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GSV Capital Corp (NASDAQ:GSVC)

25th Annual ROTH Conference

March 20, 2013 01:00 pm ET

Executives

Michael Moe - Chief Executive Officer and Chief Investment Officer

Analysts

Unidentified Analyst

(Inaudible)

Michael Moe

Thank you very much. Good morning. I'll [follow] through the presentation and look forward to answer your questions. In terms of GSV Capital, first of all what does GSV stand for? GSV stands for Global Silicon Valley. Well, we're based in Woodside, which is effectively the heart of Silicon Valley.

Part of our investments thesis is the innovation that's made, Silicon Valley thrive has really gone viral and we are looking for the fastest-growing best private companies in the world to invest in. We went public two years ago, April 2011 and raised nearly $300 million of proceeds. Our NAV as of 12/31/2012 was $13.07 per share and current share price is just over $8 or so selling at nearly a 40% discount to our state NAV. We have cash of approximately $27.3 million and the 52-week range is $6.84 to $20.89.

In terms of what GSV Capital is, we've created a publicly traded liquid vehicle to invest in the fastest-growing best private companies in the world and really the focus is to capture the value creations going on as the company is private in the time horizon from being private going public has gone from roughly three years to nine years quickly in the in the past decade. We have got a diversified portfolio of these leading companies. We have 47 companies that we've invested in, so it's very diversified, if you look at our top-10 holdings, nearly 70% that are top-10. There 70% of the overall portfolio are top-20 and [references] roughly 90% of the portfolio.

We've got a lot of different trends that we play into, disruptive technologies is driving and the innovation economy. We've got a management team that has a long track record of identifying, investing and working with rapidly growing emerging companies. I mentioned, currently our share price is selling at about a 38% discount to NAV.

In terms of the value proposition that we are focused on, on the side of the ledger, you have public investors that historically had access to rapidly growing small companies that they potential could offer and they went public early in their lifecycle, and so we create access for those public investors on the other side of ledger for private companies with this tripling of the time to claim company's formation, VC investment and going public again, so it creates all sorts of liquidity issues and capital issues that we address buying shares from existing employees, former employees early investors and so forth, and we've been able to accumulate meaningful positions in companies like Twitter and Palantir, and Chegg and Violin and Dropbox, using this approach.

The reason why we've been able to be as efficient and as effective as we've been acquiring shares, because unlike a public company we just go and put your order more difficult, higher source these shares and are able to get the information to make investments. As part of with the management team that we've put together, which has extensive experience working with emerging growth companies, but it's also our entire our tier team, so we have a very a very board of directors including people like Bill Campbell, who is on the board of Apple and chairman of the Board of Intuit. Leo Potter, who is the former Head of Private Investing for George Soros, we've got an active Advisory Board, including people like Bob Grady, who is the Past Chairman of National Venture Capital Association and Todd Bradley who is the Head of the PC Division at Hewlett-Packard, and then we also have deep and long-lasting relationships with leading venture capital firms. Firms like Andreessen Horowitz. First investment in the company called Kno came from phone call from Marc Andreessen saying "you guys should be involved with us." I am on the Advisory Board for IVP, which is one of the leading VC firms in Silicon Valley. Kleiner Perkins, actually nine of our investments have Kleiner Perkins as a lead investor. SV Angels, Ron Conway is the long-term relationship of ours and so all that network has made it, so we’ve been able to be very efficient with our ability to get great, great company shares.

So, that's kind of what this opportunity is all about. And the world that I grew up in, public investors had the opportunity to invest in small companies with potential, because they are also like public early in their lifecycle. Companies like Intel went public in $50 million market cap. It Dell, a $200 million market cap, Starbucks with $200 million market cap, so the billions of dollars of value creations occurred, public investors got to participate in that. What's happened today with the medium market capital company going public being $1.1 billion allow this value creation, most of that value creation is going to handful private investors and that's what we stepped in. We allow public investors to capture that growth that's going on in the private company world.

So, looking at our portfolio today as I mentioned, top-10 positions are nearly 70% of the overall portfolio. Twitter is our largest position at $36 million that we have committed. Palantir, our second largest position, Violin Memory, Dropbox, Chegg, Avenues, Solexel, 2U, Kno, Facebook make up our top-10. In terms of the catalyst for our stock the discount is very extreme, but there's no reason why discounts can't stay for a period of time. We think the catalyst for the stock we have that discount evaporate is that many of these companies we think could be public in the relatively near-term. I think a lot of the reasons we believe that is, when you look at what's going on in the IPO market today is the healthiest IPO market that we've seen in years in terms of pricing and aftermarket performance.

