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Marketplaces
May 20, 2018

Top Dog

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Market Snapshot

Indices Week YTD
GSV 300 -4.90% -8.50%
S&P 500 -4.10% 3.50%
Dow -4.20% 2.50%
NASDAQ -3.70% 8.60%
Russell 2000 -5.20% 0.70%
MSCI -4.10% -14.60%
Valuations P/E Fwd P/E/G
GSV 300 23.6x 0.4x
S&P 500 18.1x 1.2x
I-Rates Now YTD
10-Year Note 3.20% 31.30%
3-Month Bill 2.30% 64.00%
Sentiment - Current
Bull-Bear - 30.6-35.5
Put-Call - 1.2
Vix - 21.3
Inflation Now YTD
Gold $1221.60 -6.40%
Oil $71.51 19.00%
Mutual Funds - Week
Fund Flows (bil) - -$2.60
Growth-Value 00-09 09-Now
Growth -34% 271%
Value 87% 151%

During the time of Christ, the human population on Earth was at a steady 200 million. In the 1800s, at the height of the industrial revolution, the human population passed the 1 billion mark. But today, about 200 years later, the population boomed to be over 7 billion. And by 2050, it’s expected to rise to 9.7 billion.

You can extrapolate a lot from a demographic forecast like that. But one thing is for certain — it’s going to be raining cats and dogs.

POPULATION BOOM

World Population From 3,000 BC to 2050 (in Millions)

Source: U.S. Census Bureau, World Bank, GSV Asset Management

Furry best friends have been by our side since pre-historic times. Dogs are believed to be the first domesticated animal, and it is estimated that humans began keeping canines as pets as early as 30,000 years ago. Other pets came later, including cats (3500 B.C), birds, fish, and more.

Today, pet ownership in the United States and around the world is surging. It has more than tripled in the U.S. since the 1990s and American pets outnumbered children for the first time in 2006. The trend has not abated.

THE ANCIENTS LIFE OF PETS: A HISTORY OF PET OWNERSHIP

Source: GSV Asset Management

In 2017, there were nearly 184 million pet cats and dogs, compared with 74 million children under the age of 18, and 24 million children under the age of five. In the United States, the growth in pets owned eclipses the population growth as more people are opting to have pets.

TOTAL NUMBER OF PETS OWNED IN THE UNITED STATES (MILLIONS)

Source: American Pet Products Association (APPA), USA Today

Taken broadly, pets are increasingly becoming people and entrepreneurs are reacting with innovative products and services in a market that has been devoid of meaningful change for the last century.

In the past, people mostly spent money on their pets for staples like food, standard veterinary care and basic supplies. But this is changing. After all, your dog needs luxury.

STATE OF PLAY

The $65 billion pet market has grown steadily over the past 20 years, but there are many reasons to believe that the spending is poised to grow much faster moving forward. At a baseline, demographic trends suggest that as people live longer, they will acquire an increasing number of pets in their lifetime. But more importantly, pet owners are ready and willing to increase their spending.

ANNUAL U.S. SPENDING ON PETS ($ BILLIONS)

Source: American Pet Products Association (APPA), USA Today

To date, pet spending has been tracked across five core categories:

  1. Food
  2. Supplies
  3. Services (Grooming & Boarding)
  4. Vet Care
  5. New Animal Purchases

With the exception of e-commerce, there has been little innovation in the products and services available to current and prospective pet owners over the last 50 years. With the emergence of global megatrends including Mobile, Marketplaces (especially Peer-to-Peer), Wearables, and Wellness, the pet market is ready for a flood of new offerings.

U.S. SPENDING BREAKDOWN ON PETS (2017)

Source: American Pet Products Association (APPA), USA Today

Pets.com didn’t seem like such a great idea in the 90s when it spontaneously combusted. But like many e-commerce businesses from the Dotcom Bubble, sometimes the early bird gets the turd.

Chewy.com, which launched in 2011, has become one of the world’s fastest growing e-commerce platforms, reaching nearly $900 million of revenue in five years according to Recode. In August 2017, Petsmart logged the largest e-commerce acquisition by buying Chewy for $3.4 billion. Prior to its acquisition, the company had raised over $450 million from investors including BlackRock, Allen & Company, Wells Fargo, and Greenspring Associates.

