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Marketplaces
August 20, 2017

Thinking Inside the Box

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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

In the 1950s the world’s working ports looked a lot like they did in centuries past. Ships docked. Armies of longshoremen descended to unload cargo of all shapes and sizes crammed into the hold. Then they scrambled to squeeze in outbound cargo in a game of “maritime Tetris.”

The process was inefficient and expensive. Most ships spent more time tied up than in transit. And cargo had a way of mysteriously vanishing — especially whiskey. It wasn’t unusual for a third of a Scotch shipment to be lost to “breakage.”

But in 1937 an American trucking magnate named Malcom McLean had an idea that changed everything. He wagered that sorting and packing goods into uniform containers for shipment would make the process faster, safer and cheaper. Standard cargo units would make it more efficient to load ships, and they could be moved more quickly from truck, to train, to ship.

Twenty years later, McLean’s prototype container ship — a converted World War II tanker named Ideal X — sailed from the port of Newark, New Jersey to Houston, Texas with 58 containers on specially rigged decks. He calculated that it cost $0.16 per ton to load, compared with $5.83 per ton for loose cargo on a standard ship. “Containerization” was born. By 1983, 90% of countries had developed container ports.

OLD PORT, NEW PORT

Source: Cardiff University, GSV Asset Management

Containerization was more than a cost saver. It was a catalyst for global commerce. And as The Economist notes in “The humble Hero:” In 1965 dock labor could move only 1.7 tons per hour onto a cargo ship. Five years later a container crew could load 30 tons per hour. This allowed freight companies to use bigger ships while simultaneously slashing the time spent in port. The average cargo journey time fell by half.

Ports became bigger and their number smaller. More types of goods could be traded economically. Speed and reliability of shipping enabled just-in-time production, which in turn allowed firms to grow leaner and more responsive to markets as even distant suppliers could now provide wares quickly and on schedule. International supply chains also grew more intricate and inclusive. This helped accelerate industrialization in emerging economies such as China
— The Economist, “The Humble Hero”

Today, the global shipping and logistics industry is poised for a new wave of transformation as rapidly changing technology fundamentals and business models are creating opportunities “beyond the box.”

STATE OF PLAY

In a 2011 essay titled “Software is Eating The World,” Marc Andreessen argued that all companies, regardless of industry, will be eventually become “software” companies. The shipping, and logistics industry — a fragmented collection of service providers that has largely resisted technology innovation to date — is poised for a digital transformation.

Powerful new software platforms, data applications, and business models are streamlining how goods are shipped, tracked, and ultimately delivered to the consumer’s doorstep. Byzantine networks of intermediaries, legacy processes, and logistical obstacles are making way for streamlined, transparent services.

EMERGING FORCES OF INNOVATION AND TRANSFORMATION IN SUPPLY CHAINS, SHIPPING + LOGISTICS

Source: Company Disclosures, GSV Asset Management

Venture Capital investment activity in shipping and logistics technology startups has been accelerating since 2014, with annual funding more than doubling per year. According to CB Insights, over $10 billion has been invested in this period across more than 1,000 deals.

VC INVESTMENT ACTIVITY: SHIPPING & LOGISTICS TECHNOLOGY (2012 – 2016)

Source: CB Insights

A flurry of companies have launched with the aim of tackling inefficiencies across the supply chain. They primarily fall into three categories: Supply Chain Infrastructure, Freight Logistics, and Sensors + IoT. Two of the most well funded companies in the space are Infor and Alibaba-spinout Cainiao. They have raised $2.5 billion and $1.5 billion respectively to provide to provide e-commerce and supply chain logistics management services for companies that aren’t Amazon and Alibaba. San Jose-based Alien Technology has raised $455 million to create RFID sensors for manufacturers to tag and track cargo.

EMERGING COMPANIES: SUPPLY CHAIN, SHIPPING, LOGSITICS

Source: Crunchbase, GSV Asset Management
MOST ACTIVE INVESTORS IN LOGSITICS TECH
Ranking Based on Number of Investments Made in 2011-2016

Source: CB Insights

SV Angel, FundersClub, Kleiner Perkins, and NEA have been the most active venture investors in shipping and logistics startups over the last five years. Among strategic investors, UPS and FedEx have been the most active, accounting for nearly half of the deals done by major corporate investors in the space. UPS has focused its 20+ investments and acquisitions across the spectrum — from drones to e-commerce and trucking. Unlike UPS, FedEx’s deals have been mostly acquisitions, primarily focused on the third-party logistics and warehousing capabilities.

