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from A Round to Apple Inc.
General Commentary
Feb. 7, 2016

The Race to an Unknown Space

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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

Lots of companies don’t succeed over time. What do they fundamentally do wrong? They usually miss the future.

— LARRY PAGE, CEO, ALPHABET (GOOGLE)

An iPhone belongs in your pocket, not on the road.

— Oliver Blume, CEO, Porsche

This week, Alphabet — the artist formally known as Google — temporarily surpassed Apple to become the most valuable company in the World. (Disclosure: GSV owns shares in Alphabet and Apple)

While Apple retook the mantle after broad market declines on Friday, Alphabet’s brief ascendence cast a fresh light on the race to become the first trillion dollar market value business. The four horses in the race are Amazon, Apple, Facebook and Alphabet. (Disclosure: GSV owns shares in Amazon and Facebook)

The favorite to reach $1 trillion has been Apple for some time, as its market value exceeded $700 billion in 2015. After the way too early passing of Steve Jobs, Apple has struggled to regain its MOJO with a series of ho-hum product introductions, from the Apple Watch to Apple Music.

In recent years, Alphabet has gained some real traction with bets on YouTube, Nest, and Android all producing dominant services in their respective areas. Amazon, powered by Amazon Web Services (AWS), has continued to surge. Estimated to be worth over $160 billion, AWS entered 2016 with customers in 190 out of 196 countries — just about every corner of the World.

THE RACE TO A TRILLION

In 2013, we wrote about the “Race to a Trillion”, adding Facebook to the mix as a dark horse candidate. With a $119 billion market cap at the time, “long shot” sounded like an understatement to many (Disclosure: GSV owns shares in Facebook):

Facebook with a market cap of $119 billion is definitely the underdog of the Big Four to reach $1 trillion first, and with just $7 billion in sales and a rich price-to-sales of 17.5x and 67x price-to-earnings, tough to see FB getting to a $1 trillion on multiple expansion. That said, as the World’s communication and collaboration platform, the leverage to its model is enormous and while it’s a long way back in the pack — it has the opportunity to grow at the highest rate for the longest time, in my opinion. So, if it could grow its revenues at its historic 100% growth and keep the current valuation ratio, it would reach the $1 trillion club by 2017… unlikely but not beyond the realm of possibilities.

Coming from way back, Facebook is starting to look like it might make it to the trillion dollar finish line first. It has been propelled by a monster network of nearly 2 billion people and the home runs Zuck has hit with high risk venture bets in Instagram, WhatsApp, and Oculus.

Mark Zuckerberg, VC
Key Facebook Acquisitions

Source: Facebook, GSV Asset Management

Today, Facebook has a market value of $296 billion and a P/E of 25.3x. But it is growing earnings at over 40% per year. Hold P/E constant and assume growth of 40%, and Facebook will hit the trillion dollar mark in the Summer of 2019. But it will be a photo finish with Alphabet, which would cross the line near the end of the year.

RACE TO $1 TRILLION

Source: Capital IQ, GSV Asset Management
*GSV Estimate

THE AGE OF EXPONENTIAL IDEAS

The Race to a Trillion underscores a broader point. We have entered an age of exponential ideas. “Linear” businesses are going extinct.

Why does Green carmaker Tesla trade at 18x the 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.

Tesla’s Battery Outpaces the Competition
Drivable Miles on a Single Battery Charge by Car Brand

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.

In early January, the company announced a $500 million investment in the ride sharing platform Lyft and laid out plans to develop a network of on-demand self-driving cars. A week later, it announced the acquisition of the ride sharing service Sidecar. As millennials continue to opt for cars on demand as opposed to cars in the garage, GM is scrambling to catch up with the future (Disclosure: GSV owns shares in Lyft).

The catalyst behind the technology that powers Tesla and powerful digital marketplaces like Lyft has been Moore’s Law.

In 1965, Gordon Moore predicted that the number of transistors on an integrated circuit would double every two years. The effect of “Moore’s Law” is that computing power has doubled (or, costs have been halved) every two years for the past 50 years. If the automobile industry would have had its own Moore’s Law, a Ford Taurus that cost $20,000 in 1990 would essentially be free and you’d throw it away after you drove it.

New Technology Fundamentals: Rapidly Declining Costs
Cost of Computing, Bandwidth, and Data Storage, 2000 vs. 2014

Source: Deloitte

Interestingly, while Moore’s Law has been the foundation and catalyst behind the Technology Revolution, it’s not a physical or natural law… it is a conjecture. In other words, the “Law” that has transformed computing and society was really more of a vision of what could become. It was a force of will. Nonetheless, the belief in Moore’s Law has enabled engineers and technologists to imagine a World where you could have a computer in your pocket, self-driving cars, and personalized medicine.

We are riding powerful tailwinds that are rapidly transforming the World as we know it. In 2000, there were only 370 million people on the Internet (roughly 5% of the World’s population), no one had heard of a smartphone yet, broadband was a fantasy, and applications off of a platform had not been invented.

