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General Commentary
February 5, 2017

Xiaomi The Money

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Market Snapshot

Indices Week YTD

When the wind of change blows, some people build walls, others build windmills.

—Li Keqiang, Premier of the People’s Republic of China

We must be committed to developing free trade and investment.

—Xi Jinping, President of the People’s Republic of China Speaking at Davos 2017

Interestingly, conventional wisdom is that the China growth story is yesterday’s news. Exports in China fell 7.7% in 2016, which gave the “Chinese-Sky-is-Falling Crowd” extra ammunition.

But the Chinese story is just beginning.

China’s overall GDP is $11 trillion and GDP per capita is $15,000. In 1960, the GDP per capita was $1,500. Growing at a rate of 7%, China’s economy will double in 10 years. Contrast this to the United States’s economy which has a GDP of $18.5 trillion and GDP per capita of $57,000. For China’s economy to double, the country would have to increase its GDP per capita to half of that of the United States.

Several factors that are creating positive fundamentals to drive economic growth in China include: the rising middle class with migration into cities; significant emphasis and investment in education; China being in the center of the surging VChIIPs; investment in modern transportation infrastructure in major cities; massive savings as a percentage of income.

However, negative factors include: mass pollution (however the government is addressing this with major green technology initiatives); an aging population hurt by the “One Child” policy; lack of transparency and integrity in financial reporting.

But if you look at the growth dynamics, it’s truly remarkable. A key catalyst is massive urbanization that is constant around the world but exploding in China. If you look at the United States, there are 10 cities with a population of one million or more. In China, there are 160.

Top Cities Ranked by Population

Source: OECD, U.S. Census Bureau


The official population for Shanghai is 34 million. But demographers will tell you that based on cellphone subscription data, it’s probably over 40 million. That is larger than the entire population of Canada. Most people have never heard of China’s tenth largest city, Xi’an. With a population of nearly 13 million, it is bigger than Sweden.

Importantly, these urban behemoths are clusters of young people who are embracing technology, brands, and digital commerce. They’re getting ready to change the World. Accordingly, we’re seeing accelerating innovation, with transformative businesses being created and accelerating venture investment activity across major Chinese cities.


Source: CB Insights, Mattermark, Crunchbase, GSV Asset Management

Our view is that while the country has unmistakable cons, you want to be long on China. While you can’t predict the short term ebbs and flows, China is a Mega-theme for the future.

Today, the Middle Kingdom is positioning itself at the center of the Global Silicon Valley in three key ways.


“Copycat” is rarely a term of endearment. But most great innovators have also been great imitators. Pablo Picasso once said, “Good artists copy, great artists steal.” It’s a lesson one of Silicon Valley’s great artists took to heart as he built a $650+ billion business. Steve Jobs created a culture at Apple that was built on “shamelessly stealing” great ideas, and then making them better than anyone could imagine.

Source: GSV Asset Management

This has played out in China on a massive scale. Beginning in the early 1990s, a boom in global manufacturing outsourcing, sparked in part by access to cheap Chinese labor, became a driver of breakneck growth for the Middle Kingdom. It didn’t take long for local manufacturers and suppliers to realize that they could make more than component pieces. Phones and consumer electronics with names like “aPod” and “Nokla” flooded the market in the decade that followed.

The rise of the “Great Firewall of China” — a phase coined by by Wired in 1997 to describe China’s widespread Internet censorship apparatus — created opportunities for copycats in the realm of software. The blocking or limitation of Western sites enabled Chinese entrepreneurs to carbon copy almost every blue-chip e-commerce and social media company that has emerged over the last twenty years.

Source: Yahoo Finance
Market Values as of February 2017

But today, the copycat is becoming the innovator. China is intent on creating its own consumer brands, exporting them, and putting up roadblocks for foreign players. Alibaba (e-commerce), Tencent (digital media), Xiaomi (mobile devices), China Mobile (mobile), Vipshop (digital retail), and Baidu (search & internet services) — collectively valued at over $850 billion — are just a few examples of what China has in store for the World.

