The Only Show in Town…
While the networks tried to create drama around the looming “Fiscal Cliff,” including political analyst giving a play by play on the negotiations and a countdown clock, politicians seemed mostly anxious that they were going to miss the event that REALLY mattered…Sunday’s 8:30PM kickoff between the hometown Redskins and America’s TEAM, the Dallas Cowboys.
Taxes going up for everyone and a likely recession causing massive unemployment is trivial compared to whether RG III could run and pass the Redskins into the playoffs. To give context to how big this matchup was, thirty second TV spots for Sunday Night Football were going for over $550K versus $340K for American Idol’s new season.
With Washington’s 28-18 Victory, Owner Dan Snyder has gone from being less popular than Richard Nixon to replacing Ben Franklin on the C note, and Mike Shanahan is the Nation’s Capital Commander-in-Chief. RG III is going straight to have DC’s fourth memorial along with Washington, Jefferson and Lincoln.
While Baseball is America’s Pastime, Football is its Present. Apple and Google are AMAZING companies but the NFL might be the World’s greatest business. The 32 NFL Franchises are worth approximately $40 billion. (Disclosure: GSV owns shares of Apple and Google.)
Applying our 4P formula to the NFL — the first “P” People: the NFL is an extraordinarily well run business going back to the modern architect of the National Football League Pete Rozelle.
The second “P” Product: the NFL has a monopoly, but despite that, it continues to improve its value proposition every year. The brilliance of parity is that on any given Sunday, the TEAM with the worst record in the NFL can beat the TEAM with the best record. Splitting the $4 billion TV contract equally amongst the 32 franchises gives Green Bay as good a chance to compete as the NY Giants.
On the surface, the third “P” Potential looks the most challenged as the NFL already has the richest TV contract in American Sports and Entertainment at $4 billion, and is unlikely to be able to increase that dramatically. There is no incentive to add new teams as they would just create more “slices to the pie without the pie getting bigger.” However, the licensing value for the NFL has just started to scratch the surface as has international expansion. With the U.S. being just 4.5% of the World’s population, lots of growth potential lies ahead of it. All of this is before we even start to see the NFL capitalize on the social and fantasy gaming aspect of the game.
For the fourth “P” Predicability, the NFL has tremendous visibility with a long-term TV contract AND history of sold-out stadiums. Given the strength and popularity of its product, it’s likely this will be the case for the foreseeable future.
The football playoffs and college bowls are at the time of the year when we reflect on what had just happened the previous twelve months and try to anticipate what’s going to happen in the coming twelve months.
As we review 2012, the biggest story was what was supposed to be the public celebration party for Facebook became the public whipping. There were multiple reasons for this, some self inflicted, but many were a function of being on the other side of a mania. We predict that 2013 will be the year when Facebook shows everybody why there was a mania about them in the first place. (Disclosure: GSV owns shares of Facebook.)
Despite the Facebook debacle, the IPO Market was decent at least compared to the “new normal.” For the year, 117 Companies went public in the U.S., with the average 1-day pop being 15%, the percentage of companies pricing within the range being 43%, below the range 36%, and above the range 21%.
Of the top 10 IPOs for 2012, 4 were Technology companies, 2 were Financial Services, and 1 was Health Care.
Stocks had an up year but it happened much different than what we would have predicted, and from what you might assume looking at the various indices. While NASDAQ led all major index up 15.9% for the year, technology stocks (for which NASDAQ is associated with) actually had a mediocre year with the notable exception of Apple which was up 31.4%.
Sectors that were strong included Machinery, Chemicals, Finance-Mortgage, and Homebuilders.
As we look at 2013 and beyond, the prism we use to seek the “stars of tomorrow” from is to study the MEGATRENDS cutting across the growth sectors that result in our INVESTMENT THEMES. It has been our experience that 90% of the fastest growing companies will be found within this framework.
Knowledge Economy: Intellectual and Human Capital have replaced Physical Capital as the primary asset of most businesses. How to obtain, train and retain talent is the key priority for the great businesses of today and tomorrow. In the global marketplace and knowledge economy, education makes the difference not only how an individual does, but how a company does and for that matter, how well a country does.