LEADING GLOBAL PET RETAILERS

Source: Petfood Industry, Thomson Reuters, Yahoo Finance, GSViQ

* Denotes revenue as of Trailing Twelve Months (TTM)

This January, SoftBank’s Vision Fund announced a $300 million investment in dog-walking startup Wag. Following the financing, Wag also announced the appointment of a new CEO, Hilary Schneider, the former CEO of LifeLock. Launched in 2015, Wag provides on-demand walking and boarding services for dogs.

TOP FUNDED PET TECH STARTUPS

Source: CB Insights, Crunchbase, GSV Asset Management
Disclosure: GSV owns shares in Rover

Another notable merger was Rover and DogVacay’s union in March 2017. Combined, the company is now the largest pet services marketplace in the United States and has its sights set on global expansion.

KEY TRENDS

According to CB Insights, VC investment in “Pet Tech” startups has risen from $44 million in 2012 to $368 million in 2017. The early part of 2018 was headlined by SoftBank’s $300 million investment in Wag.

VC INVESTMENT TOWARDS PET TECH STARTUPS (2012 – 2018)

Source: CB Insights

1. On-Demand Services

According to the Harvard Business Review, U.S. consumers spent $57.6 billion in the on-demand economy in 2016. This sector expected to boom, largely driven by millennial consumer habits, who have grown up to expect on-demand, all the time.

On-demand services for pet owners, such as daycare or walking, appeal to existing pet owners but also encourage new pet owners to own pets. These services add convenience towards pet ownership and allows owners — new and old — to undoubtably rely on effortless, high quality care for Fido. Over time, the lifetime value of on-demand pet service users will continue to accelerate as owners increasingly rely on pet services to accomplish their needs.

The U.S. dog boarding and walking industry is a $13 billion, but highly fragmented market. As the leader in the space, Rover is leveraging the power of peer-to-peer marketplaces to bring efficiencies to the pet boarding market. Backed by leading investors like First Round, Foundation Capital, and TCV, Rover makes it easy to find and evaluate people willing to board dogs at a fraction of the cost of traditional kenneling operations. Rover also promises to attract dog-lovers, which will give consumers peace of mind when parting with their pets.

The company has built a reputation of providing quality services and only accepts 20% of applicants who register as a dog boarder or walker. Pet owners are highly satisfied with the service they receive, with 95% of services received a 5-star rating.

EMERGING PET MARKETPLACE + SERVICES STARTUPS

Source: Crunchbase, CB Insights

2. Supplies + Products

Over 60% of consumer spending on pets is towards purchasing supplies and food. Not surprisingly, some of the largest companies in the pet industry are food and supplies companies such as PetCo, Petsmart, Mars Petcare and Nestle Purina.

Forgoing the traditional brick and mortal retail method, companies like Chewy and Bark & Co are tackling the pet supplies industry using digital technology and new forms of commerce to attract consumers. Founded in 2011, Chewy is an online retailer of over 30,000 pet food and products and logged over $900 million of revenue in 2016. Petsmart acquired Chewy for $3.4 billion in August 2017 in an effort to build out the companies digital platform to complement its retail stores.

Bark & Co’s flagship product is the BarkBox, a subscription service that sends pet owners a monthly delivery of dog toys and treats. Since the company’s launch of BarkBox in 2012, Bark has launched a line of toys and an e-commerce website for dog owners. Today, Bark has shipped over 10 million BarkBoxes, and the company has raised $82 million from investors including 500 Startups Polaris Partners, RRE Ventures, and Lerer Hippeau.

EMERGING PET HARDWARE + WEARABLES STARTUPS

Source: Crunchbase, CB Insights

Another group of companies in Pet Tech are focused on creating smart hardware products to allow owners to better interact with and monitor parts from away. Whistle, founded in 2012, creates a small device that allows owners to monitor a pet’s whereabouts and health from a mobile app. The company was acquired by Mars Petcare in 2016 for $117 million. Petzila and Petcube both create camera products to allow owners to interact with pets remotely.

Capitalizing on the “Pets are People” trend, increasingly, Pet Tech companies are focused on creating human-grade pet products to allow owners to have peace of mind in know their pets are ingesting the highest quality food and treats.

