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from A Round to Apple Inc.
March 13, 2016

Slack Attack

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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

What has been will be again. What has been done will be done again. There is nothing new under the Sun.

— Ecclesiastes 1:9

Once you go Slack, you never go back.

— Li Jiang


The first time Slack CEO Stewart Butterfield dragged the Phoenix from the ashes was in 2004. Three years after a gambit to create Game Neverending, an ambitious online role-playing game that stalled out of the gates, Butterfield turned failure into Flickr.

Finding inspiration in a food-poisoning induced fever dream, Butterfield took a side feature from his elaborate video game and molded it into the popular photo hosting site, which he sold to Yahoo for over $20 million. But he had unfinished business.

Never Gonna Give You Up
Butterfield Accidentally Finds Two Hit Startups After Trying To Build A Game

Source: GSV Asset Management

In 2009, after a brief stint with Yahoo, Butterfield raised $17 million from Andreessen Horowitz, Accel, and LinkedIn CEO, Jeff Weiner to create Glitch — the resurrection of Game Neverending. After its launch in 2011, he recalls the game being described as “Monty Python crossed with Dr. Seuss on acid.” It shut down a year later.

Once again, Butterfield turned a “glitch” into gold, creating a wildly popular communication platform from an internal chat system his TEAM developed while designing the game. Slack launched in 2013 and it went viral overnight.

Source: Twitter

In the 24 hours after a private beta release, Slack signed up 8,000 users. Butterfield hasn’t looked back.

Just a year after its launch, investors valued the company at over $1 billion. It was pegged at $2.8 billion in April 2015, thanks to a fanatical, rapidly-growing customer base, which has skyrocketed from 500,000 daily active users to 2.3 million in just over 12 months. According to Business Insider and the Wall Street Journal, Slack is expected to close on a fresh $200 million financing in the coming weeks at a near $4 billion valuation, led by New York-based Thrive Capital.

STATE OF PLAY

The world is confronting a global epidemic of “Infobesity” fueled by a society that is Always On and plugged into an unending stream of information and communication.

Whether we go on a data diet, or simply figure out ways to use our amazing communication and information sharing tools without being consumed, Infobesity is emerging as one of the great challenges of our time.

Research suggests that the overload of information from social media, email and texting leads to frequent drops in IQ as high as 10 points — more than twice the impact of smoking marijuana found in comparable studies.

The impact of Infobesity is particularly evident in businesses, where teams are struggling to process and use vast quantities of information. According to studies from Bain & Company and Basex Research:

  • Two-thirds of managers report that tension with work colleagues and loss of job satisfaction arise due to stress from information overload.
  • One-third of managers suffer from ill health caused by information overload.
  • More than 50% of knowledge workers feel that the amount of information they are presented with on a daily basis is detrimental to getting their work done.
  • 30% of knowledge workers have no time at all for thought and reflection during their day, while 58% have only between 15 and 30 minutes.

Slack’s popularity stems from a simple value proposition. It helps people communicate and collaborate faster — and smarter. It is anti-Infobesity.

While its core is a highly intuitive messaging platform that connects individuals and groups, Slack is creating a Trojan Horse for a much broader offering. Its ambition is to become the hub at the center of the disparate tools people use share information and ideas.

Communication Convergence… All Roads Lead to Slack

Source: GSV Asset Management

A hundred years ago, the use of the telephone, carrier pigeon, town square gatherings, and newspapers led to the creation of disparate forms of communication. Now, people text or Snapchat with their friends. They instant message or email their co-workers. To see community events, they look to Facebook. To advertise to the masses, they’re pinned to Pinterest. No one expects to Snapchat their manager or use Pinterest to effectively communicate with their grandparent.

But Slack is a platform that defies those boundaries. It’s a business communication platform that NASA, the Wall Street Journal, and Harvard University uses. It’s a platform for the masses, with users creating and building specialized interest groups with thousands of members. Finally, families and even couples turn to Slack as a platform of communication.

Additionally, Slack isn’t simply creating a messaging tool. It is developing an ecosystem of high-value productivity applications to streamline how people access and process information. Slack’s “App Directory” — equivalent the iTunes App Store — offers more than 280 services that can be seamlessly integrated on demand.

