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Sustainability
August 14, 2016

Sustainability Squared?

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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

The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.

— BERNARD SHAW

Great spirits have always encountered violent opposition from mediocre minds. 

— Albert Einstein

Sometimes, it’s easier to describe what something is by giving an example of what it’s not. To wit, you might define what being “patriotic” is by using a vibrant illustration of something “unpatriotic”, such as burning a flag.

“Sustainability” is a concept that may be understood more crisply by showing what it is not.

It’s “unsustainable” to get three hours sleep a night and be a brain surgeon. It’s “unsustainable” to eat a quart of ice cream every day and be healthy. It’s “unsustainable” to be a habitual liar and have a good reputation.

Similarly, it is “unsustainable” to use finite, dirty fossil fuel to power society. It’s “unsustainable” to produce garbage that can’t be disposed of in an environmentally- friendly way. By the same token, it’s also “unsustainable” to pay people differently for doing the same job, biased by gender or race. It’s “unsustainable” for an organization to articulate one set of values but live by another.

Sustainability is an important topic that will increasingly define business strategies across sectors, with the title of “Chief Sustainability Officer” emerging rapidly into the “C Suite”.

It’s no longer a question of whether you “Grow” or are “Green” — you need to do both. The 56+ million Millennials in the workforce today expect something more from both the companies they work for and the businesses they buy from. Corporations that fail to embrace “sustainability” do so at their own peril.

TESLA + SOLARCITY

With Tesla’s impending $2.6 billion acquisition of SolarCity, “Sustainability” has taken center stage. Many have questioned whether Elon Musk is flying too close to the Sun. He’s the CEO of Tesla and serves as the Chairman of SolarCity, a full-service solar energy provider run by his cousins. Musk is the largest shareholder in both companies. As, SolarCity has faltered in recent months — it has lost nearly half of its market value year- to-date — many have suggested that the deal is a bailout in a flimsy disguise.

But context matters. Elon Musk has laid out a bold vision for a vertically integrated company that will accelerate the World’s adoption of renewable energy — from solar panels to home batteries and electric cars. Musk, more than anyone else, has given wings to the idea that we can achieve a sustainable future, powered by the sun.

To say that Tesla’s proposed takeover of SolarCity is unprecedented would be an understatement. The ties between the companies run deep. Beyond Musk’s potential conflicts as a major shareholder, CEO, and Chairman, there are overlapping directors and family ties. His cousins, Lyndon and Peter Rive, serve as SolarCity’s CEO and CTO, respectively. Musk’s brother is a Tesla director.

FAMILIAR FACES: TESLA, SPACEX, SOLARCITY

Source: Wall Street Journal, GSV Asset Management

Even SpaceX, where Musk also serves as the CEO, figures into the story. Since March 2015, SpaceX has purchased over $225 million of SolarCity bonds as the company has struggled to raise funds in the face of rising costs and elusive profitability.

SolarCity has seen its market value halved over the past 12 months, dropping from $4.7 billion to $2.4 billion. Analysts have increasingly sounded the alarm about the company’s stalling growth in rooftop solar panel installations, despite an extension of U.S. tax credits for solar projects beyond 2016.

SOLARCITY’S PLUNGING MARKET VALUE
SolarCity Market Cap ($B), Trailing Twelve Months

Source: Capital IQ

Despite suggestions that Tesla is saving SolarCity by bolting it onto the automaker’s buoyant stock, Elon Musk has argued that the deal represents a critical opportunity for Tesla to create a one-stop clean energy shop, offering consumers solar panels, home battery storage and electric cars under a single trusted brand. To this end, he has outlined two core arguments for the acquisition.

ACCELERATING SUSTAINABLE SOLUTIONS

Musk’s first argument for the deal is that it will accelerate the emergence of a World powered by sustainable energy. As he recently observed on a conference call with analysts to discuss the deal, “It’s really all part of solving the sustainable energy problem… That’s why we are all doing this, to accelerate the advent of a sustainable energy world.”

While it might be impossible for anyone not named Jeff Bezos, Steve Jobs, or Elon Musk to make this type of broad argument for a major acquisition, his sense of urgency isn’t misplaced.