Globalization: With the “Fall of the Wall” in 1989 and the commercialization of the Internet with Netscape nearly 20 years ago, the World truly has become flat. A startup used to think of mastering a local market, then a regional market, if successful, go national and after many years, develop an international strategy…today, new companies start with a global mindset with the reality if it doesn’t have world appeal, it won’t have local interest. With Europe and the USA struggling to have any growth, booming emerging economies such as the BRICs and other Southeast Asian economies such as Vietnam, the Philippines and Indonesia will supplement demand. We are interested in the Global Silicon Valley which is focused on entrepreneurism and innovation around the world.
Internet: With 2 billion people globally on the NET, we are only in the very early days of the “Internet Age” which is likely to last hundreds of years such as the Iron Age, the Stone Age and Industrial Age before it. The Internet is transforming every industry with gigantic opportunities that haven’t even been imagined yet.
Consolidation: Technology in general and the Internet specifically is about a disproportionate gain to the leader in in a category. Winner-take-all…or most is a reality for many of the growth segments. Scale and global reach are part of the formula for competitive viability. Accordingly, it’s either gobble up or be gobbled.
Brands: In a World overloaded with information, Brands are more important than ever to give customers a quick reference point for what they should pay attention to, buy or create a relationship with. No longer are brands confined to just corporations but increasingly, individuals are their own brand and using social media as their distribution outlet. Klout has created a scoring system to quantify a persons social relevance and people with a sufficient Klout score are gaining a currency from their influence.
Network Effect: Some of the most powerful business models is when network effects are created. Unlike traditional linear businesses that typically have diminishing marginal returns, when a business has network effects, it’s incremental user created exponential value. The Internet and the App Ecosystem enables network effects business from everything from Twitter to transportation like Uber. (Disclosure: GSV owns shares of Twitter.)
Freemium: Freemium models have been around since King Gillette gave away the razor to sell the razor blade but have seen accelerated adoption as entrepreneurs realize the #1 goal to world domination is to have people use your product. Other MEGATRENDS such as Network Effects, Globalization, Brands and the Internet compliment the Freemium model.
Sustainability: It’s no longer a question of being “green” or “growing” — you need to do both. In the cost equation, impact to the environment is a vital part of the formula. Moore’s law is starting to get green solutions on parity with dirty fossil fuel. Once you’ve gone organic, you never go back which is why Whole Foods sales at multiples never dreamed of by traditional grocers. Water is also going to be a huge category for investment.
Convergence: The merging of different disciplines to create products and services is an unstoppable wave. Software and the Internet combined with EVERYTHING is changing the world around us. Looking at the computer in your pocket that is also a phone, a watch, your newspaper, your entertainment center and your store is Chapter 1 of convergence.
Demographics: Demographics are like a slow curve ball that hangs over the plate…you can see it coming from a mile away. The 2012 Presidential Election was all about Demographics. Mitt Romney had a landslide in the white, male vote. He got destroyed in all the categories that are growing; Hispanics, Woman Influence, Minorities which are becoming the Majority along with older people with an aging population.
Outsourcing: Outsourcing isn’t a new MEGATREND but it still an overriding force on how businesses compete. To be successful, businesses need to control everything that is core to its business but look at outsourcing everything else to do it better and cheaper. The focus on what drives the engine means that resources and attention are allocated where they most matter and other functions get done more efficiently.
The GSV Themes that are generated from analyzing the growth sectors of the Economy mashing with the Megatrends are where we will spend most of our time hunting in 2013. By identifying and investing companies within these themes that possess the 4P’s — great People, leading Product, huge Potential and Predictability, we believe we will be able to capture a disproportionate share of the big winners.
Social Mobile: The combination of Facebook’s billion plus virtual nation and the nearly 500 million Apple iPhones and iPads creates a rich infrastructure to have companies go from idea to billions of value in breathtaking speed. Instagram couldn’t have captured 100 million users with 12 employees in 18 months if the iPhone didn’t exist. Pinterest would just be a glimmer in Ben Silbermann’s eye instead of an enterprise worth over $1 billion if Facebook didn’t exist.