In 2013, China’s e-commerce market surpassed the United States and today, Alibaba handles more transactions than Amazon and eBay combined. In 2016, Alibaba topped its Singles’ Day record (annual online shopping event), netting $17.8 billion in 24 hours. The average cost per order was $27 and 82% of were completed on smartphones. In 2016, mobile commerce will account for over half of online purchases in China, or $506 billion — up from $180 billion in 2014.

Alibaba spinout, Ant Financial (Alipay) might be best positioned to dominate the future of mobile commerce. Alipay counts over 450 million users, a group larger than the entire population of the United States, and it’s going global. In September 2016 alone, Alipay added over 80,000 retailers in 70 countries, including 10 international airports, from Munich to Tokyo. And with Alibaba, Ant Financial has backed India’s leading mobile payments platform, Paytm, which counts over 130 million users making t least one purchase per month.

In the hyper-competitive global ride-sharing market, headlines often focus on the fierce battle between Uber and Lyft. But the elephant in the room is Didi Chuxing. Founded in 2012, it now books over 15 million rides per day in China. That’s about 7x the total ride-sharing volume in all of North America. (Disclosure: GSV owns shares in Lyft)

In August 2016, Didi announced that it struck deal to effectively acquire Uber’s Chinese business, merging the subsidiary into Didi’s larger business at a combined valuation of $35 billion. Uber was granted a 20% stake in the new business and Didi, in turn, invested an additional $1 billion into Uber. If the transaction isn’t sufficiently complex, Didi has also invested nearly $100 million in Lyft, $350 million in Singapore-based Grab, and $30 million in India’s Ola.

Top Global Internet Businesses by Market Value

Source: KPCB, CB Insights, Yahoo Finance, Wall Street Journal

Today, China is home to the 9th , 11th and 12th largest public companies in the World — Alibaba, Tencent, and China Mobile. It has produced seven of the top 20 global Internet companies by market value. Incredibly, none of these companies are even 20-years-old.

This dynamic is even more pronounced among emerging venture-backed private companies. China is home to 24 Unicorns and five “Ubercorns”— private companies valued at over $10 billion. Combined, Chinese Unicorns have a market value of over $160 billion and they have raised over $25 billion from syndicates of leading global investors.


Source: Wall Street Journal, Crunchbase, GSV Asset Management

Of the five largest venture capital financings in 2016 — three went to Chinese companies. Didi Chuxing’s $7.3 billion late stage round took the top spot. It raised $3.5 billion in equity and $2.8 billion in debt less than a year after closing a $3 billion financing. Alibaba spinout Ant Financial clocked in at number three, behind second place Uber ($5.6 billion financing in June), with a $4.5 billion financing in April. Meituan-Dianping came in fourth, ahead of Snap ($1.8 billion financing in May), with a $3.3 billion round in January 2016. (Disclosure: GSV owns shares in Snap)


Venture Capital Catalyst

Bloomberg reports that in 2016, Chinese government-backed venture funds raised over $230 billion. That is over 5x the $42 billion raised by U.S. venture funds combined in 2016. What’s the objective? To rapidly modernize the economy and catalyze economic growth beyond debt-fueled spending on infrastructure.

The Hubei provincial government alone, for example, is armed with over $80 billion earmarked for venture investments in businesses that will diversify a job base dependent on steel, mining and cars. They’ve turned to venture capitalists to help deploy the money, allocating capital to funds including Sequoia, TCL Capital, and CBC Capital.

Total Investment into Chinese Government-Backed Venture Funds ($ billions)

Source: Bloomberg, Zero2IPO, GSV Asset Management

All told, over 780 local government funds are scrambling to fund the next Xiaomi, Alibaba, Didi, or DJI Technology. Accordingly, we’ve seen a proliferation of promising Chinese startups emerge that are attacking massive sectors and market opportunities. In the $5 trillion global education market, VIPKid launched a digital platform in 2013 that connects Chinese K-12 students with North American tutors to study English, Math, Science and other core subjects. It’s an arbitrage opportunity that flips the traditional U.S. China script.

