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While working at Lehman Brothers, Michael Moe was the first Wall Street analyst to slap a “BUY” rating on Starbucks just days after the coffee giant went public in 1992.
The experience later led him to write the book “Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow”, in which he tries to predict industries with highest growth potential and explains the four P’s great companies must have: people, product, potential and predictability.
After working at Lehman and Merrill Lynch and co-founding the tech banking firm ThinkEquity, Moe moved to the buyside in 2011 when he founded GSV, which has since invested US$ 1 billion into venture companies.
GSV — which stands for Global Silicon Valley and is based in Woodside, California — focuses on late-stage investments in themes such as cloud/big data, edtech, sustainability, social/mobile and marketplaces.
The firm has thrown its clients’ money behind companies including Palantir, Spotify, Dropbox, Snap, Lyft and Lime.
One way for investors to piggyback on GSV’s eye for startups is to buy GSV Capital, a US$ 180 million closed-end Nasdaq-listed fund. Depending on whether or not it’s IPO season, GSVC trades at a discount or a premium to its NAV.
“Historically, what happens is that when a company like Lyft, Spotify or Dropbox is going public, the stock trades close to the NAV, sometimes above,” Moe says.
Brazil Journal caught up with Moe during his recent trip to São Paulo, where he was visiting potential partners and investors with the help of its local advisor, HMC Itajubá Capital.
Michael, what company is the next Starbucks and where can we find it? Tell me that and we’re outta here. (Kidding.) Why are you in São Paulo?
In the good old days, you could spend your time between San Francisco and San Jose and find the next game-changing business. And you’re still gonna find those in Silicon Valley, but it’s going around the world in what we call the “Global Silicon Valley.” That’s what GSV stands for — Global Silicon Valley —and it’s strong from Austin to Boston, from Chicago to São Paulo, from Mumbai to Shanghai to Dubai. It’s this explosion of innovation and entrepreneurship going on around the world.
So, if our goal is to find the next Starbucks, or to identify, invest and accelerate the most dynamic growth companies in the world, increasingly it’s likely that it’s not going to be in Silicon Valley, but in some other innovation market. So, one of our key strategies is how we get connected, how we connect Silicon Valley to this emerging Global Silicon Valley.
Maybe it’s just an inferiority complex, but aside from China — which is always a whole different story — when you look at the difficulties of doing business in a place like Brazil and you compare that to the benign macro and regulatory environments in the US… Why do think you can find unicorns or the next Starbucks outside of the US, if it’s so much harder to do business here?
I think it’s natural to think what’s going on somewhere else is better, that they’ve got all the advantages while you have all these problems. But frankly, every place has problems. What Silicon Valley has going for it is a long history of company success and people learning from that success.
I like to say that it’s like when [British athlete] Roger Bannister broke the 4-minute mile in 1954. Before he broke the 4-minute mile, the scientific journals said it was impossible for a human to run a mile in less than 4 minutes – in fact, they said your heart was going to explode if you broke the 4-minute mile, and when Bannister in fact ran the 3.59 mile and he collapsed to the finish line, people thought he had died.
It was so interesting that six weeks after that, somebody else broke the 4-minute mile and, after that, over the next two years, half a dozen people broke the 4-minute mile, because it was just a change of mindset, all of a sudden you believed you could do it.
So, the biggest advantage Silicon Valley has is to believe that there is no reason that you can’t start a game-changing business and be successful. In fact, Silicon Valley has a bunch of problems: one, it’s really expensive to live there, to start a business there; the regulatory challenge in California is that it’s enormously expensive to have a business and cost of having a business, I guess what I’m saying is: every place has problems. It’s natural to say: the grass is always greener on the other side.
I’ve been involved in growth companies my whole adult life and it’s happening. If you look, for example, at total venture capital investments 10 years ago, 92% of it was in the United States and most of that was Silicon Valley. Last year, 55% of VC investments were outside of the US. Obviously, that’s a window to the future, where the venture capitalist is allocating capital and opportunities.