Today, the “digital tracks” have been laid, with three billion people on the Internet, over two billion smartphones in the hands of Digital Natives, and 140 billion Apps having been downloaded from Apple and Google.

The Digital Tracks Have Been Laid

Source: Gartner, Nielsen, A.T. Kearney, eMarketer, KPCB, GSV Asset Management

Digital Tracks have ushered in Digital Disruption as new technologies upend Old World business models and ideas. While digitization dramatically increased the quantity and convenience of photography, for example, it also completely redefined the economics.

Smartphones made everyone a photographer and Instagram rode this trend in 2010 to cultivate a network of 200 million people uploading 60 million photos per day. Just a year after its founding, the company was sold to Facebook for over $1 billion. Instagram had 15 employees at the time.

Rise of Smartphone Photography
St. Peter’s Square, Rome, 2005 vs. 2015

Contrast these figures with pre-digital age giant Kodak — synonymous with photography — which at one point employed 145,000. Ironically and tragically, 132 years after its founding, and at the inflection point of the photography boom, it went out of business. Facebook acquired Instagram just months later.

Uber, the fastest growing company in the history of the World and the fastest new verb, has achieved a $62 billion valuation just six years after its founding in 2009. While this screams “bubble” to some — in our way of thinking, it screams the question of where else value can be created that quickly. Essentially, Uber was built on three new technology fundamentals: ubiquitous mobile devices, hyper connectivity, and cheap computing with unlimited storage.

As is too often the case, the “early bird gets the turd.” Carey International was Uber before Travis Kalanick was born. Listed on NASDAQ in what seems like a century ago, (full disclosure: I was a research analyst covering it) Carey created a black car network spanning 1,000 cities around the globe.

Effectively it was a brand, an “800” number, and a scheduling service. Sound familiar?

Uber doesn’t own any of the cars in its network. The drivers are independent. Carey should have been Uber, but they lacked the imagination to see the impact that smartphones could have on their business. Carey launched its first app in 2014.

We’re seeing the same dynamics play out across a variety of industries, whether it’s Dropbox emerging as a disruptive force in file storage and collaboration, or Airbnb upending the hotel industry with a network of 60 million travelers in 34,000 cities across 190 countries. (Disclosure: GSV owns shares in Dropbox)

Billion Dollar Babies

Source: Yahoo Finance, GSV Asset Management

Ironically, in a week where Google — a company that has set a gold standard for corporate innovation — briefly became the World’s most valuable business, Oliver Blume, the CEO of automaker, Porsche, offered the following response to a question about his company’s plans to develop self-driving cars: “An iPhone belongs in your pocket, not on the road.”

But in an age of exponential ideas, an iPhone does belong on the road. Cars are computers. Google gets it, and they’re reimagining the future by pushing the boundaries for self-driving cars. Apple gets it too.

Porsche was once a flagship for innovation excellence, hailing from a country that prides itself on superior engineering. But the rules have changed. Linear ideas are going nowhere, fast.

Bubblin'

by Luben Pampoulov

Watch And Be Seen

When George Orwell wrote the classic novel 1984, he predicted that all humans will be constantly monitored by the higher authority — implying a totalitarian regime for the future. Orwell wrote the book back in 1949, and a movie was later released in 1984. Most famously, Apple used the 1984 concept for its Macintosh commercial that aired during the Super Bowl halftime in 1984. That commercial is broadly viewed as Apple’s most iconic of all times. (Disclosure: GSV owns shares in Apple)

Fast forward to 2016, and it is interesting to observe that we humans have indeed moved towards an era of 24-hour “monitoring.” If Orwell was alive, he would have been somewhat surprised to see that, but he would have been even more surprised to realize that we (led by the Millennial generation) are voluntarily exposing ourselves to society, rather then being monitored by some higher authority. The rise of social media, led by Facebook, has created a World in which everyone wants to be seen by everyone. (Disclosure: GSV owns shares in Facebook)

And now there is a new trend emerging… Remember the movie EDtv with Matthew McConaughey and Woody Harrelson? The movie, which came out in 1999, was a live TV show, showing a normal person’s life 24/7. A camera team was “glued” to the star of the show, played by Matthew McConaughey, and captured every moment of his day.

There is a new social media platform that exposes our lives to everyone, throughout the day. Its only difference to EDtv — there are no TV crews around, and all the capturing is done by users, with their phones. Snapchat is evolving as a modern version of EDtv, allowing everyone to be a star in their own reality show. 

Snapchat’s “My Story” function was first introduced in October 2013, and it has catapulted itself to be one of the most powerful and most popular tools in social media today. Its functionality? My Story strings Snaps (pictures and videos) together to create a narrative that lasts for 24 hours. That narrative is visible to everyone who follows you on Snapchat (see intro video).

Stories have become Snapchat’s powerful engagement engine and have been the key driver to the 7 billion daily video views its ~200 million monthly active users are watching. As a comparison, Facebook’s 1.6 billion MAUs are watching just slightly more, at 8 billion videos per day. So on a per user basis, Snapchatters are leading with ~35 video views per day versus Facebookers ~5 video views per day.