The “cheap labor” in this case is U.S. and Canadian teachers who are chronically under-compensated. In China, there are hundreds of millions of students with parents that are willing to pay out of pocket for high-quality education. That spells opportunity for VIPKid.

It began 2016 with roughly 200 teachers. By year end, it had over 5,000 teachers serving 50,000 students, according to Bloomberg. In 2017, VIPKid expects to grow to 25,000 teachers and 200,000 students.


Source: CB Insights, Crunchbase, GSV Asset Management

In the World of social media, Snap’s S-1 will dominate the headlines but the fastest growing self-broadcasting platform is China’s, which is now used by half of all U.S. teens, according to company disclosures. The app lets users broadcast 15-second clips of themselves lip-synching to hit songs with layered-on graphics, time lapses, and other “special effects.” It’s combining music and video in a distinct experience — think air guitars, dancing, and Snapchat filters all in one. now counts over 140 million registered users, up from 10 million in September 2015. It is currently adding 13 million new users per month.(Disclosure: GSV owns shares in Snap)

Interestingly, while Snap’s (Snapchat) market value has been bolstered by a distinctly younger user base, is moving even further upstream. A substantial majority of its users are between the ages of 10 and 20, and nearly three quarters are girls. As with Snap, the age distribution is changing as the app manages to attract broader demographics. Six months ago, almost 90% of users were below the age 24. Today it is just over 60%.

Doubling Down on R&D

Beyond venture investments, the Chinese government is fostering an innovation ecosystem across China by accelerating investments in R&D, building hundreds of science and technology parks, universities, and government research institutions across the country.

In 2000, less than 1% of China’s GDP was invested into R&D. Today, it has grown to 2.0% and is expected to surpass 2.5% by 2020. China’s share of Global R&D spend is 20%, above that of Japan (9%) and Germany (6%) and second only to the United States (26%). As a corollary, the number of PhDs granted annually in science and engineering in China is now second only to the United States.


Source: CB Insights

In 1950, Stanford University created one of the first “high tech parks” in the World, which had a lot to do with the eventual rise of Silicon Valley. In the late 1990s, China took note and began to construct its own network of university science parks, notably the Tsinghua University Science Park (TusPark).

Over the past 20 years, TusPark has produced more than 600 startups and 14 listed corporations — producing over $58 billion in revenue and representing $15 billion of market value. These numbers will accelerate dramatically over the next decade. Today, TusPark operates in over 30 locations across China and Hong Kong, providing incubator services, market access, and connectivity to capital.


Today, you don’t have to look beyond Silicon Valley to find evidence of China’s emergence as a driving force in the global innovation economy.

According to CB Insights, since the start of 2011, investors from China and Hong Kong have deployed over $18 billion across 679 deals in U.S. startups. Over this period, deal activity by Chinese investors in American companies risen over 5x.

Chinese Investor Deal Activity in US Tech

Source: CB Insights
Chinese Investor Deal Activity in US Tech by Stage

Source: CB Insights

Investment activity is poised to accelerate as Chinese government-backed funds quietly set up shop in Silicon Valley in greater numbers. The Information recently reported that the governments of Beijing, Shanghai, Shenzhen, and Hangzhou have each approved funds that will be focused on the region.

While the ownership and capital dynamics are typically opaque, a clear pattern is emerging. Here’s how The Information describes it in a recent piece (“Chinese Government¹s Path into Silicon Valley”):

That funding is generally through so-called government guidance funds. Central and local Chinese governments have been aiming to raise 3 trillion yuan, or $4.4 billion, for these funds to promote innovation and pursue a range of priorities the government deems important, from new energy and biopharma to “advanced information technology.” Fund managers are also seeking companies willing to open offices in their hometowns or whose technology they can learn about to bring back home.

ZGC Capital (a subsidiary of Zhongguancun Development Group), for example, has committed to raising $500 million in the next five years to invest in funds and early stage companies, primarily in Silicon Valley. Westlake Ventures — a subsidiary of Hangzhou High-tech Investment — has created a Silicon Valley beachhead at GSVlabs with a similar objective. Its parent has been allocated $370 million from the Hangzhou government and other state-owned enterprises to invest in innovation in areas like artificial intelligence and digital health. Chinese universities, including Tsinghua University, have also created funds dedicated to direct U.S. investments in emerging technology companies. (Disclosure: GSV owns shares in GSVlabs).