It's history is any guide what that shows and tells companies is that the water is fine, so they're looking to come into that marketplace earlier than maybe they were originally expecting, so we think that companies that we expect originally 2014 to be public, we think can happen in 2013 and we think that's going to be very beneficial for our shareholders and our stock price. Also I'd make reference when you look at the growth that's embedded in our portfolio is very extreme. If you look at overall portfolio 47 positions, the average revenue growth was about 80%. If you look at our top-10 positions, it's even higher than that. Twitter is growing well in excess of 100% per year, Palantir over 100% per year and so forth. Dropbox is experiencing hyper growth and these are all companies that we have meaningful positions in that we think represent tremendous upside for our investors.

Another key point that I think sometimes gets overlooked is how important is to have tier-one premier VC-backing with these companies, what history has also shown is that the top-tier VCs have a disproportionate share of the a great companies that get public. And so, when you look at our track record, we are fortunate to have very best VCs that they are backers of a number of our companies. I mentioned, Kleiner Perkins has nine of our companies. They leave the rest of four, SV Angels, Ron Conway, six, [XO]four, Andreessen Horowitz, four, Benchmark, four, so it shows a type of sponsorship and the quality of the overall portfolio.

The themes that we are focused on is, primarily five game-changing themes. Social Mobile is a core theme of ours. Obviously mobile computing continues to be explosive and the ongoing activity going on mobile devices from the traditional devices. Cloud Computing and Big Data is another key theme of ours, Palantir and Violin being core holdings within that theme. Internet commerce green technology and education technology, which is a major theme of ours that we think has explosive potential and we've got a number of the very leading companies that are in that segment.

In terms of our process, how we do this, and I think it's important. We are not just reacting to the phone somebody saying hey do you want to buy shares of Twitter or do you want to buy shares of the ABC? Effectively, what we've done is, we've looked at the overall private company landscape over 2,000 VC-backed private companies of a $100 million greater market value, so it's quite a pool. And then we go through the themes that we are focused on basically do four key analysis, look at the people, product, potential, predictability and then what I call an NFL draft of what we think are the top private companies in the world. So, number one pick, Twitter. Number two pick, Palantir. Number three pick, Dropbox. And then we have to make a decision to our analysis of what price we think is appropriate to pay for it and then we aggressively look to source these shares. And, again, you have to be approved buyers all sorts of unique aspects of buying private shares that we think we've been very effective doing. And again, we think the position in the marketplace is only being enhanced by the reputation what we've been able to do today.

So, important point is that, when you look at our portfolio most of the companies, we don't really call them venture companies. I mean they are private companies rapidly growing but the bulk of them over 80% have a market value over $100. So, again in the good old days, most these companies were already been public and just because the public market dynamics of these companies are private, but they are rapidly growing. As I mentioned, the overall revenue growth is approximately 18%.

So, just a quick feature on some of our core holdings and kind of where we bought them and we're at today Twitter as I mentioned is nearly 15% of our overall portfolio. We made our first investments in May of 2011. We've made approximately 17 transactions. Typically, what we do is get a position, get on the cap table and keep on building at prices that we think make sense. But when we've made our investments Twitter at 200 million users today has over 500 million in terms of real time search, the model is absolutely exploding in terms of the application and the ways to monetize that. In fact one of our investments is in company called Dataminer, which basically taps into the Twitter fire hose for real time analytics helps traders, helps government officials track bad guys and so forth. And if you look at the caliber of investors that we invest alongside of we think in Twitters, we think it's a great position for us and our shareholders.

Dropbox is another core position of ours. When we first made our investment in November of 2011, we had 50 million users. Today it's well over 100 million users. 2 million pay for it in 200 countries. When you look at the actual, now it's a very competitive marketplace obviously, but when you look at the numbers what’s going on Dropbox is absolutely killing it. We love businesses that are addictive that don’t cause cancer. Dropbox is one of those kinds of businesses with tremendous growth and we think enormous potential. Effectively, they are making the operating system and device irrelevant and letting everybody collaborate and share against established business that own a nice position.

Spotify another great growth business. I have just announced looking at their initial subscriber base. They've got 24 million of monthly active users. We had 6 billion of those 24 million actually pay for the service, which is a remarkable number from a premium model. If you look at those types of models, what's remarkable about Spotify is the low-level of churn. If you think about the typical Spotify customer that basically my daughter, but they don't they don't lose them. The turn off the electricity, they turn of the Spotify account and if you do $10 a month with $6 million monthly subscriptions, you can see how these numbers are getting very, very large to Spotify, and again we think that could be a public offering sooner rather than later with great sponsorship. And last one, Violin Memory, who is a leader in the flash memory area experiencing explosive growth. I mean there has been rumors of Violin being public and I think from a business standpoint in the numbers and growth, I certainly think they can go public when they want to go public and again we got a position about 6%

So, I walked through that extremely fast, but just maybe quickly in terms of where we are at today. We do have a stock that sells at a significant discount to its NAV. We think that's primarily and we can't complain too much about it when Facebook was of position that we had early on and with the Facebook stock and so we kind of benefited from that when the Facebook offer didn't go the way as peopled hoped. We got the flipside of that, but I think it creates an opportunity today the portfolio that is extraordinarily robust, growing very fast and we feel very good about the positions that we own. We think the IPO market being better than we've seen in many, many years is going to be a motivation to have many of these companies go out serve then hoping and we also have substantial growth in online portfolio which we think is creating value every day.