PETS ARE PEOPLE: HUMAN-GRADE PET PRODUCTS

Source: Crunchbase, CB Insights

3. Veterinary & Pet Health

Net Promoter Scores (NPS) have become the gold standard for customer loyalty as they get to the heart of how passionate customers are for a product or service. An analogous proxy for how much people love their pets is a survey that asks dog and cat owners how much money they would spend to save their pet’s life. Interestingly, 61% would spend between $100 and $1000, and 25% would spend over $1000.

AMOUNT DOG & CAT OWNERS ARE WILLING TO SPEND TO SAVE THEIR PET’S LIFE

Source: Reuters, Kroger

The North American Pet Health Insurance Association estimates that less than 1% of the nearly 180 million cats and dogs in the United States are currently insured. Beyond the logic of pet insurance for owners, the market opportunity for this industry is staggering. The few animals that are insured, for example, generated nearly $500M in annual premiums in 2013.

U.S. PET INSURANCE MARKET SIZE (MILLIONS)

Source: North American Pet Health Insurance Association

Today, there’s emerged a group of Pet Tech startups focused on providing services to owners to allow to them more easily access care.

EMERGING VETERINARY + PET HEALTH STARTUPS

Source: Crunchbase, CB Insights

Founded in 2010, Vets First Choice provides veterinary practices with digital tools like an online pharmacy and delivery service to allow them to optimize their practices and personalize engagement with customers. The company has raised $286 million from investors including Sequoia Capital, Wellington, Hillhouse, Clayton, Dubilier & Rice, and Polaris Partners. This April, Vets First Choice announced its merger with an animal health spin-off from Harry Schein to create a comprehensive veterinary care and services platform.

Chinese venture capital firm Hillhouse Capital Group, an investor in Vets First Choice, has acquired more than 500 veterinary clinics in an effort to build and run one of the largest animal health groups in China. According to the Information, the firm has reportedly spent $475 million on clinics. As pet ownership and spend continues to accelerate in China — pet care spending is expected to triple by 2022 — Hillhouse is positioning themselves at the center of the megatrend to capitalize on the surge of the pet health industry.

WHAT’S NEXT

We’ve already seen the “Pets Are People” trend proliferate and lead to the creation of a crop of companies focused on providing human-grade products for pets. Looking forward, the “Pets Are People” trend will continue to grow as pet owners seek to provide the best comfort, experience and products for their furry friends.

WHAT’S NEXT: PET TRENDS TO WATCH

Source: GSV Asset Management

Bubblin'

by Luben Pampoulov

Quality-Driven Leaders

One of the key indicators for great businesses is how they treat their customers. A major reason why Apple blew past all of its competition during the last decade was because of the product experience and the Apple Stores.

Other examples of experience-driven success include Spotify, Dropbox, and Rover. In Spotify’s case, its superior user interface combined with the data-driven suggestion engine added significant value to the whole music experience. The likes of Apple, Amazon and Alphabet are still lagging behind Spotify, with slightly lower quality services.

Similarly, Dropbox’s innovative culture and laser-sharp focus on its sharing and collaboration service is the reason why it is ahead of its competitors. And just like Airbnb has differentiated itself in the lodging industry, Rover is delivering high customer satisfaction to both pet owners and pet hosts in the dog boarding space. Rover’s success is also reflected in its 70+ Net Promoter Score!

But quality is difficult to maintain! Over time, as companies grow in size, it becomes harder to keep innovation, quality, and growth all in-sync. They all go hand in hand, and if one starts to lag, the others will too. If innovation starts to fade, so will quality, and ultimately growth. Among the large consumer technology companies, there are only very few that continue to impress, even at large scale.

Large Cap Consumer Tech Companies With High Customer Quality & Innovation

Source: Yahoo Finance

Looking at the new and next, there are several emerging companies with high consumer satisfaction, and with potential to become multi-billion businesses. One of them is Peloton, “the fitness equipment provider.” In reality, Peloton is much more than that, being a lifestyle brand similar to Apple, Lululemon or Tesla.