SLACK ECOSYSTEM

Source: GSV Asset Management

By integrating a variety of popular productivity applications — including Dropbox, GitHub, Google Apps, and Zendesk — into a seamless communication stream, Slack creates powerful efficiencies and network effects. (Disclosure: GSV owns shares in Dropbox and Alphabet).

Rise of Slack
User Growth and Key Milestones Since Inception

Source: Slack, GSV Asset Management

Technology Leaders Take Notice

Gartner estimates that the enterprise market for “unified communication and collaboration” technology will surpass $42 billion in 2019. Until recently, efforts to streamline information exchange have largely been limited to legacy technology companies.

In 2007, IBM launched an enterprise social network called Beehive, which enabled employees to create and share personal profiles, organize events, and connect around shared projects. A decade earlier, it made broader waves with a $3.5 billion acquisition of Lotus Development Corporation, a pioneer in digital communication through its groundbreaking Notes platform.

Microsoft secured a spot in the Pantheon of Infobesity with the launch of Outlook in 1997. Later, it acquired the novel enterprise social network, Yammer, for $1.2 billion in 2012. In recent months, Microsoft mulled an $8 billion acquisition bid for Slack. Swayed by heavy skepticism from Bill Gates, it ultimately elected to invest in a deeper integration between its core business software and the messaging platform, Skype — a technology it acquired for $8.5 billion in 2011.

Elephants in the Room
Leading Technology Companies with Integrated Communication + Collaboration Platforms

Source: GSV Asset Management, TechCrunch, Company Disclosures

But Slack’s sudden ascendance has caught the attention of a new generation of technology leaders. Facebook recently unveiled Facebook at Work, a product aimed directly at the enterprise market that enables businesses to create dedicated social networks among their employees. It is being tested by nearly 300 companies, including the Royal Bank of Scotland and Club Med, which together have 25,000 employees using the service. More than 60,000 companies requested to join the beta test. (Disclosure: GSV owns shares in Facebook)

In late 2015, Alibaba announced the launch of DingTalk, an integrated communication platform targeting the 8.5 million small and medium-sized businesses that are active sellers on its e-commerce sites. It has over a million early adopters to date.

Communication + Collaboration Apps, Platforms

While Slack has grabbed headlines with meteoric user and valuation growth, a crop of new companies focused on smarter communication have emerged in recent years. Telegram, a free service that mimics core Slack features launched in 2013 and already counts over 100 million users.

Acquired by Atlasssian in 2012, Hipchat is a freemium service with striking similarities to Slack. On top of team messaging, Hipchat is also a mobile platform that offers third-party app integrations, voice and video calling, and file storage. Unlike Slack, Hipchat has built-in enterprise software capabilities, a product line that Slack is rolling out later in 2016.

Communication + Collaboration Apps: Messaging

Source: GSV Asset Management, CrunchBase, Wall Street Journal, QZ, Company Disclosures

Tencent’s WeChat, with 650 million users, announced that it will launch an enterprise service in 2016. WeChat Enterprise will offer integrated file sharing as part of a suite of utilities targeting corporate users.

At the same time, a broader range of consumer and enterprise productivity platforms are converging around this theme. Dropbox, for example, which just surpassed 500 million users and 150,000 business customers, is developing a virtual “workspace” to make it easier for people to communicate and work together on shared files.

Communication + Collaboration Apps: Platforms

Source: GSV Asset Management, CrunchBase, Wall Street Journal, Company Disclosures

Public Comps

With an upcoming financing at an expected $4B valuation, Slack remains priced for hyper-growth. Its $64 million revenue run rate translates into an eye popping 63x P/S. But the fundamentals are evolving quickly.

Select Social + Enterprise Public Comps

Valuation, Multiples, Performance
Source: Yahoo Finance, Capital IQ, Wall Street Journal, Slack, GSV Asset Management
*Since December 2015 IPO
**Projected Post-Money Valuation on a $200M Financing Expected to Close in March 2016, Led by Thrive Capital, as Reported by the Wall Street Journal and Business Insider

We anticipate enormous upside on Slack’s pricing. Currently the company’s Average Revenue Per User (ARPU) per month is $7.90. The ARPU/month should move closer to $20 as Slack continues to add new integrations and functionalities, and with expansion into larger business customers.

