Five years ago, when Eric Ries was working on the book that would become his best-selling entrepreneurship manifesto “The Lean Startup,” he floated a provocative idea in the epilogue: Someone should build a new, “long-term” stock exchange. Its reforms, he wrote, would amend the frantic quarterly cycle to encourage investors and companies to make better decisions for the years ahead.
When he showed a draft around, many readers gave him the same piece of advice: Kill that crazy part about the exchange. “It ruined my credibility for everything that had come before,” Ries said he was told.
Now Ries is laying the groundwork to prove his early skeptics wrong. To bring the Long-Term Stock Exchange to life, he’s assembled a team of about 20 engineers, finance executives and attorneys and raised a seed round from more than 30 investors, including venture capitalist Marc Andreessen; technology evangelist Tim O’Reilly; and Aneesh Chopra, the former chief technology officer of the United States.
Ries has started early discussions with the U.S. Securities and Exchange Commission, but launching the LTSE could take several years. Wannabe exchanges typically go through months of informal talks with the SEC before filing a draft application, which LTSE plans to do this year. Regulators can then take months to decide whether to approve or delay applications.
If all goes according to plan, the LTSE could be the stock exchange that fixes what Ries sees as the plague of today’s public markets: short-term thinking that squashes rational economic decisions. It’s the same stigma that’s driving more of Silicon Valley’s multi-billion-dollar unicorn startups to say they’re not even thinking of an IPO. “Everyone’s being told, ‘Don’t go public,’” Ries said. “The most common conventional wisdom now is that going public will mean the end of your ability to innovate.”
To Ries, 37, the public markets encourage self-destructive behavior, and he sees their dynamics as one reason why the number of U.S. public companies has fallen by half since its peak in 1996. Once companies go public, employees “are on Yahoo Finance every day, and it’s palpable how much that is affecting the decision-making of ordinary managers,” he says.
The problem begins with stock market investors who favor companies that show big increases in sales, profits, users, or other measures every quarter. When a company falls short, investors flee, and the stock plummets. Managers, hoping to avoid such jolts, spend too much time focusing on short-term performance. Ries said he’s heard the same story many times: halfway through a quarter, an executive realizes the company isn’t on track and starts slashing innovative projects to meet the targets.
Ries’s seminal book preached a fail-fast method of building startups where teams get a “minimum viable product” in front of customers as quickly as possible to avoid wasting time and effort. “The Lean Startup” made Ries, who previously worked as a software engineer at the failed virtual world maker There and as a cofounder of the more successful social network IMVU, a revered name among Silicon Valley entrepreneurs. While readers flocked to his startup lessons, no one picked up his stock market proposal — it was too polarizing.
When he decided to do it himself, he started talking to bankers, venture capitalists and regulators, who told him his idea was ridiculous. “People treated me like a barbarian,” he says. Undeterred, he spent three years recruiting a team and weighing different ideas, such as charging higher fees for short-term trades. Eventually, the LTSE settled on three reforms that address how executives are paid, how companies and investors share information and how investors vote.
A company that wants to list its stock on Ries’s exchange will have to choose from a menu of LTSE-approved compensation plans designed to make sure executive pay is not tied to short-term stock performance. Ries complains that it’s common to see CEOs or top management getting quarterly or annual bonuses tied to certain metrics like earnings per share, which pushes them to goose the numbers.