SMARTER GLOBAL FREIGHT

Today, 12% of Global GDP is allocated to logistics expenses and companies around the world spend $1.1 trillion on freight forwarding alone.

The concept of freight forwarding is simple. Any shipment weighing over 150 kilos is considered freight and getting it from origin to destination requires multiple handoffs on the land, sea or air. To optimize this process, freight forwarders provide the brokering services to get wholesale and retail customers the best shipping rates, owning relationships with truckers and shippers. Unfortunately, the hand off is done through people via phone calls, fax messages, and worse off, paper.

While technology innovation feels more and more like the Jetsons, freight forwarding looks a lot more like the Flintstones. The average age of the ten most valuable freight logistics companies is over 100-years-old. All of the key legacy players were founded well before the Internet Age and have built behemoths that rely on man power and technology-lite processes.

OLD GUARD OF THE FREIGHT INDUSTRY
Average Age of Ten Most Valuable Freight Logistics Companies Are 100+ Years Old

Source: S&P Capital IQ, GSV Asset Management
*Norfolk Southern was formed following a merger of Southern Railway and Norfolk & Western Railway, founded in 1894 and 1870 respectively.

Companies like Flexport are developing a digitized freight forwarding industry, effectively creating an operating system for global trade.

Companies go to Flexport to move freight from point A to point B, with specific rules and qualifications. Flexport then uses its software, built on a global database of shippers, to analyze all routes, rates, speeds and customs compliance requirements to determine the most optimal route for the shipment. It then digitally brokers the legs of the shipment with handlers and sends the shipment to its final location, providing tracking services every step of the way.

WORLD DOMINATION
Flexport Tracks the Movement of Global Freight in Real Time

Source: Flexport

What Flexport is ultimately doing is providing transparency to an industry that is typically a giant black box, an issue that Flexport CEO Ryan Petersen experienced first hand when he began his career by buying and selling goods from China. And by using digital technology and improving algorithms, Flexport’s routing decisions will be increasingly automated and smarter as more transaction data is captured. Founded in 2013, Flexport has raised $94 million from investors including Founders Fund, Bloomberg Beta, Felicis Ventures, and First Round Capital.

EMERGING GLOBAL LOGISITCS STARTUPS

Source: Crunchbase, CB Insights, GSV Asset Management

LOGISTICS AS A SERVICE

Today, over 70% of consumers buy products online. Forbes estimates that the e-commerce industry will surpass $2 trillion this year, and eMarketer projects that it will surpass $4 trillion by 2020. The rise of e-commerce has created the opportunity for companies to provide shipping and “logistics-as-a-service” to smaller companies. Amazon and Alibaba are using their massive networks and balance sheets to seize the opportunity.

Alibaba-owned Cainiao Logistics was launched to meet the logistics demands of China’s online and mobile commerce sector. China is the world’s leading e-commerce market with huge projected growth, thanks to the rise and success of e-commerce giant Alibaba and its sister properties. Analysts estimate that by 2018, over 40% of China’s population will shop online, doubling online retail sales to exceed over $1 trillion.

Cainiao’s has developed a delivery and warehouse network that primarily focuses on serving merchants on Alibaba’s marketplaces. Its platform provides sellers with the physical and technical infrastructure to transport goods from point A to point B, while also improving visibility and efficiency in all parts of the supply chain — from buyer, to shipper to seller. The company has raised over $1.5 billion and currently supports 152 countries and 70 carriers.

EMERGING LOGISTICS-AS-A-SERVICE STARTUPS

Source: Crunchbase, GSV Asset Management

Companies like Convoy and Shyp digitizing and modernizing the domestic the shipping and handling industry. Convoy provides an on-demand trucking service for regional and local shipments. Its platform connects shippers with nearby trucking companies to help them book jobs on short notice using a “load matching” algorithm. Its marketplace improves efficiency in the domestic transport industry while also providing an unprecedented layer of transparency across the shipping lifecycle.

Other startups are building a software layer for e-commerce management. Salesforce-backed Infor has developed an enterprise CRM for supply chain management. Elementum offers a suite of mobile apps that enable supply chain monitoring services to retailers. Narvar bridges the gap between retailer and shopper by creating a delightful post-purchase experience.