Of its 2.3 million daily active users, nearly 700,000 are paying customers — just two years after its launch. Slack is growing 3-5% per week — it is on pace to double its users every five months — with signs of acceleration as the brand becomes better known and network effects take hold. CEO Stewart Butterfield reports that 20% of Slack’s active users joined the platform in the last two months. On average, users spend over two hours using Slack per day.

THE POWER OF SLACK

Slack’s success reinforces the Silicon Valley adage that first isn’t always best… the early bird gets the turd. Facebook followed MySpace and Friendster. Google’s search engine followed Excite, Lycos, and AltaVista. Spotify continues to defy the naysayers who claimed that it would not overcome iTunes or survive the launch of Apple Music.

Unlike its predecessors, Slack was able to catch the wave of the powerful Mobile megatrend. In 2008, during the age of Skype, Yammer and HipChat, the average American spent 2.7 hours per day on digital media. By 2015, we spent 2.8 hours per day on smartphones alone — more time than we used to spend on desktops, laptops, mobile, and other connected devices combined.

The Rise of Mobile

Source: MIT Technology Review

More and more people are getting work done on mobile devices, collaborating with people halfway across the globe instantaneously. Slack, with it’s intuitively-designed, mobile first platform, creates a perception that staying in touch with co-workers is effortless.

Unlike other platforms, Slack’s core feature funnels messages into channels that everyone team member can see. This in turn creates an online “water-cooler” effect that allows people to overhear what else is going on in a company, which research has shown can enhance productivity, communication, and drive business impact.

Slack is winning with a better product that people love. It offers far more utility than basic messaging apps that are scrambling to catch up, and has a superior design than enterprise communication tools like Salesforce Chatter that have been buried in broader product suites.

Teams That Adopt Slack Report 32%+ Productivity Improvements 
July 2015 Slack Survey of Users (2.36 Margin of Error with 95% Confidence)

Source: Slack

According to a survey of its users, Slack adoption has resulted in a 49% reduction in email volume. Nearly 80% of users indicate that it improves transparency and office culture, while reducing the number of superfluous meetings by 24%. On average, users report productivity increases of more than 32%.

For Slack, the magic number is 2,000 messages. As Stewart Butterfield observed in a recent interview:

Based on experience of which companies stuck with us and which didn’t, we decided that any team that has exchanged 2,000 messages in its history has tried Slack — really tried it,” Butterfield says. “For a team around 50 people that means about 10 hours’ worth of messages. For a typical team of 10 people, that’s maybe a week’s worth of messages. But it hit us that, regardless of any other factor, after 2,000 messages, 93% of those customers are still using Slack today.

WHAT’S NEXT

Slack released a suite of new APIs designed to make it easier for developers to build new apps on top of Slack. The most intriguing of these is BotKit, an open-source framework for building automated services that users can access through conversational interfaces.

The aim is for Slack “bots” to increasingly automate the most tedious business interactions, from setting up meetings to expense reporting and recapping basic information to colleagues.

Birdly, a bot armed with advanced natural language processing capabilities, can automatically call up timely customer data directly within Slack from relationship management platforms like Salesforce and Zendesk.

The next frontier is the creation of SlackBots powered by Artificial Intelligence, particularly Machine Learning. Applications that observe and learn from patterns of communication and collaboration will be game-changers. They will escalate information that matters, when it matters. They will anticipate questions and problems and tee up answers and solutions.

Slack recently announced a partnership with a syndicate of leading venture capital firms — including Accel, Andreessen Horowitz, Index Ventures, Kleiner Perkins, and Spark Growth — to create an $80 million fund that will invest in software projects that complement its core technology. Since it’s inception, Slack invested in 3 companies, 2 of which create bots that are integrated on Slack’s core platform.

As for what’s next for the Slack platform, CEO Stewart Butterfield points Tencent’s WeChat as a model.