Source: CB Insights, GSV Asset Management

Source: CB Insights, Crunchbase, GSV Asset Management

The impact of China’s move into Silicon Valley is already becoming clear. Over one quarter of U.S. Unicorns have a Chinese backer. The number of Chinese investors attending Y-Combinator “demo days” is 20% higher than it was five years ago. Stay tuned for more. As GSV seeks to invest in the most dynamic growth companies in the World — the Stars of Tomorrow — “Made in China” is taking on a whole new meaning.

The Market had a lot of motion last week but ultimately not a lot of movement… NASDAQ and the S&P 500 finished the week fractionally up and the Dow fractionally down. In between, stocks swung based on Trump’s tweets, the Fed holding tight, missed EPS by UPS and Under Armor to name a few, ending in a Friday crescendo, floating of repealing Dodd—Frank.

World Indices

Source: GSViQ, Yahoo Finance

In IPO land, three new issues came public last week with two pricing below the range and the average aftermarket performance being up 3%. This week, five IPO’s are expected to price and of course, the long anticipated Snap IPO was officially filed last week.

While it’s hard to not be caught up in the unique style of the Trump Presidency, the fact that stocks haven’t gone down, suggest to me they are going up. If you listened to the media and the pundits, you would believe the World is coming to an end but stocks remain resilient. Perhaps lowering tax rates, reducing onerous regulations on business, creating incentives to repatriate trillions of dollars from overseas and investing in modern transportation infrastructure is good for business and therefore share prices.


by Luben Pampoulov

A Snapping IPO

It is undoubtedly the most exciting company to go public in years. The expectations for Snap’s upcoming IPO are high, and with its S-1 filing released, public investors are getting ready to see SNAP hitting the tape soon. (Disclosure: GSV owns shares in Snap).

It has been remarkable to see what Evan Spiegel and Bobby Murphy created in just six years. What initially started as an app with disappearing messages, has become a major broadcasting platform with 158 million daily active users (DAUs), spending 25-30 minutes per day, on average.

Snapchat is disrupting traditional TV, and it is also hurting Facebook. As an example, about 3/4th ESPN’s millennial audience consumes ESPN content on ESPN’s Snapchat Discover channel…and only a quarter is being watched on ESPN, the TV channel. Meanwhile, millennial’s Facebook posts have largely shifted away from containing personal content (personal picture and videos) to being about news article sharing, YouTube video posting, or posts on whatever else is trending on the web. Facebook-only engagement has certainly fallen among Millennials, and its one big driver has been Instagram, which is Snap’s main competitor.

Snapchat has transformed social media by enabling users to create their own “reality shows”, posting those as 24-hour stories. After the introduction of Stories, Snapchat’s user growth surged; daily active users growth rocketed +472% to 46 million in Q1 2014. Growth has maintained strong since, with the only concern being the most recent quarter, when DAU growth decelerated to “only” +48%.

Source: Snap S-1 Filing

Part of Snapchat’s DAU slowdown is a direct result of Instagram Stories. After a long list of failed attempts to copy Snapchat, Instagram & Facebook finally found something that worked, and launched Instagram Stories last summer. The results have been impressive, with Instagram now having 150 million users engaging with Stories on a daily basis. Additionally, Instagram now has 400 million daily active users, growing at approximately +50% YoY.

Personally, I have seen the number of Stories on my Instagram rise too, currently seeing about 30 out of the 260 people I follow posting daily stories — or about 11%. On Snapchat, I currently see about 28% of my followers to post Stories on a daily basis. An important difference is that Snapchat stories are typically longer, and the use of lenses, drawings and filters seems significantly higher than on Instagram. This indicates engagement rates on Snapchat are still superior to those on Instagram.