The International Energy Agency projects that global energy demand will grow 37% by 2040. This additional demand is equivalent to the total current annual consumption of the United States and European members of the OECD combined. China and India alone are expected to account for over half of the total increase.

While global population growth will naturally drive demand, demographic changes are accelerating it. According to the Organization for Economic Cooperation and Development (OECD), the world is in the first inning of a demographic transformation that will result in the rise of a Global “Middle Class” numbering more than 4.9 billion people, ascending predominantly from the low income populations of the world’s developing and emerging economies. Defined as households that spend between $10 and $100 per day, the Middle Class is a cohort of CONSUMERS.

SIZE OF GLOBAL “MIDDLE CLASS” POPULATION
OECD Projections for the Rise of the Global Middle Class

Source: OECD

The world has never witnessed income growth at this speed or magnitude. China and India, for example, are doubling their real per capita incomes at 10 times the pace England achieved during the Industrial Revolution and 200 times the scale.

And the American way of life — house(s), car(s), comforts — have become the world’s gold standard for quality of life. William Faulkner, who served as a cultural ambassador for the State Department during the Cold War, remarked that if we simply gave people a used car and a TV, they would understand the benefits of the American model.

Unfortunately, the Earth cannot sustain carbon copies of America. Today, we are already using 1.5 planets worth of resources to meet global consumption demands (it takes 1.5 years to replenish the resources we consume in a year). We will need another half of a planet to simply sustain the next generation.

But this assumes that the new global Middle Class will follow the consumption patterns of their low-income parents. I wouldn’t bet on that.

According to a recent study by the University of Michigan, for example, if India, China and Indonesia were to use air conditioners at the same rate as the United States (they are on pace to do so), energy consumption in those countries would be 50x levels in the United States.

AIR CONDITIONER DEMAND IN THE DEVELOPING WORLD

Source: New York Times

Beyond resource constraints, the implied CO2 emissions of meeting this demand by burning fossil fuels is untenable. Bill Gates lays out these constraints in a succinct equation:

Beyond resource constraints, the implied CO2 emissions of meeting this demand by burning fossil fuels is untenable. Bill Gates lays out these constraints in a succinct equation:

GATES CLIMATE EQUATION

Curbing population growth (“P”) and meaningfully limiting the goods and services consumed per person (“S”) is a losing proposition. Limiting the energy required to produce goods and services (“E”) and the C02 per unit of energy produced (“C”) is the only viable path forward.

It is up to Tesla shareholders to evaluate if the deal will meaningfully reduce the “E” and “C” in the Gates Climate Equation — and whether this justifies the deal in the first place.

“DISTRIBUTED” RENEWABLE ENERGY PLATFORM

In his master plan for Tesla, Elon Musk outlines a second key reason for the transaction. His vision for Tesla, which extends far beyond cars, is to create an integrated solar-roof- with-battery product that empowers the individual as their own “utility”.

In the current system, there is little opportunity or incentive to improve efficiency or conserve energy. Our electricity grid is predominantly fed by utilities that make more money by adding power plants and customers because rates are based on capital expenditures.

Like mobile phones before the rise of the smartphone, the electricity grid is “dumb”. Effectively, the grid can only distribute power from a central location, making it prone to massive outages. It cannot efficiently adapt to fluctuations in customer demand, instead keeping massive amounts of reserve power online, leading to tremendous energy waste.

OLD ENERGY MANAGEMENT

The ability to generate and store power off the grid enables the creation of a “smart” system. Increasingly, “Apps” and connected devices will empower consumers and businesses to optimize energy use. A “distributed” system that increasingly relies on the energy creation and storage capacity of individual homes and small businesses represents a true paradigm shift. It would enable a more nimble, fundamentally resilient energy network built on renewables.

SolarCity’s DemandLogic platform, for example, enables businesses in markets where energy rates fluctuate during the day to draw down stored solar energy during times of peak demand and cost. They can toggle back to grid power during the morning and evening when energy demand and rates fall. As more utilities and regulators adopt dynamic pricing, consumer offerings that combine storage and off-grid energy production will thrive.

NEW ENERGY MANAGEMENT

Source: SolarCity

In theory, SolarCity’s solar panel and energy management capability aligns directly with Tesla’s $5 billion investment in its massive Nevada Gigafactory, which is projected to produce 150 GWH of lithium ion batteries by 2018. For context, the entire global production of lithium ion batteries in 2014 was 53.3 GWH. The batteries will not only power the cars Tesla produces, but they will also be packaged and sold for home energy storage.