Source: News reports, Facebook, GSV estimate

What’s really impressive is that over recent months, a huge number of celebrities have joined Snapchat and have become power suppliers to the My Story section — displaying their daily lives, all the time, on the go, to everyone who follows them. Followers can see them from a very personal side, something that no other social media platform has been able to display. To Snapchat’s big credit, they have done an incredible job on getting the most important young celebrities to join Snapchat and to generate content on a daily basis. And that list is growing by the day…

Obviously, this new trend is driven by the activity of younger pop celebrities including Ariana Grande (moonlightbae), Pia Mia (princesspiamia), Zendaya (zendaya_96), etc., but surprisingly the likes of Arnold Schwarzenegger (ArnoldSchnitzel — really fun to watch) or the White House (WhiteHouse) have joined too. The majority of Snapchat users fall in the 12-25 year-old demographic, but its rapid expansion is quickly spilling over to older age groups.

While the My Story feature does not have monetization (the Discover section does), it drives user growth and strong engagement. On one hand, users have strong incentives to check in multiple times per day, in kids’ cases it’s often multiple times per hour, and on the other hand they also want to create content and to display their own activities to their friends.

We believe that Snapchat is emerging as a very powerful social media platform, and its management is showing strong efforts of innovation and creativity. 

Growing List of Celebrities on Snapchat

Source: Celebrityusernames

Pioneer Notes

by Li Jiang

The Magic of Silicon Valley

As I stepped into the shower of the Airbnb that I was staying at and reached to turn on the water, I noticed something peculiar. There was a dial with the exact temperature option. Forty one degrees celsius, I decided on a whim, let’s try that.

Not only is everything in Tokyo precisely measurable, every facet of life is perfectly rational and structured. The trains come on time, the bus fares are calculated by the exact number of stops you are traveling, and food comes in well-manicured portions that fit neatly into the meal trays that are themselves divided into nice small sections.

From the 1960s to 1980s, Japan grew to become the second largest gross national producer in the world behind just the United States and was at the top of the world on a per capita basis, surpassing even the U.S. They were poised to speed right past every other nation not only in economic output, but technological progress and civic achievement.

And then, they didn’t. Growth stalled in the 1990s, leading many to deem it the country’s “Lost Decade”.

What happened? While the meteoric rise and relatively plateauing of Japan was complex, the story can be boiled down to the fact that the country lost its innovation edge.

The same story can be repeated in a number of the key nations in the European Union who are struggling to find growth today. Much of the United States is in a similar position. Jobs have been either outsourced or replaced by software. The affected population are either doing unfulfilling contractor jobs or more likely at a Donald Trump rally, channeling their frustration into brain-dead war cries, blaming anyone else (immigrants, liberals, China, etc.) besides themselves for their plight.

One place that has been able to stay above the fray? Silicon Valley. The people of Silicon Valley often sound and act like they are in their own bubble, mostly because, they are. Silicon Valley is by far the best example in the world where there is still invention and innovation driven growth.

The world has come to realize that 19th Century style industrialization can only take us so far and that the real way forward is invention created economic growth.

What enables Silicon Valley to continue to fuel growth is its unique culture. The “secret” of Silicon Valley is actually not all that mysterious. It is the people and the mentality formed around those people that make it all work as the epicenter of the creation of new product and services.

Instead of believing the world to be zero-sum, people operating in Silicon Valley generally believe the world to be positive-sum. Here’s an easy example to illustrate what they means.

Zero-sum: if I have an apple and I give you that apple, you have an apple and I have nothing.
Positive-sum: if I have an idea and I give you that idea, now you and I both have that idea.

Most of the world treats ideas as zero-sum, because we’ve evolved in a world where physical goods are indeed zero-sum. If I have a product and I give that to you, then I no longer have that product.

But ideas don’t work the way physical goods do. They become more valuable when shared, discussed and recombined into new ideas. And no one loses an idea by sharing it.

This isn’t an attempt to analyze why a particular country, in this case Japan, stopped growing but a higher exploration of what makes Silicon Valley and the network of global innovation spots that we call Global Silicon Valley function.

The default for most companies is to have departments and sub-tribes of people where they are trapped in zero-sum thinking and are primarily trying to better their own sub-group. The perception is to keep ideas to yourself so that you can take credit for it and benefit by having more resources allocated to your department.

What most companies can’t do, Silicon Valley can do even across different companies and different venture capital firms. The fluid movement of employees amongst different companies helps grease the wheels for an open idea sharing culture.

It’s not the coffee shops that matter, it’s the ideas exchanged inside them that drives new products and services from this small physical space on the map between San Francisco and San Jose.

In order to even have a chance at replicating the success of Silicon Valley, global organizations must adopt the positive-sum mindset and learn that give away an idea is radically different than giving away a physical resource. Only then will they become capable of the experimentation and collaboration necessary to bring breakthrough ideas to life. 

Market Update

Week ending Feb. 7, 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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