By Herina Ayot
GSV Capital Founder & CEO Michael Moe interviewed by OneMedRadio. GSV raised $50 million in an IPO in May 2011 to invest in emerging technology companies. Moe describes the background and objectives of GSV and its initial investments.
Brett Johnson: This is Brett Johnson with OneMed Radio. Today, we are with Michael Moe, founder and CEO of Global Silicon Valley Capital, listed on the NASDAQ as (NASDAQ:GSVC). The company became public in May, raising $50 million in an offering made by Ladenburg Thalmann and Lazard for the purpose of investing in venture-backed growth companies, enabling average investors the opportunities to participate in companies like Facebook, LinkedIn (NYSE:LNKD), Zynga, Groupon (NASDAQ:GRPN), some of the other exciting stories that only institutions have able to participate in. Michael, thanks for joining us. Can you tell us a little of your vision for GSVC?
Michael Moe: Thanks, Brett. You know, the vision we have for Global Silicon Valley Capital is to have a publicly traded liquid security that invests in the fastest growing, most dynamic VC-backed private companies in the world. What you alluded to before is that for the average investor, you know, while you see this explosive growth taking place in the innovation economy, that’s not an area that most people have access to. So we’re effectively creating an access vehicle that lets investors participate in this dynamic growth.
Brett Johnson: So companies like this are sort of a new type of investment vehicle?
Michael Moe: It is. It’s through a structure called the BDC (Business Development Corp.) and really BDCs are generally used for a debt lending type of security. And what we’ve said, is we kind of re-conceptualized this and said, why can’t we use that structure to invest in the capital appreciation strategy. Again, because of the changes that have gone on in the capital markets over the past decade and the fact that companies are waiting to go public much longer if not forever, you know, the ability to invest in these emerging growth companies has been very constrained. So that’s a key part that we saw an opportunity to create a publicly-traded security around that problem. So, yeah, this is really the first investment vehicle of its type.
Brett Johnson: Interesting. So, why do you think this will be successful? I mean what’s going to make this work?
Michael Moe: Well, a number of things need to happen for this to be successful. First and foremost is that we have to have a great way to prioritize and analyze private companies, which, you know, that’s a tricky business. As a side, we have a research business that focuses exclusively on private companies and innovation so that helps, but having just an understanding of who are the most important private companies. Secondly, having the discipline and ability to quantify what these companies are worth and have a strategy that both creates diversification, but at the same time allows the most significant successes too and have a dramatic impact on the portfolio. So, I think it’s a combination of company selection, evaluation criteria, and portfolio management, which will be the key ingredients for making this a success.
Brett Johnson: So now, you talk about Global Silicon Valley. You are located in the Palo Alto area, I understand, and that’s been one of the things you think has given you sort of the ability to find these companies?
Michael Moe: Well, yeah. And we call it Global Silicon Valley for a reason. You know, we are physically located in the heart of Silicon Valley, which puts us sort of at the epicenter of where much of the venture capital activity goes on, where many of the important new innovative companies are being formed. So being in this community and having that as part of your network is critical. But increasingly, I believe, while Silicon Valley physically is the epicenter, this whole Global Silicon Valley is becoming a mindset. So it goes really from Silicon Valley, to Boston, to Austin, to Chicago, to San Paulo, to Shanghai, to Mumbai, to Dubai and so forth. I mean that’s really how we look at this kind of landscape of innovation. But having been physically located sort of in the heart of it all with that network, I think gives us tremendous advantage, both in terms of access to companies to invest in as well as knowledge.
Brett Johnson: Uh-hum.
Michael Moe: So our first investment that we announced is the company called Kno, at Kno.com is just sort of an example of things that we’re able to do. That investment was made alongside in the same round and the same terms with Andreessen Horowitz, and with Marc Andreessen who’s arguably the hottest venture capitalist in Silicon Valley right now, the Facebook.
You know, Mark was obviously the founder of Netscape. He’s on the board and an investor in Facebook and Skype. He was a major investor and on the board of Ebay (NASDAQ:EBAY) and at Hewlett-Packard (NYSE:HP) so, you know, having the lot. We invested alongside with Marc Andreessen, Intel (NASDAQ:INTC) and Goldman Sachs (NYSE:GS), and along with that you get sort of evidence of the type of access that we’ll be able to get in terms of these important companies. And if we weren’t physically located here, I think that’d be more challenging.
Brett Johnson: So how do you get access? I mean doesn’t everyone want to invest along these guys?