The Apple App Store will have nearly 50 billion apps downloaded in the past five years and is growing nearly 100% year over year.
The Value of Social Networks such as Facebook and Twitter has rapidly eclipsed the traditional portals such as AOL and Yahoo. Time spent online is soaring and time spent on traditional media is plummeting.
Mobile growth is exploding with time spent on mobile devices compared to overall time on Internet now at 14%, versus 10% in May and 1% at the beginning of 2010. With Smart Phones being roughly 1/6th of the overall cell phone population combined with young people basically only using a mobile device, this is clearly the not so distant future. While Mobile Internet is currently 14% of time spent on the Net, it is just 1% of ad spending. We’ve seen this movie before with the Internet 15 years ago, where there will be a positive double whammy of increased time spent and an advertising “catch up.”
Native to Mobile and Social is TWITTER which we believe 2013 will be the year when EVERYBODY starts to get how powerful this business is. With over 200 million active monthly users, 500 million TWEETS a day and incredible network effects, we think the value accretion will be enormous. Like Facebook, Apple and eBay before it, an economy around TWITTER is growing and becoming very powerful such as with a company like Dataminr which taps into the TWITTER “firehose” and sells that information and analytics. (Disclosure: GSV owns shares of Dataminr.)
Cloud Computing and Services: According to Stanford Director and former Chief Scientist at Amazon Andreas Weigend, “more data was created in 2011 than since the beginning of humankind to the end of 2010.” Information created has now surpassed total available storage.
“The Cloud” is the backbone supporting everything from Software as Service which will quadruple to $93 billion in 2016, to virtual computing. Amazon Web Services (AWS) is growing at 50%.
Our favorite Cloud Service play is Dropbox which works like magic with 100+ million users and an addictive model that once you use it, it’s almost impossible to get off. While there is plenty of competition from the likes of Google, Microsoft and Apple, the people are voting with their clicks and Dropbox is head and shoulders above in the file storage and collaboration space. Dropbox makes the operating system and device irrelevant so in effect, it has the opportunity to be the operating system for the cloud. (Disclosure: GSV owns shares of Dropbox.)
Internet Commerce: Online Commerce continues to eat away at traditional retail with Best Buy becoming a “petting zoo” for Amazon. 25% of all of Black Friday purchases were online up from 6% two years ago. Innovative online merchants such as Fab, One King’s Lane and Gilt Groupe have blast on the scene disrupting an industry which required nimbleness already. Mobile payments make sense in a mobile World with Square leading the way and plastic is replacing paper to the benefit of leaders such as Visa and Mastercard. (Disclosure: GSV owns shares of Gilt Groupe.)
Sustainability and Clean Technology: While its taken longer and cost much more money than was originally forecast, the clean tech sector is going to be a major force in the markets and the economy due to technology finally coming into its own and the negative realities of fossil fuel. Nearly 25% of venture capital in 2011 was invested in Green Tech, or $6.5 billion and the Solar industry has grow from essentially zero ten years ago to nearly $60 billion globally. We are very bullish on emerging leaders such as Solexel which has found heaven on earth producing solar cells that are both lower cost and higher efficiency and Bloom Energy which has finally starting to realize the potential people saw for its fuel cells. (Disclosure: GSV owns shares of Solexel and Bloom Energy.)
Education Technology: The $4.5 trillion education industry is being revolutionized by education technology and innovative services. An increasing part of society believes they aren’t participating in the future and they are right, without the knowledge skills necessary to compete, workers are being outsourced or “Siri’d”.
The concept of “Kaizen EDU” or continuous learning borrowing from the Japanese principle of Kaizen — continuous improvement — is the key fundamental for how people will stay relevant. No longer can individuals fill up their “knowledge tank” to age 25 and drive off through life…they will continue to need to replenish knowledge to stay relevant. Online learning will be key to accomplish this with providers such as 2U, Grockit, CorpU and Stormwind benefiting from this trend.