TESLA’s GIGAFACTORY WILL TRIPLE GLOBAL LITHIUM ION BATTERY PRODUCTION

Source: Visual Capitalist, Tesla Disclosures, GSV Asset Management

As a preview of things to come, in 2015, SolarCity announced that it would incorporate the new Tesla battery into its enterprise and retail offerings. It was a first step towards providing a turnkey solution for customers to create an “off the grid” power system that stores energy generated by SolarCity solar panels, using stored electricity to reduce peak demand and to provide backup power during grid outages.

TESLA BATTERY + SOLAR POWER
Home Installation of Tesla Battery, Powered by Rooftop Solar Cells installed by Solar City

Source: Associated Press

According to Bloomberg, customers can prepay $5,000 for a nine-year lease on a 10 kilowatt-hour system. Customers can also buy the entire system for $7,000.

Tesla and Solar City are projecting to cut about $150 million in costs through the transaction in the first full year after the deal closes. They expect customers to benefit through lower hardware and installation costs, and they plan to use Tesla’s 190 stores to expand SolarCity’s reach. Ultimately, the devil is in the details and Tesla will need to demonstrate why acquiring Solar City is more effective than an expanded strategic partnership.

Battery Challenge

In recent years, the accelerating adoption of solar energy has intensified a central challenge: how to use the sun’s energy when it isn’t shining. The technology to generate renewable energy has leapt far ahead of the capacity to store and deploy it. An exponential breakthrough in battery capacity and cost would bulldoze limitations to adopting renewable energy on a massive scale.

WHAT’S NEXT IN BATTERY TECHNOLOGY

Source: Bloomberg

Compared with breakthrough technologies like the computer processor, batteries have progressed remarkably slowly. Moore’s Law gives us twice the amount of transistors every two years, but Bloomberg estimates that battery performance is improving at no more than 7% per year.

The first battery was invented in 1800 by Alessandro Volta, and in 1859, Gaston Planté invented the lead-acid battery, which is now ubiquitous in gasoline-powered cars. It took until 1991 for Sony to produce the first commercial lithium-ion battery and little has changed since.

While a variety of researchers and entrepreneurs are ramping up efforts to produce alternative technologies, Tesla is is doubling down on its bid to produce on lithium-ion batteries through economies of scale.

SUPERSIZE: TESLA GIGAFACTORY

Source: Visual Capitalist, Tesla Disclosures, GSV Asset Management

RUSH FOR RAW MATERIALS
Tesla Will Need to Create Global Supply Chain for the Extraordinary Amount of Natural Resources Its Batteries Will Consume

Source: Visual Capitalist, GSV Asset Management

BROADER TAKEAWAYS

Belief in the Electrification of Transportation

The anticipated approval of Tesla’s acquisition of SolarCity (as well as the resilience of its stock) despite murky details underscores a massive belief in the electrification of transportation.

Why does Tesla trade at 23x P/E of General Motors?

Because a Tesla now gives you the ability to drive 270 miles and you can recharge your car in the time it takes to grab lunch. If Teslas only went 40 miles, the company would be dead in the water. Add in the fact that Teslas are effectively computers on wheels (with hands- free mode they drive themselves) and stylish to boot, and you have a game-changing product.

General Motors, in contrast, spends over $7.2 billion per year on R&D, and the net result has been the Cadillac ELR, which will take you 35 miles on a charge.

TESLA’S BATTERY OUTPACES THE COMPETITION
Drivable Miles on a Single Battery Charge by Car Brand

Source: Company Disclosures, GSV Asset Management

Tesla aims to sell 500,000 cars in 2018. If it hits the mark, it will be a major milestone for the electric vehicle (EV) market. To put that number in perspective, the total sales (all- time) for the three most popular EV models (Leaf, Volt, Model S) add up to an estimated 404,000 cars as of December 2015.