AMAZON EATS THE WORLD

Amazon was launched in 1994 — the same year Marc Andreessen co-founded Netscape, effectively creating the Internet as we know it. Amazon started as a novel way to order books and it helped retailers like Target fulfill their fledgling online orders. At the time, Sears, once the largest retailer in the world, had a $16 billion market value. Today, Sears is worth $1 billion and it recently announced that it may have to file for bankruptcy to protect itself from creditors. Amazon is now worth over $450 billion.

BRICK & MORTAR RETAILER MARKET VALUE (2006* VS. TODAY)

Source: Yahoo Finance

*Peak Market Value 2006

Today, Amazon has over 300 million shoppers, including over 80 million Amazon Prime subscribers. Amazon captures one-third of U.S. e-commerce and is expected to make up over 50% of the market by 2021. The platform has over 2 billion products on its marketplace, fulfilling orders in over 185 countries — basically in every corner of the world.

But what’s core to the success of Amazon’s e-commerce business is its vertical integration. Amazon intends to own every step of the supply chain from the moment the shopper presses “buy” to the moment they receive their package on the doorstep.

Today, approximately 45% of Americans live within 20 miles of an Amazon fulfillment center. Over 45,000 factory robots manage these fulfillment centers, automating the processing and organization of goods to accelerate delivery.

Source: Amazon, GSV Asset Management

Today, Amazon hands packages off to third-party delivery services such as UPS and FedEx to get the final product to the customer. But that’s changing.

Through an initiative, dubbed “Dragon Boat,” Amazon is seeking to control the flow of goods from factory floor to the front door. It is systematically acquiring space on cargo planes, trucks and ships at reduced rates, to drive down global freight overhead. In support of Dragon Boat, in 2016 Amazon launched a fleet of “Prime Air” planes — 40 rented Boeing cargo jets that it plans to to use for long-haul transport. Additionally, Amazon announced its entry in the freight industry by registering Amazon China as an ocean freight provider.

Eventually, as this process matures, Amazon intends to scale an integrated offering dubbed “Global Supply Chain by Amazon”. Just as Amazon built Amazon Web Services to fulfill its internal computing needs before spinning it out into a $12 billion business, Amazon will do the same for Global Supply Chain, offering the service to merchants of all sizes.

WHAT’S NEXT: SUPPLY CHAIN TO BLOCKCHAIN

At its core, a supply chain is a series of transactions that move products from a point of origin to a point of sale or deployment. While the World’s top manufactures, from Apple to Boeing, have developed competitive advantages through complex, proprietary global supply chains, tracing the origin and movement of products, and paying for them, remains inefficient and error-prone.

Blockchain can optimize supply chains by creating a secure, common record for all key participants to track the origin and movement of goods — from raw materials to components and manufactured end products. Transparency creates efficiencies for all participants, enabling quicker adjustments, more accurate forecasting, and targeted forensics in the case of recalls.

COMPANIES TO WATCH: BLOCKCHAIN FOR SUPPLY CHAIN

Source: GSV Asset Management, CrunchBase, CB Insights, Company Disclosures

This year, mining giant BHP Billiton began to use blockchain to manage rock and fluid samples from its vendor network — a key input that guides where the company creates mines and oil wells. Instead of continuing to rely on emails and spreadsheets, BHP is partnering with blockchain startups BlockApps and Consensys to create a transparent ledger where technicians taking specimens can attach data (e.g. collection time and conditions) and lab researchers can add detailed reports. All will be immediately visible to anyone with the appropriate access.

IBM handles millions transactions per year, from its own vendor purchases to financing purchases for clients. Disputes, which take 44 days to resolve on average, typically arise over tax rates and missing or incorrect shipments. In September it began using a blockchain ledger that has reduced dispute resolution time to ten days on average. Additionally, Walmart began to work with IBM to follow the movement of pork in China using blockchain, to more easily target and monitor outbreaks.

Startups like Skuchain and Hijro are focusing on supply chain finance — a $2+ trillion market where suppliers borrow against expected receivables from major retailers like Walmart, which often push out their payments by 40 days or more. Financiers have traditionally offered suppliers who are eager to be paid right away the equivalent of payday loans, charging 5-10% for their services. But blockchain can create transparency around the process, providing better visibility into the status of receivables, enabling lenders to offer more competitive rates. This, in turn, enables suppliers to lower prices, as they are no longer burdened by unreasonable borrowing terms.