So, yeah, you talk about China. Yeah, China was the imitator and now it’s become the innovator — certainly the most sophisticated mobile market in the world. It’s also the Number 1 education market in the world. By the way, Brazil is right up there with the focus on education. India is a place that has lots of smart people and lots of ambition, it also has many challenges, but again, this global megatrend is happening. So, anyway, I think that every place has challenges, but the opportunity… this gravitational force of innovation and entrepreneurship is pulling opportunity everywhere.
How do you pick sectors where to allocate money?
First off, we look at megatrends that are going on in the world and we try to think about what is it doing in terms of creating opportunities. One of our themes has been globalization and the Internet, which, by the way, I think we are only in the very early stages of transformation.
Knowledge-economy is another theme. What you know makes a difference not only for individuals, but for companies and, for that matter, for a country. Social-mobile is another theme: obviously that’s where Facebook, Twitter, and Spotify have participated.
Another major theme we see is AI. Increasingly, almost every important growth company that we see has some component of AI part of it. It may not be an AI company, but AI is part of it. There are a lot of different things such as smart technology and individualized technology and so forth.
Cloud and big data?
Cloud, big data, AI, ed-tech… Sustainability is another idea. It’s no longer “you’re green and you grow”. It plays into a lot of other things, it’s not just energy – it’s wellness, it’s water, it’s how employees look at where they want a job, it’s how companies work with their communities, it’s a concept around what I call the new “invisible hand”.
The ‘invisible hand’ of the market described by Adam Smith is not being replaced but is being complemented by this new invisible hand of people seeking meaning and purpose and where they work and who they do business with.
And then, marketplaces – if you look at many of the investments we’ve made, they have a marketplace component, looking for a network effect.
What do you look for in a company?
We’ve got the 4 P’s in a great growth business. The first P is people, which is the most important P. So, there’s no shortage of interesting ideas, but it’s always the execution against the opportunity that makes the difference. Every great company that I’ve been involved with has always had different challenges or near disasters. And what you find is what the best management teams do is they adapt, they power through, they persevere, and they’re also able to attract other talent.
Second P: product. And this gets into… You know, when you look at business that we invest in, we’re always looking to invest in the leader, because what technology in general says and the Internet specifically says is that Internet economics is a disproportionate game to the leader in the category. Right? Winner takes most.
Third P is potential – how big can it become, how big a market, what’s the market, what are the megatrends, what are the tail winds that are impacting the opportunity?
And the fourth P is predictability: how visible is that growth? For a younger business, you may not have the predictability you’d find in a more mature business, but we’re looking for the business model as a reoccurring revenue, as a kind of engagement, but also what are the sign posts on the highway that tell us that we are on the right path to our destination?
So, those 4P’s are really the framework we look at. So, when we look at a Lime, for example, it’s a fascinating company. And I think that what it boils down to is, ‘are they a fad or a trend’?
Can you say today whether scooters are a fad or a trend?
We made the bet that it’s a trend.
Some 25 years ago, when you wrote research on Starbucks, did you think coffee was a fad or a trend?
What we saw was ‘affordable luxury’. Whether you were a CEO or a secretary, anybody could have the best cup of coffee in a day. People who were looking for a third place, a place where they could be comfortable outside their house and their work… The brands…
But, ultimately, you have a leader in [Starbucks founder] Howard Schultz. He knew he was exceptional and he was having people around him that were exceptional. He had a product that he knew it was the best they could find. But the predictability piece was: coffee was a big market even then! You could see that the market analysts did was they said, in the time they were in San Francisco, in Seattle and Vancouver, and I just did the math, if they could put as many Starbucks in the United States as they had in San Francisco, it was going to be bigger than McDonalds. Well, it turns out it was way bigger than McDonalds.