Currently, Peloton sells stationary bikes at $2,000 a piece, and has an on-demand subscription model at $40/month. Upon purchase, the company delivers the bike directly to your home and helps with the set up. During workout, it lets users stream videos from a catalogue of 7K on-demand classes and live sessions.

Later this year, Peloton will start selling high end treadmills, at $4,000 a pop. Those are also expected to have subscription models attached. And besides selling fitness devices online, Peloton also has high-end retail stores in 25 mall locations across the US, as well as work-out studios in NYC, London and soon in Toronto.

What’s very impressive is that Peloton has the second highest Net Promoter Score across major consumer brands, at 91, which is second only to Tesla.

Pioneer Notes

by Li Jiang

Why Every Founder and CEO Needs A Coach

In 2002, the newly appointed CEO of a Silicon Valley startup was having a conversation with one of his board members. And that board member suggested:

“You need a coach.”

Having served as the CEO of another company for the prior four years, he responded to the board member’s suggestion with:

“Why do I need a coach? Is something wrong?”

There are three stages in the life of most startups

  1. Hard
  2. Very hard
  3. Damn near impossible

It might make sense for a first time founder to get a mentor who has been there and done that, but even established leaders need a coach.

John Doerr explained to Eric Schmidt:

“No no no, you need a coach, everybody needs a coach.”

Every top level performer, be it athlete, artist, or leader has a coach. A coach can give you a fresh perspective and watch how you perform. A coach can guide you, “is this what you really meant to do?” As Schmidt noted, the one thing people are never good at is seeing themselves the way others see them. A coach really helps.

After that conversation between Schmidt and Doerr, Bill “Coach” Campbell became Eric’s coach and shepherded the team at Google to become one of the most innovative and valuable companies in the world. Along the way, Coach Campbell was the coach, mentor, advisor, and confidant for an entire generation of leaders from Steve Jobs to Sheryl Sandberg.

Sadly, the world lost Coach Campbell in 2016. But what he taught us will remain with us forever. Long ago, Bill gave all of us a mission to teach the values he shared to the next generation and for them to teach it to the generation after that.

Our passion is to build a future we are excited about. We do that through working with founders and innovators and we strongly believe having the right support at the right time makes all the difference.

“Everybody needs a coach”
Coach Campbell in 2015

My friend Kevin, Coach Campbell, and me. At the Old Pro in Palo Alto…because of course!

Market Update

Week ending May 20, 2018

World Indices

America Index 10/14/2018 YTD Week
U.S. GSV 300 108.6 -8.50% -4.90%
NYSE 12439.4 -2.90% -4.30%
Dow 25340.0 2.50% -4.20%
NASDAQ 7496.9 8.60% -3.70%
NASDAQ-100 7157.2 11.90% -3.30%
Russell 2000 1546.7 0.70% -5.20%
S&P 500 2767.1 3.50% -4.10%
Brazil Bovespa 82921.1 8.50% 0.70%
Mexico IPC 47444.1 -3.90% -1.30%
Canada S&P TSX 15414.3 -4.90% -3.30%
Euro-Asia Index 10/14/2018 YTD Week
China SSE 2606.9 -21.20% -7.60%
Heng Seng 25801.5 -13.80% -2.90%
Singapore Straits Times 3069.2 -9.80% -4.40%
Indonesia JKSE 5756.5 -9.40% 0.40%
Japan Nikkei 225 22694.7 -0.30% -4.60%
India Sensex 34733.6 2.00% 1.00%
Russia RTS 1141.4 -1.10% -1.60%
France CAC 40 5096.0 -4.10% -4.90%
Germany DAX 11523.8 -10.80% -4.90%
U.K. FTSE 100 6995.9 -9.00% -4.40%



U.S. Indices Snapshot

Valuation P/E Est. P/E/G Price/Sales
LTM NTM Growth LTM NTM LTM NTM
S&P 500 24.4x 18.1x 15.10% 1.6x 1.2x 2.5x 2.3x
NASDAQ 26.0x 21.8x 17.00% 1.5x 1.3x 3.1x 2.7x
Russell 2000 58.7x 27.3x 6.30% 9.3x 4.3x 2.7x 2.5x
GSV 300 37.0x 23.6x 57.80% 0.6x 0.4x 6.5x 4.2x

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