ROE…Return on Education, will be the key measure to determine an education technology or service companies effectiveness (not whether it’s “for profit” or “not for profit”. Knowledge as a Currency will supplement degrees and certifications to provide opportunities to workers and companies such as Parchment, Chegg and Kno will be leaders in supporting the next generation education ecosystem. (Disclosure: GSV owns shares of 2U, Grockit, CorpU, Stormwind, Parchment, Chegg, Kno.)
Based on this investment framework that we have outlined, here are our top 40 public and private companies going into 2013…
Happy hunting…here’s to a healthy and prosperous 2013 to you and your family! Happy New Year!
Wrapping up 2012, gifting app Wrapp partnered with PayPal and will help the eBay subsidiary gain stronger access in Sweden. In this agreement, PayPal will add SEK 49 ($7.30) on top of every gift card available on Wrapp when users pay with PayPal’s mobile payment service. Wrapp, which uses the Facebook platform, had ~5 million digital gift cards sent in the past year and is now used by 180 merchants in eight countries. Its CEO Hjalmar Winbladh is a successful serial entrepreneur and is among the top people in Sweden’s innovation space.
Square is seeing success with its iPad-powered register, Square Register, which is increasingly adding smaller chains to its platform. Small businesses are seeing the value of having easy and fast credit card payment solutions and are opting to switch from traditional credit card terminals. What will be interesting to see is how Square goes about its international expansion. While magnetic stripe readers (the one that Square uses) are still O.K. in the US and Canada, they are not sufficient for Europe, Asia, or Latin America as all those geographies require readers for cards with chips. Chip & Pin or Chip & Signature are the methods used by European payment leaders iZettle and SumUp. If Square wants to become a global leader, it will have to look for adjusting its hardware, or entirely switching to in-app payments through its Square Wallet.
Up and coming star Bitcasa, which promises to bring infinite data storage solutions for $10 per month, launched its first apps for Android and Windows, and will launch its OS X and iOS apps in the beginning of January. Bitcasa’s storage technique works as follows: it distributes the files of a user across its entire user base’s physical drives, and from the user’s point of view, the Infinite Drive acts as a virtual external drive that continues to grow as the user saves more files. Obviously all files are encrypted so that no one has access, including Bitcasa itself… according to the company. The idea is quite impressive and it will be interesting to watch the growth in the next year or two. We are keeping Bitcasa high on our priority list.
A new shipping service hit our radar last week. uShip, a market place for freight, vehicle shipping, etc., raised $18 million in Series C funding from Kleiner Perkins. Based in Austin, TX, uShip brings the booking and sourcing process online. On the carrier side, it provides shipping/moving companies access to transport jobs, and takes a transaction-based fee at completion. So far, uShip has served 1.6 million shipping customers and has 325,000 registered carriers. It targets to get to $100 million gross shipping volume this coming year. It’s an interesting business which we’ll be monitoring.
Silvercar, the new car rental service focused specifically on Airport rentals, announced it is launching in January at Dallas/Fort Worth Airport. Using a very similar approach like Uber, it provides high quality cars (Audi initially) and is entirely app driven. The user has an account and at arrival at the airport, he can pick up an assigned car, without having to wait in-line and go through the typical process at the counter. At pickup, Silvercar sends a specific code to the user’s phone app which he scans to opens the car. The user is able to adjust his needs on the app and the entire experience is mobile-driven… except the driving obviously. Rates are similar to those on standard and full-sized rental cars. CEO Luke Schneider was previously the CTO at Zipcar, and had worked at Flexcar before that. Silvercar, which is based in Austin, TX, received $11.5 million funding from Austin Ventures, CrunchFund, SV Angel, Dave Morin and Chris Dixon. Rates are in the high double digits on a daily basis, and certainly not cheap compared to some of the traditional rental services. But the high end cars and the user friendly service are the real value add. I will certainly look forward to try it out next time I’m in Dallas.
Happy New Year!
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