But the predictability piece is the most interesting, because you could say a retail restaurant was not predictable. Still, the average Starbucks customer went there 20 times a month. So, it was not predictable like a subscription business, but if people go there 20 times a month… We love businesses that are addictive, that don’t cause cancer. Coffee is an addictive business and doesn’t cause cancer.
So, anyway, you’ve got to look at Lime. It’s new and people freak out and they say, there’s litter all over the place, there’s 10 different companies and blah, blah, blah… But a huge megatrend is that the megacities all over the world are getting more crowded and more congested and more polluted and that ‘last mile’ is a gigantic problem. How are you going to get from Point A to Point B? So Lime creates the most efficient, the most cost effective, most environmentally friendly way to go that last mile.
And you know, people talk about it’s a liability and the fact of the matter is, it’s the fastest-growing technology business we’ve ever seen. Faster than Facebook, faster than Google, I mean…
In terms of growth?
Revenue growth. It’s the fastest. The numbers would startle you. Now it doesn’t mean it’s sustainable, but it’s also saying that they’re tapping into something that’s really powerful.
Where is the herd mentality bigger: Wall Street or Silicon Valley?
I think people are people everywhere. I think Wall Street has a herd mentality, and the Valley, I think, tries to act like it’s above that, but venture capitalists are people too, and there’s what’s called FOMO, the ‘fear of missing out’. You live in fear of having missed some game-changing business, the next unicorn.
Do you see a problem with the size of the checks being cut by Masayoshi Son at SoftBank, and do you think that it creates some sort of problem for the tech ecosystem?
So, I think conventional wisdom is that it does. Frankly, I think that some of is jealousy, some of it maybe is legitimate fear that you’re going to screw up… like when government gets involved and starts throwing money at things, things start getting screwed up.
I mainly admire what they’re doing, because, one, they see something that others haven’t seen yet, which is the kind of mass scale that’s being created in technology and in the internet. Internet economics is all about a disproportionate gain to the leader in a category. Effectively, Softbank is anointing the winner by overcapitalizing a potential leader, which becomes to a large degree self-fulfilling. Paying what appears to be a high price today becomes trivial if the company becomes the winner in a “winner take most” market.
Another company GSV has invested in is Coursera. What’s unique about it?
Coursera has created the world’s learning platform. It’s fascinating to me how unique their platform is, not only because it’s 4 million students on the platform around the world – 77% of the students are outside the United States… Not just because they have partnerships with 150 universities, from Stanford to the first online degree with Penn, to Peking University to HTC. Not just because 75% of the people who take courses on Coursera don’t pay anything for it. I think that’s interesting, but not really the point. What’s interesting to me is they’re creating a new economic model that you haven’t seen in education, with true network effects, barriers to entry that get created, and opportunities that are disproportionate: leader or winner take most.
And what’s so important about it is that we’re in a knowledge economy, and the change taking place is driven frankly by the technology that makes it so. You no longer need to go to the university to get a degree. No longer you’re going to fill your knowledge tank and drive off through life, you’re going to continue to replenish, and you’re not going to get the education you need in a traditional way. And this degree is not the only currency that you’re going to represent, your capabilities are. You’re going to complement it with other ways to represent it. To me, it’s a fascinating business, it’s a gigantic potential and I think we’re just in the early days of it.
A company that you’ve probably never heard of, and I think it could be really big.
You have invested in Nextdoor, which is now a unicorn at a US$ 1.4 billion valuation?
Nextdoor is creating is a local social community. So, you could think of it as a localized social media company, but it’s really localized social infrastructure. So, think about you in a neighborhood, and the information and connectivity that’s relevant for you: “I need a babysitter tonight.” “I’ve got extra tickets for the football game.” “My dog…”
Is it the anti-Facebook?
It’s real connection, it’s real relevant things and it’s in this local area. And that local market, by the way, is huge, it’s in need of social infrastructure, right? So, it’s a company that’s doing really well, but it’s still earlier. But I think it has the opportunity to be a big, large global player. So, some people are going to say: “Where did this come from?”