Eric Ries is something of a cultivator in technology circles. During his early days as a software engineer in Silicon Valley, he co-founded social network IMVU and then spent some time at venture capital firm Kleiner Perkins before striking out on his own as a startup advisor.
“I had been programming since I was a kid, but when I became an entrepreneur I was finding over and over again that the conventional approach to building products and companies simply didn’t work,” Ries explains “I spent a lot of time in the wilderness trying to find solutions to this problem, reading voraciously and talking to people in business.”
The lessons learned from these experiences — combined with an appreciation of how shorter development cycles could be applied to companies in the seed funding stages — coalesced in his book The Lean Startup. Published in 2011, it shortly made it onto the New York Times bestseller list.
In the aftermath of the global financial crisis, the concept of a lean business was clearly appealing. However, when Ries started discussing the theories that formed the basis of his book, the response was extreme: “some companies practically threw me out of their conference rooms because here was some kid challenging the way technology companies had operated”.
“It took some time to figure out how to talk about my theories, but the book has since become something of a baseline for how to build products and companies.” This planted the seed for something much more encompassing. In the almost decade since The Lean Startup Ries has been focussing on developing a new national securities exchange, the Long-Term Stock Exchange (LTSE). Ries explains to Opto how he first came up with the idea.
“It took some time to figure out how to talk about my theories, but the book has since become something of a baseline for how to build products and companies”
“The idea for the LTSE came from the questions I was asking while trying to help venture-backed startups build long-term profitable, public companies. I didn’t appreciate just how polarising the concept of a long-term stock exchange would prove to be. But the great thing about a polarising idea, as opposed to one that is simply ignored, is that some of the people I spoke to thought it was amazing.
The first Lean Startup Conference was almost like a TED revival meeting — there were only about 300 people in attendance but the energy in the room was electric. In the period immediately after 2008, old models were being discredited and people were looking for something new.
I knew nothing about stock exchanges or capital markets at the time, I was just thinking about how to make companies more effective and profitable. It made no sense to me that companies were run on a quarter-to-quarter basis, since companies that are distracted from their mission are worthless and no investor wants to lose money
I saw it as a coordination issue. We needed a social contract between long-term investors and good companies whereby everyone would change their behaviour to make more money together. It then occurred to me that the mechanism for regulating the behaviour of managers and investors was a stock exchange — so why not a long-term stock exchange?
“It then occurred to me that the mechanism for regulating the behaviour of managers and investors was a stock exchange — so why not a long-term stock exchange?”
We have had to make numerous changes to the business model to ensure compliance with securities laws. It took about five years just to figure out how it could be built. We canvassed views from both established companies and startups. The people who are building businesses know me from The Lean Startup and some of these companies are now listed.
I also do some consultancy work with public companies so I was a known quantity. However, the desire for a new capital market option has been stronger among private companies, because they have to go public eventually, and therefore have the greatest need for change.
The concept of a long-term stock exchange has run into opposition. For example, in a letter to the SEC in January 2019 the Council of Institutional Investors (CII) expressed concern about the LTSE’s proposed corporate governance requirements permitting newly public companies to have multi-class share structures with unequal voting rights.
One of the most seismic events in the LTSE’s development, and one that has been largely unremarked upon, is that when we submit rule fillings with the US Securities and Exchange Commission (SEC) there is a public comment period and a range of institutions have commented favourably.
In the filling we submitted last year in relation to our listing standards, for example, we received a favourable letter from the CII. That was the culmination of years working with the association to find common ground.
The LTSE has a variety of mechanisms to insulate its listed companies from short-term stock market pressures, and an enforced commitment to long-term value creation. With our long-term focused listing standards, the LTSE offers companies in every industry a public market option designed to shift the narrative and metrics of success from a quarterly drumbeat to a long-term perspective, while still providing flexibility and full liquidity.
“With our long-term focused listing standards, the LTSE offers companies in every industry a public market option designed to shift the narrative and metrics of success from a quarterly drumbeat to a long-term perspective, while still providing flexibility and full liquidity”
Based on the LTSE’s listing standards, a company needs to develop and publish a policy that meets certain specified parameters, while also being in line with the listing principles (see boxout). The exchange then verifies that each policy is consistent with the underlying principle. These standards also allow investors to know which companies are making binding commitments for the long term.
Truly great and transformative companies are already run with a long-term time horizon — just think of Amazon in 1997. All company builders understand that operating with a long-term philosophy is necessary for sustained growth and success. However, the current landscape of public capital markets doesn’t reward this type of thinking. We designed the LTSE to allow company builders to take their businesses public, reward their stakeholders and collect new capital without having to give up their identity or mission.
A public market focused on long-term value creation is attractive to both companies that are currently private and those that are already public. Companies can undertake a dual listing on the LTSE and an existing exchange, but when they list on the LTSE they get the long-term focus that our market offers.
The LTSE has the same financial requirements for listing as the incumbent exchanges. But we still believe every company can be long-term focused from its very earliest days and we are here to help. The LTSE family of companies includes not only the exchange, but also our software business, which helps companies operate for the long term from the time they launch. The LTSE protects the mission and long-term mindset that all early-stage company builders have.
“The LTSE protects the mission and long-term mindset that all early-stage company builders have”
For those companies not yet ready to go public, we built a software suite, LTSE Bridge, to help formalise those governance protections early on. Bridge is a suite of free software tools that help founders manage their capitalisation table, hire without bias, plan their runway and take all the small governance actions that when conducted together can help set up a company for long-term success.
There is certainly a place in the LTSE for special purpose acquisition companies. This is the hottest trend in the capital markets universe all of a sudden. Direct listings were the flavour of the month last year, now special purpose acquisition companies are all the rage.
SPACs have been around for a while and it is hard to say why they are making a comeback now. For every method of going public, there are pros and cons depending on the company and the circumstances.
We don’t have a strong opinion about how companies go public. We have worked with companies that have done very traditional IPOs and others that have adopted more unconventional strategies.
We only care what the company’s experience will be after it goes public. Our focus is on the corporate governance reality of their partnership with the capital markets. If the structural details are not right it doesn’t matter how much money they save on the first day of trading.
“Our focus is on the corporate governance reality of their partnership with the capital markets. If the structural details are not right it doesn’t matter how much money they save on the first day of trading”
Obviously, the coronavirus pandemic has impacted our launch date. However, we are confident in the technology and have sell-side members signed up. We delayed our debut at the request of a number of member firms and regulators who felt that the market volatility would be challenging. The coronavirus has been a negative development but we were fortunate to have raised finance last year, especially considering that fundraising in the current environment would clearly be challenging.”