Bubblin'

by Luben Pampoulov

Analyze This

One of the emerging stars in the Enterprise SaaS space is San Francisco-based Amplitude. Launched in 2012 by Spenser Skates and Curtis Liu, two MIT grads and each a winner of Battlecode — MIT’s largest programming competition, Amplitude has emerged as a major analytics suite helping companies of any size gain valuable insights from user behavior. Until recently, most analytics tools providers only pointed to problem areas, but solutions such as Amplitude help customers improve their product by gaining advanced analytics and in-depth insights.

Historically, a customer would launch a new product but did not have any immediate insights of the product’s effectiveness. With Amplitude, a business gets real-time insights on what’s working and what’s not – where users are engaging and where they are churning. Amplitude’s software also helps businesses gain critical insights on conversion trends, for example the specific features that make users more likely to pay.

Another advantage of using Amplitude is it bridges the Product team and the Marketing team, and enables companies to be light on sales and on S&M spent. As CEO Spenser Skates states, “while the influence and importance of product teams inside large enterprises is skyrocketing and product teams are now being held accountable for user growth and revenue, they’re stuck using solutions built for marketing that don’t tell them how their products are being used and what features drive revenue. Many of these companies are turning to Amplitude because we are the only solution custom built to serve their needs.”

Over the last few years, Amplitude has grown to be valued in the multi-hundred millions. In its Series A in 2015, it raised $9 million from Benchmark. Last year in June, Amplitude raised $15 million at a $85+ million valuation from Battery Ventures, and last week, Amplitude raised a $30 million Series C led by IVP. Angel investors also include SV Angel and Y Combinator.

Part of the reason for amplitude rapid raise and success is reflected in its customer count: the company had 150 customers in June last year, and has grown to over 5,000 customers today. One of the drivers for the rapid rise was last year’s launch of a new plan that offers Amplitude’s basic features for free, as long as the customer is tracking fewer than 10 million monthly user events. The advanced solution costs $2,000/month or more, depending on the customer’s needs.

For Amplitude to continue to rise, it will have to maintain its effective solution to stay ahead of competitors, which include Mixpanel and Google Analytics. We are adding Amplitude to our priority list given the strong fundamentals and momentum. 

Pioneer Notes

by Li Jiang

The Most Important Founder Trait

One Tuesday morning, I was at Philz Coffee in Redwood City just grabbing a cup of coffee and in walks Jacob Jaber, the CEO of Philz.

Jacob spoke at our conference last year so I immediately recognized him though most of the patrons didn’t seem to know him. I thought okay I’m not going to go fan-boy him right now. He’s got things to do and places to go.

But then Jacob goes behind the counter, high fives and fist bumps his fellow baristas and takes up an open station and start calling customers down. He’s handcrafting individual cups of coffee for people. When my turn came, I got a cup of Jacobs Wonderbar (look man, I’m a VC so I need to pander because I don’t have any other real skills).

I mean they only have 36 of the hottest coffee stores around and Jacob is brewing coffee, one cup at a time.

There’s something different about these founders.

Everybody says you need passion, but what does that mean. More importantly, what precisely does that look like in practice. There are founders, and then there are founders — the 10X founders — who are on another level in intertwining their souls into the basic atomic units of their products.

huh? atomic what?

When I talk to these 10X founders, their souls light up with joy when they get to do the foundational piece of work serving their customers. Jacob serving coffee; Seth hand building the furniture for the spaces he designs; Farb moving into a clinic to work with the doctors on their administrative challenges; Brian and Joe hosting guests in their apartments.

The real personal question for aspiring founder is “do I obsess about serving my product to people?”

And the question for investors is “am I working with founders whose souls are on fire about doing their work?”

My friend Ahren (pronounced “Aaron/Erin”) told me that I need to write a post about how someone can go about figuring out their calling and find that thing that lights them up in metaphorical flames. I’ll have to get back to you on that one 😉

Jacob Jaber serving coffee at the Redwood City Philz.

Inspired by Jacob Jaber (JJ), SQ, FN, TR, SV, DK, DD, JD, JS, AV, ZT. You all know who you are…and there are so many more people to include, so this is only a slice from the past month. Recency bias.

Market Update

Week ending August 20, 2017

World Indices

America Index 10/16/2017 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 10/16/2017 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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