Michael Moe: For sure. I mean, you know, the old saying is, you know, Kleiner Perkins, the only thing more difficult than getting Kleiner Perkins to give you money, is to give Kleiner Perkins money, right. So I mean the top venture capitalist, you know, have more people that are trying to partner with them than there’s time in the day. So some of the key things that we bring to the table, you know, is our relationships that go many, many years where people know me, know us, you know, know what kind of value we can bring, know how we’ll play in the sandbox, and so forth. And a key part of what we bring is we don’t need to be on the board. We don’t have limited partners that require that as part of one of the things that we needed to invest and so we’re a pretty good partner to bring in that. And I guess besides just primary capital that we can provide, we’re also a resource or a source to buy shares of secondary stock.
Brett Johnson: Maybe it’s a good time for our listeners to hear a little bit of your background. I know you are a highly regarded analyst on Wall Street. From Lehman Brothers to Merrill Lynch, and then you went out and started ThinkEquity. Can you tell us a little bit about your background in the investment business?
Michael Moe: Well, Brett, you just hit on many of the highlights, but, you know, I’ve been involved with growth companies for nearly the past 25 years, first as a research analyst. I was the head of the growth research at Lehman Brothers and then I was head of growth research and strategy at Montgomery Securities, which was a very successful San Francisco firm. And then I was head of global growth research at Merrill Lynch before starting ThinkEquity Partners in 2001, and we grew ThinkEquity, which was a growth-focused investment bank. You know, we grew it from idea to 200 people and $70M in revenue, and sold it in 2007.
So really since that time, what I’ve been focused on are these structural changes that have taken place in capital markets, how growth investors and growth companies need to re-conceptualize this ecosystem. You know, this fund that we’ve created, a publicly traded fund, really is a way to kind of bridge this idea that growth companies need access to different types of investors and investors are looking for ways to access the most dynamic emerging growth companies in the world.
Brett Johnson: So I know you had also written a book called, “Finding the Next Starbucks” that you’ve gotten a pretty good success and as I understand has been published in five different languages or multiple printings. I guess within that, you described your investment philosophy. Can you kind of give our listeners a little sense about what you do or what the process is and a little bit about the book that you wrote?
Michael Moe: Sure. So “Finding the Next Starbucks” really was my investment philosophy put into words and it’s focused on, you know, how do you identify and invest in what I call the 'stars of tomorrow today'. So, the first part of that is we have a disciplined way of how we think about where growth companies are going to be found. And so we think about what are the important growth sectors of the economy, you know, technology and healthcare, media, education. and then we think what are the megatrends that are impacting these growth sectors; globalization, the internet, outsourcing, demographics, convergence, consolidation, freemium models, open source, and sustainability. And we think about how this cross sects to create powerful investment themes and that’s where we allocate our attention and look in to find the important next stars of tomorrow. We create these investment themes and social media, for example, is an investment theme today, and mobile computing application, the digital doctor, and social learning, are all themes that we like.
Then when we’re actually looking for a specific company, we have a formula, I call the Four P’s, that is the common denominator of every great growth business that we’ll invest. The first P being people with no shortage of interests and ideas, but it’s also people that make the difference, and who their partners are and what the culture is. So, if we don’t get beyond the first P, we won’t look at the other three P’s.
Secondly we’re looking for companies that have a leading product and that’s a company that leads its industry, proprietary product, one of a kind business. Again, looking for companies that not only survive, but thrive during their corporate evolution, not interested in the me too’s or the number three or fours that might be cheaper from a valuation standpoint. We really believe that it’s about leadership. You know, the internet is all about disproportionate gain to a leader within the category, so we want to focus on who’s going to be the number one player.
The third P is potential, how big the company can become, what are the megatrends at the back of this opportunity? what are the investment themes? how big a market is it?
And the fourth P is predictability, how visible is that growth, what kind of operating leverage does it get as it scales. You know, many of these companies don’t have a predictable model developed yet, but you look at the characteristics of the business and the people, and what they’re doing, and you start to see what these signposts on the highway are going to be in that you can quantify what you think what you think the value can be two, three, four, five years down the road. That’s really the essence of what we talk about in the book and what our investment philosophy is, both with the fund and what we’ve been doing before that.
Brett Johnson: So in terms of the operations, now you are looking for deals, you’re seeing deals, you’re evaluating deals; what sort of kind of low are you getting now and what’s sort of the process, and how many investments do you hope to make and expect to make?
Michael Moe: We raised $50M initially for our fund as you mentioned in May. We anticipate making, you know, approximately 15 investments from that initial $50M and expect the typical size will range from a couple of a million to $5M, but we can go smaller than that if it’s a unique situation, we can go larger than that if again we feel compelled. We’re seeing enormous flow in opportunity. So, while we’ve only announced one investment, we’d also announced with the investment that we have a handful of investments that we have made and are in the process of closing. We anticipate that over the next month, we’ll be able to discuss these in more detail.
