fundraising Timeline

Source: The Daily Telegraph, Smithsonian Magazine, Wikipedia, GSV Asset Management

Seeking less sophisticated capital sources, Columbus went to family offices in Genoa and Venice. The “dumb money” wanted to know why the “smart money” didn’t bite and ultimately passed as well. 

Having struck out on his own, Columbus hired his brother Bartholomew as his banker and told him to find the money. Bartholomew pulled a Ryan Lochte and claimed he was robbed by pirates en route to pitch King Henry VII of England and King Charles VIII of France on his brother’s idea. He arrived in disarray and was soundly turned down by the King.

Convinced that his “distorted reality field” was correct, Christopher Columbus went back to King Ferdinand and Queen Isabella of Spain to once again give them an opportunity to back his “game changing” idea.

The King and Queen of Spain entertained Columbus and his idea and hosted him as an “entrepreneur in residence” for several years before sending him home without the money.

Finally, as Columbus was dejectedly riding out of town on a mule, the King and Queen VC sent for him to come back to the castle to do a deal (this makes Reid Hoffman’s 25 VC rejections with LinkedIn before scoring look like Kindergarten).

The Term Sheet Columbus and the King and Queen signed looked like Venture Capital Economics in reverse. The Deal they struck was that Columbus would receive 10% of revenue from New Lands in perpetuity, AND he was granted the option to buy a 13% interest in any subsequent commercial venture arising from territory discovered.

Columbus discovering North America instead of finding a faster path to Asia was the first “pivot” of modern venture capital… to be followed by many others. Facebook began as “FaceMash”, with the user picking which face was “hotter”. Twitter began as “Odeo”, a personal podcast service. YouTube was first a video dating site. Pinterest was “Tote”, which alerted users when their favorite stores had sales. Instagram was originally Foursquare-meets-“Mafia Wars”.

Pivots in Silicon Valley

Source: Company Disclosures, GSV Asset Management

Stocks sagged last week with the NASDAQ off 0.4%, the S&P 500 down 0.7% and the GSV 300 flat. While job growth in September was 156K, more or less in line with expectations, this perversely concerned investors that rate hikes might be happening sooner than was conventional wisdom.

World Indices

Source: Yahoo Finance, GSV iQ

“Innovations” in Techland were basically the big guys doing something their kin were already doing. Facebook announced “Marketplace,” which was their answer to eBay and Craigslist. Google announced “Assistant” which was its non-gendered initiative to join the virtual assistant game already in session with Apple‘s “Siri”, Microsoft‘s “Contana” and Amazon‘s “Alexa”.   

Twitter stock was as volatile as Tweets from Donald Trump with its stock falling as fast following leaks that nobody accepted Salesforce interest in getting married. TWTR dropped 20% on Thursday. It was also leaked that Snap (the artist formerly known as Snapchat) was ramping up to go Public by next March.

Elon Musk continues to dazzle or puzzle depending on your perspective, with Tesla reporting it produced nearly 25K cars last quarter one week after he announced he’d like to colonize Mars within ten years. Investors still worry that he’s already on Mars with his Solar City acquisition and remain leery with TSLA shares down 3.5% for the week.

We continue to be optimistic about the outlook for growth stocks. While earnings growth overall is expected to be down for the sixth quarter in a row for the S&P 500, leading growth companies such as Facebook and Alphabet continue to deliver strong results. Moreover, with the IPO Market heating up, we expect a number of attractive fresh faces to be available to public investors soon.   

Bubblin'

by Luben Pampoulov

Time Spent

Engagement is a fundamental driver of success. It is a key metric for any media business — whether a TV channel, a radio station, social media, or a mobile app, if users come back and spend time, you’ve got a winner. Else, it’s a flop.

Four years ago, Twitter did a study and found that people were checking their phones 110 times a day. Given that we now do many more things on mobile, that number has probably increased by 10-20%. Not only have phones become better and faster, but they are also thinner, lighter and have larger screens. We now do more things on mobile that we used to do on a PC. Some people don’t even own laptops anymore because everything can be done on the phone (and it also fits in the pocket).

The average American sleeps 7.7 hours a day, which means the rest of the 24 hours is spent on work, eating, driving, care, leisure, and household activities, which also means we are constantly using our phone during those other activities. In fact, a recent Deloitte study found that 81% of Americans are constantly looking at their phone while dining out in restaurants.

This trend is especially strong among Millennials and the younger generation, which for example spends increasingly more time on broadcasting themselves on Snapchat. Whether in school, at sports events, with friends, or at dinner, Snapchat is like an attached TV camera, constantly filming and broadcasting to the user’s Story. Remember the 1999 movie EDtv where Matthew McConaughey’s character is in a reality show and is being filmed 24/7? Snapchat is the new EDtv, except everyone is their own producer, cameraman and star. (Disclosure: GSV owns shares in Snapchat).

A Scene from EDtv

While social media is taking a good portion of our day, it is not as much compared to Music listening. Somewhat surprisingly, the average American spends 3.5 hours on Music every day. This becomes more clear when considering that the average daily commute to and from work is about an hour, and the majority of people listen to music while commuting. Additionally, many people listen to music while at work, or when studying. A CNN study shows that 75% of teens listen to music while doing homework, implying that most teens listen to music 60-120 minutes a day just as a side activity. When counting that we do the same at the gym, when jogging, or when resting, it becomes more obvious how we get to 3.5 hours per day.