What’s interesting about WeChat is that its transformed from being a messaging app to becoming a portal, platform, and mobile operating system. A mobile-first platform, WeChat is a suite of apps that essentially integrates into the lives of its Chinese users. Users in China can access services that allow them to hail a taxi, pay the water bill, follow celebrity news, send money to friends and more … all in one app.

Essentially, WeChat combats Infobesity by converging daily aspects of life into one service. Slack aims to be the point of convergence for communication platforms.

A thousand years ago, all roads lead to Rome. Now, all roads lead to Slack? We may finally have a glimpse of life beyond the Age of Infobesity.

Stocks were up for the fourth week in a row, with NASDAQ advancing 0.7%, the S&P 500 moving up 1%, and the GSV 300 gaining 0.2%. The 10-Year Note yield moved up 11 bips to 1.98%.

World Indices

Source: Yahoo Finance, GSViQ

The European Central Bank cut its rate even further into negative territory and increased its monthly asset purchases. European bank stocks rallied for the week.

Apple and the Department of Justice continued to fight over the iPhone encryption case. The next court hearing is March 22nd, the day after Apple is expected to announce new products. (Disclosure: GSV owns shares in Apple)

We continue to be BULLISH on the outlook for growth stocks and believe valuations are attractive for many leaders. Global technology franchises such as Facebook, Twitter, and Alphabet sell at modest P/E’s versus their leadership positions and growth characteristics. (Disclosure: GSV owns shares in Facebook, Twitter, and Alphabet)

Bubblin'

by Luben Pampoulov

Oh, How Engaging!

The number 1, 2 and 3 most fundamental metric for any media business is the engagement power. Whether a TV channel, a radio station, a social media platform or a mobile app, if users keep on coming back and spend more time, you’ve got a winner. Else, it’s a flop.

In Social Media, Facebook has been the powerhouse over the last decade. Not only has it grown to reach 1.59 billion people around the World every month, but its daily active users are now at 1.04 billion — implying a very strong 65% DAU/MAU ratio. The standard DAU/MAU ratio is somewhere in the 20-40% range, with companies like Twitter, Pinterest, LinkedIn fitting in that range. (Disclosure: SGV wins shares in Facebook, Twitter)

WhatsApp, now the largest chat app in the World, disrupted the entire SMS/texting segment with just 55 employees, and when it was acquired by Facebook in February 2014, its DAU/MAU ratio was a stunning 70%! While most people thought the $22 billion acquisition offer was way overvalued, in hindsight it was actually “cheap.” WhatsApp now connects over 1 billion users around the globe, and is also disrupting the phone calling industry. With essentially all your contacts now on WhatsApp, why would anyone be using their carrier to call someone abroad?

Another one that appears to be jumping up high is Snapchat. The company has not even used the monthly active users metric when disclosing its size and instead only focuses on daily active users. Last year in May, CEO Evan Spiegel said that they were approaching the 100 million daily active user mark. 

More recently, Snapchat has been announced the amount of daily video views on its platform. That number shot up from 2 billion in May 2015, to 8 billion late last month. Facebook in comparison, reached the 8 billion daily video views mark in November 2015, but it did so with its massive 1 billion daily active users. This implies that Snapchatters watch somewhere between 6 to 10 times more videos every day than Facebookians. That’s certainly a strong sign for engagement for Snapchat.

Snapchat Daily Video Views (Billion)

Source: Company announcements and news reports

On the flip side, social media apps with lower engagement stats tend to only announce their registered user number, which can be somewhat misleading. One example that I can think of is Kik, which states it has 275 million registered users, up approximately 40% from the 200 million it had a year ago, but with unannounced monthly or daily active user numbers. Looking at my personal case as an example — I registered on Kik while I was in college in 2006, but I haven’t used the app for the last seven years… Given that Kik has been around for so long, the active users number (the relevant number) is likely significantly lower than the 275 million registered users it states on its website.

Skype is another example. Once the big disruptor of telecommunication, it has lost its mojo and relevance as other platforms have blown past it. While its registered user base reaches close to 1 billion, its monthly active user base was estimated at 330 million in May 2015, and its daily active users were just 80 million in January 2015…implying its DAU/MAU ratio was below 30%, and the ratio of daily active users to total registered users is maybe even in the single digits.