So, with that, what I'd love to do is open up to any questions.

Question-and-Answer Session

Operator

Unidentified Analyst

(Inaudible).

Michael Moe

Yes. And I think as investors both get confidence in what we have to understand the portfolio and the results. I think what you will find is that initially we'll be happy just to see the stock getting back to NAV, but here's what's interesting when you really get under the hood. The intrinsic value of the underlying portfolio, we believe is actually greater than the state NAV, because the way that you account for the different positions and what they create on the books. And my point is, if you look at Twitter for example, right? I mean, Twitter, when we bought this, most of our positions are basically carrier cost unless there’s an outside event that where the terms of known we use as a transaction then you know what the terms were financing, you know the terms. Basically, the adjustments up are going to be pretty limited, right? So inherently, we think you our positions in many of our holdings, Violin, Twitter, Dropbox, I think are much higher than that we carry at, so actually state NAV is one thing. Intrinsic NAV is higher, so ultimately I think we should premier I guess what I'd say, but.

Unidentified Analyst

(Inaudible).

Michael Moe

Yes. I mean, so when you have a portfolio with underlying growth that being 80% per year, so right on the fundamentals generally speaking. The value creation going on here is pretty significant, because of where our stock is and because we think what ultimately I can sit here and tell you how undervalued it is versus the real intrinsic NAV, but I guess what I think is the best thing for us to do is to let some of these events materialize, people see guys who bought Violin here. It's there. You bought Twitter here, it's here and so forth and I think that's going to help people kind of start to understand what maybe an appropriate way to the value this portfolio.

Unidentified Analyst

(Inaudible). NAV is as least 20% under stated or you not that much?

Michael Moe

Yes.

Unidentified Analyst

Can you share with us your strategy or actually how do you build out and accumulate shares in my discussion (Inaudible), you talked about large income assets and how you buy the multiple tranches over time and (Inaudible) share that thought and maybe if you can track it to let's say buying through another (Inaudible) portfolio of companies share close to (Inaudible) you buy your stock versus and investor are not buying that way.

Michael Moe

Yes. So, first of all we are agnostic where we get the stock. Meaning, we have the list, I think very different than maybe a lot of private investors. Different than at least many private investors, because we are looking primarily for second issues about 60% of our investment have been secondary 40% of them primary. Primary has actually been growing, but basically what we done is, we've created a list by our research to say what are the best private companies. Then we say what price would we be interested in buying them and then we basically go to every source imaginable, venture capital community, we go to the different brokers we know that are transacting. We go to companies and we say, "We are buyer". We got to be approved buyer too, so that makes it different as well, but we've bought shares from law firms, we bought shares from consultants and we've bought shares from former employees, current employees. We've bought shares, office SharesPost in SecondMarket, and so it's a very proactive approach, but we are looking to source issues anywhere we can find them and we are very proud of what we've been able to accomplish.

One is just going to think a lot of people missed this transaction with SharesPost in NASDAQ, but NASDAQ with SharesPost have created the NASDAQ private market, which we think is going to be great for emerging growth investors. I think, it's actually good for us and we think we are excited about what that means.

Unidentified Analyst

When you buy stock or usually able to buy is it (Inaudible).

Michael Moe

We're disciplined about where we buy the shares and at what price. Sometimes, look, I mean part of the advantage you have as a buyer is you have to be approved buyer, so you could theoretically contract something at SharesPost over the seller, but if you can't get the company approve you, you are out of luck, so in the case for example Dropbox. There not many approved buyers at Dropbox. There's not been approved buyer for Twitter. And you go through the whole there's Palantir. So, all that there's an advantage to us as people that are known and trusted and that have the opportunity to make up.

Unidentified Analyst

(Inaudible). You are a publicly traded company that offer international assets to portfolio private companies, what (Inaudible).

Michael Moe

Yes. I mean, again, I think there's probably I think we are very different than I think the two firms that you are referencing and that are better but different, But what we think is attractive about what we are doing is, we are literally, we've been able to, we are saying who are the best private companies in the world and we've demonstrated abilities basically to access them. I think if you look at those who funds, it's a different approach. I think that primarily doing private placement some of it big in structure return, it's not that things, but it also is limiting I think in terms of the kind of companies that you are going to get access to.