TESLA PLANS TO SELL 500,000 CARS IN 2018
There Have Been 404,000 Electric Cars Sold by the Top 3 Suppliers ALL-TIME through 2015

Source: Visual Capitalist, Company Disclosures, GSV Asset Management

Tesla is still a relatively small auto manufacturer, but if it meets its stated production goal of 500,000 vehicles in 2018, it will be comparable with brands like Chrysler, Land Rover, Isuzu, Volvo, and Lexus.

PRODUCING 500,000 CARS WILL PUT TESLA ON PAR WITH MAJOR AUTO BRANDS
Units Sold by Auto Brand (2015) vs. Tesla Projected Sales (2018)

Source: Visual Capitalist, Company Disclosures, GSV Asset Management

“Clean”, “Distributed” Energy at “Grid Parity” = Massive Opportunity

Distributed, renewable, baseload (not intermittent) power at grid parity is a revolution waiting to happen. To put this opportunity in perspective, consider that the entire e- commerce industry is Global e-commerce sales are projected to reach $2 trillion in 2016, rising to $3.6 trillion over the next three years. The International Energy Agency estimates that for the World to meet global energy demand for the two decades from 2015 to 2035, it will require investment of at least $48 trillion

GLOBAL ENERGY CONSUMPTION BY SOURCE

Source: International Energy Agency (IEA)

The shift to a sustainable energy future may be upon us.

The United States, for example, has seen two complete energy generation shifts, each lasting roughly 50 years. The first major shift was from wood to coal. From 1875 to 1925, wood dropped from 66% of U.S. energy consumption to under 7%.

IS THE U.S. POISED FOR A MASSIVE ENERGY SHIFT TO RENEWABLES?
Percentage of U.S. Energy Consumption by Source, 1875-2015

Source: EIA Annual Energy Review, Dr. Stefan Heck (4/1 Presentation: Driving Growth with Big Ideas — Private Capital and Global Innovation)

From 1925 to 1975, a similar transition occurred. This time, coal dropped from 66% of energy consumption to 17%. At the same time, oil and gas soared to over 75%. While they have dropped moderately to 60% of energy consumption over the last 40 years, the fundamentals are in place for an accelerated decline led by a rise in viable renewable energy alternatives. Companies like Tesla and SolarCity are at the vanguard.

The “Big Three” — the Dow, S&P 500, and NASDAQ — all reached new all-time highs last week, albeit with modest gains. NASDAQ and the Dow both inched up 0.2%, while the S&P 500 was just barely above being flat.

World Indices

Source: Yahoo Finance, GSViQ

Solar stocks, which are visible members of the Sustainability family, had a tough week, epitomized by SunPower’s 28% decline. Weak industrial demand caused both SunPower and SolarCity to reduce their outlook and expectations. In the long term, we are BULLISH on solar as a sustainable power source because when the Sun runs out of energy, we have bigger problems to worry about.

Despite broad skepticism about the Middle Kingdom, Chinese Internet leaders Alibaba and JD.com reported monster numbers. Alibaba’s revenue accelerated to 59% growth and JD.com delivered 42% revenue growth for the quarter. Alibaba’s and JD.com’s stocks responded in kind, moving up 16% and 13%, respectively.

In other tech news, Nvidia put up 24% revenue growth and 700% EPS growth. Twilio reported its first quarter as a public company and blew out its numbers, achieving 70% revenue growth. Its stock moving up 28%.

Interestingly, Big Box retailers Macy’s, Kohl’s, Nordstrom, and JC Penny reported mixed- to-ugly results, but their stocks surged 16%, 14%, 18%, and 12%, respectively.

We continue to see the action in stocks as being very BULLISH for the best growth companies, which is confirmed by strong fundamentals. Accordingly, we remain optimistic as long term growth investors.

Bubblin'

by Luben Pampoulov

Boosters Platforms

When iTunes became a platform, it boosted thousands of apps-companies to come to life and thrive. Think Lyft, Uber, Instagram, Whatsapp — they were all created because of the iTunes platform. In a recent interview, Apple’s Eddie Cue emphasized how “it’s awesome that Travis and his team have done Uber on our platform. It would not exist without our platform, let’s be clear.”

Similarly, when Facebook expanded outside of just being a college network, it evolved to a major platform for games, gifts, groups, etc. Most famously, with Facebook’s rise, gaming startup Zynga became a $9+ billion company in just a few years — a short-lived success that quickly turned south.