Brett Johnson: Can you talk a little bit about your first investment, what was special about that?
Michael Moe: Yeah. I mentioned before, you know, the characteristics or the other partners that we have investing in the company Kno, but kind of using this whole Four P formula. You know, first all what Kno does is digitizing textbook and so this whole digital revolution that has already transformed the music industry and transformed the newspaper industry, the magazine industry, and the traditional book industry is now just coming into the textbook market, which is a $10B market.
So looking at the Four P’s, the first P, people, Kno was founded by Osman Rashid who formally founded Chegg, which has been a very successful book rental company kind of like a Netflix for textbooks. He’s put along with him, you know, premiere investors as I said like Marc Andreessen and Intel and Goldman and a real stellar management team. The second P, product, you know, Kno is leading this digital textbook area. They’ve got over 80,000 textbooks that they’ve already digitized with all the major publishers. They’ve just launched or announced the first iPad app that will be on multiple platforms in the coming months. The third P potential, obviously, you know, this tailwind of digitization and the digital revolution and the fact that you’ve got $10B spent already on textbooks that is going to go through a radical transformation with Kno as a leader. And the fourth P, predictability, there’s elements to this business model including the fact that it has subscriptions, a subscription base as well as other revenue legs that will create greater visibility than a normal high growth company.
And so you put it on the mix and it fits very, very well, perfectly kind of what we’re trying to articulate to investors that we’re able to do — get access to the highest quality, fastest growing, most dynamic, biggest potential companies in the private company marketplace. So that’s I think a good example and as I said the other companies that we’ll be able to discuss in the next month or so have a similar kind of characteristics behind it.
Brett Johnson: What’s been the response to the market for your stock and also what’s sort of your outlook on valuing your stock? Because obviously, you’re making investments in liquid securities typically that don’t release earnings results. Can you talk a little bit about those two issues?
Michael Moe: Yeah. I mean the stock price you know, infers to me how people receive it. You know, it was a small offering, a $50M offering Lazard and Ladenburg were our underwriters and I think the reality is the stock isn’t well known at all right now. I mean when people hear about what we’re doing, they’re sort of like a-ha, but generally speaking, you know, people just don’t know that much about our strategy, what we’ve done, and what we’re doing.
So the stock has languished since we went public. I mean again, I think not because anything has happened, I mean basically cash was in the fund, we’ve made investments, but people don’t even know what those investments are. So we went public at $15 and the stock is trading at $11 and changed today. And again, I don’t think somebody should buy this or sell this based on this, but that represents a pretty significant discount than the net asset value of the fund. So that’s one way just to look at it. I think ultimately the stock will be valued by the value creation that goes on within the portfolio.
And so your point about how it’s difficult to value these private businesses; one element of success is understanding who are great, you know, what are fundamentally great companies. And the second element is making sure you’re paying a price that creates both, you know, some type of margin of safety and ability to create return that will ultimately be reflected in the share price.
And so our expectation is that and we will undoubtedly make some mistakes, but what we aspire to do is to — you know, if we in fact are investing in the leading private companies in the world at a price that’s a fair price, the shareholders are going to be well rewarded for participating in our stock at these levels and candidly higher levels.
Brett Johnson: Right. So the opportunity for investors now is you can actually buy in at a business that’s trading below its book value. The cash has got in the bank at a time when it’s beginning to make what sounds like some good investments, Kno being one and a number of others in the queue, and largely capitalize in the fact that the story is really pretty much unknown.
Michael Moe: Yeah. I think that's the biggest — I meant there’s two things. You know, I think the strategy that we have is unique, and yet I think compelling, and you couple that with the fact that today, very few people know about us. So, I think as our story gets better known as well as our portfolio starts to evolve and people see what’s in it and so forth, you know, my expectation would be that that would be reflected in the share price. So, yeah, I think today, we’re very excited about how we’re positioned and we think investors should take a good hard look at what we’re doing and where we’re going because I think they’ll be happy that they do so.
Brett Johnson: Well, it sounds like an exciting story, Michael. Thanks so much for joining us. Again that’s–
Michael Moe: Brett, I very much appreciate it.
Brett Johnson: You bet. Again, that’s Global Silicon Valley Capital listed on the NASDAQ as GSVC, a Palo Alto based, I guess, investment company focusing on promising growth companies shaping the future of investments in the technology sector.