Unidentified Analyst

(Inaudible) like to ask the questions? Okay. Fine.

Unidentified Analyst

What is your policy with respect to holding unrestricted public stock?

Michael Moe

So, generally speaking, we know that when a company goes public and the stock becomes tradable, generally speaking, our policy to look for the first opportunity to get liquid out of it, because we know that we are not. People aren't investing in us to have us manage a public portfolio, but we also have fiduciary responsibility, so if we make the decision in the best interest of our shareholders to hold a stock for a little bit longer than what will be required, we'll do that, but as a policy and as a philosophy, we are looking to exit once the company goes public.

Unidentified Analyst

Yes. And to clarify, there you have public positions right now in Zynga on Facebook. Are there any other public companies you hold?

Michael Moe

Yes. As of the 12/31/2012, that's correct. That Silver Spring just recently went public.

Unidentified Analyst

Okay. Who else would like to like to ask a question?

Unidentified Analyst

Can you tell us about any investments you've made that in retrospect were mistake or multiple-year acquisition costs, and also what are the tax implications when you exit a liquid public security?

Michael Moe

We've never made a mistake. No.

Yes. So, fortunately the realities of emerging growth investing is as we all know in this room it's a [bearing] average business and the key is that we do everything we can to increase the bearing average and reduce the number of strikeouts. I think one that candidly the investments that I regret the most because it violated our own principles was Groupon, and we have made small investment in Groupon, but I can make the bulk case. I can make that bare case, but we basically we did it because we had just gone public and we said you know here are the kind of things we are going to do and then I felt like people would want us to own Groupon as we did, and yet Groupon was a named again I can make the bare case and the reasons I wouldn't have invested in Groupon for the reasons and also we never would invest in something, but we did it in a of course we got to miss and we deserve when you violate your own your own principle, so that's the one that I regret the most.

We have others, investments that have not performed as we expected them to, but I think the way that we went into it and analysis just were going to be wrong sometimes, but generally speaking the positive thing and again I'll say this just as it relates to what we are doing and why? I think we are interesting for investors. If you look at the underlying, the investments we've made or we've got most on our capital, we couldn't be more thrilled with the performance of what's going on with these businesses. And when you look at, what, Twitter and Palantir and Dropbox and Violin and Chegg, it's awesome.

Unidentified Analyst

(Inaudible).

Michael Moe

So, tax issue. Basically, you offset your gains versus your losses, we make distributions on a yearly basis. We try to be tax efficient, so it's just that we have to go through kind specific example, but basically we distribute the gains like a dividend. The net gains like a dividend.

Unidentified Analyst

Are you active as an investor? You vote the stock?

Michael Moe

Generally speaking one of the things that we're viewed as attractive shareholder is because we unlike a typical VC and we are not looking to take board seats, we are not looking to be super active in the management. I mean, we see our value proposition is sourcing shares of the best businesses and therefore the VC, I mean they don't want another noisy venture capitals involved with them, right? And so they look at us as being well play well [sandbox], I think that makes us that much more attractive. That said, if we feel, the company feels like we can add value, we've been in various situations where we were helping.

Unidentified Analyst

Who would like to ask a question?

Unidentified Analyst

(Inaudible).

Unidentified Analyst

Best investment today?

Michael Moe

Well, I think that I am excited by I mean, I think it's evidenced probably we put our money where excitement is. I mean, Twitter is going to be a big, big deal. Dropbox has a shot to be a really big deal. Palantir has a shot to be a really big deal. A company that you probably haven't heard of is more bigger risk reward earlier, but could be a big deal as Kno, K-N-O, which Marc Andreessen that we are investor in and Intel and Goldman are investors with us. The digitizing textbooks, so there's much, much bigger and cooler than that, effectively has created smart content, huge marketplace and these guys are, the software basically makes content smart and that could be gigantic.

Unidentified Analyst

Would you consider exiting a position through the private exchanges, pre-IPO for valuation? Does it bother your intrinsic assessment?

Michael Moe

Great question and answer is absolutely.

Unidentified Analyst

Looking at your portfolio of top-10 and less restricted to private company investments, what are the top-three or four that you think are likely to go public over the next 12 months?

Michael Moe

Again, so I think if you look at our top investments and we make our best guesstimate unless we have specific knowledge when we think companies go public, what I'll say is everybody in that list and with the exception of Palantir is Palantir has got a different mindset. We expected potentially 2014 maybe earlier. With what's going on in the IPO market, I think many of those companies could go sooner and even the company that doesn't show up in. I think all the companies basically are on top-10 and could go public if they wanted to. And I think, many of them would in 2013, which again I think is a good catalyst for our stock.

Unidentified Analyst

Michael, thank you so much for that presentation.

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