Google and Tencent are similar examples of powerful platforms that carry leaders and winners.

One of the newest such Platform is Snapchat. Because of its disruptive approach and the way it is defining modern self-broadcasting, Snapchat has attracted millions of eyeballs (over 150 million on a daily basis according to Bloomberg) and billions of dollars. (Disclosure: GSV owns shares in Snapchat).

Last year, Snapchat launched Discover — a media channel within the app. On Discover, users can read and view daily curated content by some of the leading media brands including CNN, ESPN, National Geographic, Cosmopolitan, BuzzFeed, Vice, and a handful others.

One of Discover’s media brands is Refinery29 — a 10+ years-old, NY-based media company focused on modern women. Refinery29’s content centers around fashion, beauty, health and the stylish lifestyle in general. Its Co-CEO Philippe von Borries recently mentioned that Refiner29 has 25 million users and reaches an additional 125 million when counting the exposure from Snapchat and Facebook. Von Berries also mentioned that they target to generate more than $100 million in revenue this year, all of which coming from advertising.

I expect that engagement rates are strong and are experiencing positive impact from the Snapchat platform. Snapchat itself has one of the highest engagement rates among media companies, with time spent per user in the 30 minutes levels.

Last week, Refinery29 raised its Series E round of $45 million from Time Warner’s Turner, which also owns CNN, Cartoon Network, and Bleacher Report. The round values Refinery29 at $500 million and included participation from existing investor Scripps Networks.

The new round values Refinery29 at $20 per unique user, and assuming they hit their $100 million revenue target this year, it would yield a $4 ARPU. 

Pioneer Notes

by Li Jiang

How to Build Many Silicon Valleys Around the World

When I wrote this, I did not expect to come across an article that would dramatically alter this essay. But that is exactly what happened when I landed on Medium and read “Silicon Valley’s Unchecked Arrogance”.

There’s a lot of truth in what Ross Baird and Lenny Mendonca wrote. Some people in Silicon Valley do believe we are the center of the innovation world. While the argument in the article was compelling, the solution was unsatisfying.

My thesis, which forms the core of the essay I expected to write, is that we need to put the power of innovation into the hands of many more people around the world.

What Silicon Valley Is Not

Silicon Valley is a very unique place, but if you come to visit Silicon Valley for the first time, you will be confused. The buildings, stores and roads are like many other developed cities. Our Internet coverage isn’t even all that good if you are walking around Palo Alto, the birthplace of Stanford University, home to the first office of Paypal, Facebook, and countless startups.

So what explains the tremendous track record of companies being built in Silicon Valley?

The physical infrastructure of Silicon Valley is quite pedestrian. There are so many cities with better access to transportation, Internet, affordable housing, etc.

The real killer app of Silicon Valley is of course its people and the culture formed by those people. It’s not just raw technical and business talent that drives the innovation economy forward, its the pioneering attitude of creating a big company in the face of all odds.

Big Buildings, Bigger Problems

in 2009, Russia embarked on a massive $4 billion construction project called Skolkovo. It was to become a science park for 30,000 people to create new startups.

Yet, just a few years later, the entire project was instead featured as a warning not an example in “The Short Life and Speedy Death of Russia’s Silicon Valley”.

Skolkovo was plagued with political and cultural problems. Corruption, brain drain and the reassertion of Vladimir Putin all contributed to its rapid demise. In the end it became a massive, impressive and rather empty park.

Build Humans, Not Buildings

The way to build many Silicon Valleys around the world will look a lot less like Skolkovo and much more like Andela, led by Jeremy Johnson.

Andela trains talented and promising students on the Africa continent to become world class engineers. While these students are training and learning, they have the opportunity to work for large global technology companies who also pay for their services.

They also have the opportunity to work on their companies both in school and down the road, using the valuable skills and mindset they acquired at Andela.

The digital revolution may have begun in Silicon Valley, but its future will be written in cities across Africa.

Brilliance is evenly distributed; opportunity is not.

That is the way to solve problems that aren’t being solved by the very well to do Silicon Valley founders. We must bring more founders with different experiences into the global startup ecosystem.

Our collective mission, if we want to solve major global problems, is to distribute opportunity more broadly to every corner of the world.

Market Update

Week ending August 14, 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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