While the slowdown in DAU growth is a concern, there are a few things to consider;

  • So far, Snapchat has been focused only on developed countries in North America and Western Europe. Essentially 3/4th of its user base comes from countries that make up 12% of the World’s population. Compare that to Facebook, which has only 25% of its user base coming from North America and Europe, and the rest from Emerging Countries. We believe there is a big expansion opportunity for Snapchat, but are also mindful that local bandwidth will be key for the expansion; Snapchat is a video-centric app that requires strong internet connections to function.
  • Snapchat has seen its user growth slow down in the past too, and has managed to release new tools to re-accelerated user growth and engagement. Prior to the release of Stories, user growth was slowing down. In early 2015, user growth was also decelerating, but jumped back up with the enhancement of video viewing tools and the launch of lenses.

Source: Snap S-1 filing

Snapchat’s extremely high engagement metrics — users visit the app 18 times per day and spend 25-30 minutes per day, on average — are well above those of Twitter, Line, Pinterest, or even above Instagram’s, in our estimates, and are at the very top among social media leaders. Only Facebook and Tencent’s Wechat have engagement rates at those levels.

What’s also impressive is that in just 24 months since starting to monetize, Snap has managed to grow to $405M in annual revenue, growing at +408% in Q4 2016. On a per user basis (ARPU), Snapchat generated $1.05 for 2016. But that’s just a beginning, and the upside potential is big. Compare that to Twitter, which generates approximately $20 per daily active user per year, or Facebook, which generates about $24.20 per daily active user per year.

Snapchat going to a $10 ARPU, would imply $4 billion in annual revenue. We believe this can be achieved in a few years, especially if DAU growth continues to be between 45-50%.

Snapchat’s Key Metrics

Source: Snap S-1 Filing

Disclaimer for the rest of this article: The stated numbers for Snap’s IPO market cap are hypothetical. The forward revenue estimates are based on GSV internal research. All of those numbers are used for comparison purposes only.

Looking ahead, we think there is strong visibility for Snap’s revenue to grow at a fast pace. We estimate that with continued strong DAU growth and high engagement rates, the company could achieve ~$1.4 billion in revenue in 2017, over $3 billion in 2018, and ~$6 billion in 2019.

In addition, Snapchat recently released Spectacles — its cool sunglasses that can record and post video snaps directly on Snapchat. With a brilliant marketing strategy, Spectacles were one of the most desired gift during the 2016 holiday season. And there is a real revenue opportunity; if just 4% of Snap’s user base bought a pair over the next year, that could result in approximately $1 billion of incremental revenue.

Most expectations point to a potential IPO market cap of $20-25 billion, as reported in many media outlets. It will be difficult to justify such a valuation by just looking at past performance, but considering the strong fundamentals and the big growth opportunities ahead, it is likely an attractive value for the long-term investor, in our opinion.

Potential Forward Looking Valuation

Source: CapIQ; *Snap market cap is hypothetical, and Snap estimates are GSV internal

When looking at the speed of Snap’s monetization, it is remarkable that they’ve reached over $400 million in revenue by year five. Facebook at its fifth year had just under $300 million in revenue, and Twitter had just over $100 million of revenue.

Source: Company reports and street estimates for 2017;

*Snapchat’s 2017 Valuation is hypothetical, and the 2017 revenue estimate is GSV internal

Also, looking at the user growth and engagement comparison to competitors, Snap’s hypothetical $26 billion market cap would not be out of line. Especially the engagement metrics, and the Value per DAU comparison point to Snap’s attractiveness.

Source: Company announcements;
*Blue fields are GSV estimates based on internal research

*Snapchat’s Market Cap value is hypothetical, and the 2017 revenue estimate is GSV internal

Previous high-profile IPOs like Facebook, Twitter, or Line, had different outcomes;

Facebook was a highly anticipated IPO, but it had several big issues: prior to going public, Facebook’s stock had traded in very large volumes on the private market, and there was not as much demand when FB shares hit the public market; its user growth was decelerating in the quarters leading to the IPO, there was a glitch for FB shares on the stock exchange, and banks mishandled the IPO…

Twitter on the other hand, priced its IPO at an $18 billion market cap, or a 13x forward P/S with +110% forward revenue growth and with +39% MAU growth at the time of the IPO. Two months later, TWTR shares were trading at a $53 billion market cap, or 38x forward P/S, before starting their long-lasting decline thereafter (which was caused by deteriorating fundamentals).