As we are focused on identifying and investing in the strongest businesses in the World, Engagement is the key metric we focus on in the New Media and Mobile space. 

Pioneer Notes

by Li Jiang

Good Morning America, Welcome To China’s Century

Steph Curry is good. Like historically good. Like video-game-cheat-code good.

To opposing team and fans alike, it must feel like Steph is playing a different game than the other nine players on the court. How else can you explain watching Steph shoot the ball from the center circle, 38 feet away from the basket, and hitting the bottom of the net. You are severely shocked when his shots from the other side of San Francisco Bay don’t go in.

In the game of economic competition and growth, China is playing a different game than the other 195 countries on the global stage.

Just a few years ago, the chorus was clear: China can’t innovate, China only makes copy cat products, China has IP problems, and so on.

While it will take tremendous efforts to correct the current challenges that the country faces, dramatic progress has been made.

There are 3 major ways in which China is winning on talent, innovation, economic growth and ultimately national competitiveness:

1. Speed

Speaking of playing a different game, China is moving at a speed that is unrivaled in most economies.

In a prescient article by Marius Luther, he describes the China tech scene in a nutshell and how much people are willing to work to get to their end goal:

“When working for themselves, the Chinese work 24 hours/7 days per week. When working for other visionary entrepreneurs, it is 10 hours/6 days per week (Xiaomi example). When working for others in general, it is 5 hours/5 days per week for the company AND 5 hours/5 days per week for their own ideas & projects.”

This is only one slice of the energy that is gripping the country. On a national level, China is putting resources into national transportation, building high speed rails that will cover 90% of the population by 2020. China’s infrastructure investments amount tops every other country in the world.

But China isn’t just going to stop there. They are literally shooting for the stars. The China space program, which not too long ago looked like the shadow of the Soviet program, is now soaring (or rocketing, whichever pun you prefer) ahead.

2. Strategy

Make no doubt, China is on a full court press to dominate multiple aspects of the global economy.

From 2005 to 2015, China spent over $1.2 trillion on investments and contracts. They spent another $273 billion on distress assets.

Of the $1.2 trillion spent on investments and construction contracts, most of that went towards energy, transportation, metals and real estate, as an observer of China would guess. But following closely behind is finance and technology, two areas of high growth and high profitability opportunities.

Source: The American Enterprise Institute and The Heritage Foundation

It’s no wonder Quartz wrote in late 2015 that China is building the most extensive global commercial-military empire in history.

For numerous developing countries around the world, China represents a majority of their foreign investments.

In Afghanistan for example, China plowed in roughly 80% of all foreign investments into the country. Similar stories can be said about Zimbabwe, Sierra Leone, and Ecuador. China is making big and long form investments in areas largely ignored by the economic establishment. Where the U.S. and Europe see problems, China sees opportunity. They are making contrarian bets and they should be right in the long term.

Talent is equally distributed around the world, opportunity is not. China is investing their way to level the opportunity field so that they can gain from the underutilized talent pool.

China also represents over 90% of North Korea’s foreign investments. Let’s hope they come to their senses and stop soon.

Source: NY Times

3. Stamina

Yes, there are empty ghost towns in China. And not just one or two, but hundreds by now. They are the results of aggressive over expansion.

China’s philosophy seems to align well with the typical startup and venture capital mentality: it doesn’t matter how many failures we have, as long as the successes are really huge. Except they are doing this on a national scale.

China is investing a record amount into technology startups, as evidenced by the chart below that shoots off the page.

Of course, there’s risk with this entire China experiment. The world has never seen a country of China’s size grow so fast and in so many different ways.

China is not only rewriting the rules of the game, but in many ways, they are playing a different game on their own court and on their own terms. When we wake up fully to this MEGATREND, China won’t just be a talented high school recruit, it will be re-writing the rules of the NBA, except in this analogy, it will have global consequences for every nation large and small, established and developing.

Stay tuned, closely.

Market Update

Week ending March 13, 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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