Confirming the trend, Nielsen, in its annual Music 360 study, found that the average American spends 24 hours a week on Music. But the study also shows that 75% of that listening happens online, mostly on the popular platforms YouTube and Spotify. And listening is becoming more Mobile too, with 44% saying they consume music exclusively on their mobile device. (Disclosure: GSV owns shares in Spotify).

Pandora, which has largely failed to innovate and is still a radio-centric app, reported 78 million active listeners and 5.7 billion listener hours during the second quarter. Spotify, which has emerged as the clear leader, and is a pure on-demand listening platform, has well over 100 million active listeners, and also more listener hours than Pandora. And while Pandora is barely growing (or even declining), Spotify’s growth is above +50% on most of its key metrics. The recent announcement that it passed 40 million paying users actually indicates an acceleration in its growth.

Time Spent On Major Medias

Source: Company reports

*GSV estimates based on public information 

Pioneer Notes

by Li Jiang

Growth Metrics versus Death Metrics

“If you can’t measure it you can’t manage it and, what doesn’t get measured doesn’t get done.” — Andy Grove, former CEO, Intel

Metrics, data, analytics and business intelligence is in vogue. We throw the term “Big Data” around to label everything from survey data to sensor-generated data to actual vast amounts of data from the likes of Google and Facebook.

But on a more fundamental level it’s important to keep in mind how we even look at information. I believe too much of the world is fixated on things I’ll call “Death Metrics” that are after-the-fact data which are easy to measure but risk being entirely irrelevant to help people navigate rapid changes in a dynamic environment.

If you can measure the data and intelligence, but it’s too late, are you still intelligent?

On the flip side, there are “Growth Metrics” that may be much more vague and difficult to measure but are invaluable to help guide responses before a crisis point even happens.

1. Startups

Ultimately, the goal of any startup is to not be a startup, but to grow into a larger and enduring organization. That’s not to say it should ever lose its entrepreneurial DNA, but scale is an important means to make a larger impact on the world. Naturally, the company will be measured on revenue, earnings, users, customer satisfaction. Yet those are all Death Metrics.

Imagine a board meeting where the company has missed its annual revenue target or is trailing its annual budget. The point is that those revenues has already been missed. You can’t turn back the clock. For larger public company measured on a quarterly basis, the bias towards financial results from the prior quarter is a lot stronger. In technology and innovation industries, a bad quarter of revenues and earnings isn’t just an indication of potential trouble to come, trouble is already knocking down the front gates. When Blackberry’s financial performance weakened from 2011-present, the seeds were sown as early as 2005 when the iPhone team at Apple decided that they were disappointed with their own “smartphones” and went into war mode to create a better product. Even things like customer satisfaction and net promoter score are Death Metrics that reflects reactions from products that have already shipped.

Growth Metrics are harder to measure but more powerful. They include but are not limited to the level of talent that a company is able to attract, the culture, the process in which the team works to make a delightful product, the humility of the team to empathize with users, etc. One recent metric we used at a portfolio company was to see what percentage of our top choice candidates for job opening we actually landed. In the past 100 days, we ended up with 10 out of 11 candidates that we wanted, which meant that almost everyone who we were excited about also saw us as the best opportunity for themselves.

In the age of Lean Startup, there has been some convergence of Growth Metrics and Death Metrics on the product side because the feedback cycle is so tight with new digital products shipped multiple times a day and a slew of A/B testing that feedback after the fact is actually Growth Metrics for the next iteration of the product.

It is up to the founders and board members to meticulously design Growth Metrics for a corporation. I’d love to hear what the best ideas are from various founders.

2. Investment Firms (Venture Capital)

We can carry that same story to investment companies. The industry measure in many cases is to look at the Asset Under Management or AUM of a firm. In other cases, it is looking at the financial returns of the last X years.

That’s all fine, but we also say in the industry:

Past performance does not predict future results.

What does predict future results is a mix of Growth Metrics including the high quality of the investment professionals at the firm, the relationships that the firm has, the attitude and investment process, the ability to attract more talented and dedicated teammates to the firm. In the venture capital world, the ability to add value to entrepreneurs is a critical Growth Metrics that won’t be reflected in financial returns or assets under management for many years into the future.

3. Life

When I was in college, I aspired for things like earning a lot of money or being in a certain station in life.

I no longer do.

Today, I optimize for Growth Metrics — am I becoming a more disciplined person over time? Am I becoming a better teammate for the people I work with over time? Am I helping to grow the team either by attracting new people or by supporting current colleagues? Am I becoming a more and more helpful person in the broader Silicon Valley ecosystem? One tangible metric is how often and how quickly you can provide a value-add introduction when you meet with someone? Am I able to help almost every founder and investor that I meet with in some way? How much could I help them?

These are the Growth Metrics that will naturally drive the end results.

In Conclusion

Certainly, Andy Grove speaks the truth, measuring allows an intelligent way to manage one’s company and life. Yet, to stay relevant and thrive in a dynamic world, I argue that we need to measure the slightly more vague set of Growth Metrics rather than optimize for Death Metrics. This is true for an operating company, an investment firm, and for life in general.

Market Update

Week ending October 9, 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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