Line, which is the weakest platform among this group, priced its IPO at a $6.9 billion market cap last July. The IPO valued Line at 4.9x forward P/S, while its MAU growth was +19% and the expected revenue growth was +33%. Two months later, Line shares were at their high, trading at a $10.4 billion market cap, or 7.7x forward P/S. But as user growth was cooling down, most recently growing at just +6%, its stock pulled back to below IPO levels.

High Profile IPOs

Source: Yahoo Finance, Company Reports;

* Snap market cap at IPO is hypothetical; Snap’s forward revenue estimates are GSV internal

Over the past year, numerous surveys showed that advertisers are shifting focus towards Snapchat and Instagram. Ad budgets are getting moved away from traditional media, and away from Twitter, and are increasingly targeted to these two apps. The high engagement rates combined with creative ad formats have resulted in attractive ROI to advertisers. Several such examples are displayed in Snap’s S-1 filing:

Source: Snap S-1

Source: Snap S-1

Source: Snap S-1

We look forward to SNAP hitting the tape, and remain bullish on the overall prospects for the Venice Beach-based startup.

Pioneer Notes

by Li Jiang

Top 5 Pragmatic Advice For Doing Business in China

If you are a non-Chinese person going to do business in China, it may feel like you’ve just stepped into a different universe.

I would advise anyone serious about China to learn about its rich history and language but if you are going on a trip to China in a few weeks and can’t binge learn everything on Coursera, you need some pragmatic ideas right now, here are my top 5. (Disclosure: GSV owns shares in Coursera)

1. Have a friend (mediator)

Usually this is a given because a trusted friend or colleague is bringing you into any meetings you have in China.

If you don’t have an introduction already, I don’t even know how you got the meeting in the first place since it’s a very relationship-driven place, it will help to find a friend who has both a China and U.S. perspective.

If you are really struggling, try finding a second degree connection. It’s not that you need the language translation as most top business people in China already speak English or have a translator, but you do need someone who can bridge cultural understanding and give you insider tips along the trip.

2. Bring a gift

Giving a small gift is a common and simple Chinese custom. It’s a sign of friendship and collaboration. Chances are your counterparts in China may have prepared something for you. Even if they didn’t, showing up with a gift for them is a sign of both friendship and that you appreciate Chinese culture.

Get something distinctively American or British (or wherever you are visiting from).

Unless you are meeting with the chairman of one of China’s largest conglomerates, a $50–100 gift will work, as long as it’s interesting.

3. Learn a tiny bit of Chinese

Even knowing how to say “nice to meet you” in Chinese will go a long way.

“Hen gao xing ren shi ni” — “very nice to meet you”

Chinese people know that Chinese is a very hard language to learn for non-native speakers so putting forth the effort to say a few words in Chinese will be seen as appreciative, smart and friendly. If you are feeling ambitious, you could even learn a few short jokes in Chinese.

4. Know your alcohol tolerance

You can be plenty successful if you don’t drink (I drink sparingly), but drinking together and eating together, usually in a big roundtable where people order way too much food, is the single culmination of relationship building in China.

Even if you only drink tea or water, you have to learn the cadence of cheering everyone around you. Drinking by yourself is basically not done. If you want to take even a sip of your wine, beer, tea, whatever at a dinner party, you always have to cheers someone at the table to drink with you.

5. Download WeChat

Most people outside of China don’t use WeChat, which is China’s Facebook, Twitter, Instagram, PayPal all rolled into 1 app. Most people in China don’t use anything but WeChat. Do yourself a favor and get familiar with WeChat before going to China. It’s the platform on which most people conduct their daily and business lives. People respond to WeChat constantly. Emails might as well be snail mail in comparison.

Those are my top 5 pragmatic tips for doing business in China. Good luck!

Market Update

Week ending February 5, 2017

World Indices

U.S. Indices Snapshot

Valuation P/E Est. P/E/G Price/Sales