What if the problem with capitalism wasn’t income inequality or an education gap but the stock market itself? And what if that problem couldn’t be fixed by a wealth tax, billionaire philanthropy, or other sweeping cultural and political pivots but by simply slowing down?
That’s the intriguing idea at the core of something that began as a bit of a loony, never-gonna-happen proposal that has become a very real consideration in Silicon Valley. It’s called the Long-Term Stock Exchange, and its goal is to reshape the incentives for the next generation of public companies so that they can focus on the long term. And if — a big if — it is attractive enough to dislodge incumbents like the New York Stock Exchange, then maybe it’s going to reshape how corporations think about their objectives and our approach to capitalism itself.
Regulators this month approved the LTSE to become the nation’s 14th listed exchange, a nine-years-in-the-making accomplishment backed by Silicon Valley heavyweights like Reid Hoffman that is expected to pave the way for it to begin accepting IPO candidates later this year. You might only be on a first-name basis with the NYSE or Nasdaq, but other stock exchanges in places like Chicago and Boston serve as marketplaces for buyers and sellers of company shares, too. And the LTSE wants to be home for companies that find the existing exchanges too misaligned with their thinking.
I caught up last week with Eric Ries, the man behind the once-quixotic quest to create the only exchange west of the Mississippi River. The author of one of Silicon Valley’s entrepreneurship bibles, The Lean Startup, Ries is a well-known figure in tech circles, but his new challenge is to convince Wall Street suits to take a chance on him.
Ries is behind Silicon Valley’s latest stiff-arm to traditional Wall Street, though he’s more diplomatic than confrontational toward the old guard. And he reflects a new wave of rethinking the old ways of doing business. Spotify’s decision last year to hold a direct listing instead of a traditional IPO was something of an inflection point in tech’s relationship with Wall Street, and now Slack is doing the same. Some other leading voices in Silicon Valley have tried other gambits meant to minimize the big banks’ involvement.
“The IPO is like a wedding. The IPO process is, what kind of wedding planner do you hire? What kind of wedding do you want to have? But being a public company is you’re now married to the public markets for the rest of your life. People have mostly focused on the IPO process — it’s like making the wedding more efficient,” he said. “That’s not the problem. The problem is we have to live like this forever.”
Here’s his big idea: Today’s public companies are too focused on things that revolve around short-term stock price increases — beating quarterly projections by Wall Street analysts, shrinking extraneous budgets for research and development to cut costs, and tangling with activist investors who want to nip and tuck to create extra margins.
This makes becoming a public company less than attractive, and it’s no surprise that a lament in Silicon Valley has become that the fabled IPO isn’t as sexy as it once was. The necessity of going public to raise operating capital isn’t as much of an imperative, either: Tech companies can delay an IPO for longer and longer — raking in the cash from venture capitalists, allowing early employees to trade their shares for real money through private so-called secondary deals, and sometimes even disclosing financials just like public companies do to show their strength and growth — if they so desire.
Indeed, the number of IPOs in the US has fallen sharply over the last two decades.
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The downside for the rest of us? Well, public-market investors — especially regular people — don’t have the ability to ride the Silicon Valley growth rocketship.
“That whole complex — of the beat-and-raise game and therefore companies going public later and therefore the public being locked out of growth and all these macro trends that relate to the economy — I think they share common causes. And I’m not grandiose enough to think that this one reform will solve the whole thing,” Ries said.
“But if we’re going to have a capitalism 2.0, it’s going to need a capital market to be listed on.”
Because of regulatory restrictions, Ries can’t spell out exactly what requirements companies will have to adopt to be listed on the exchange. But here are the big ideas behind his proposals in recent years:
Investors are too focused on the short term
A common complaint from aspiring public-company CEOs is that they’ll be forced to deal with day-traders, activist raiders, and other short-term shareholders who are looking for a quick buck and are not actually invested in their company’s long-term value creation.
The IPO of Lyft, for instance, has been bedeviled by short-sellers. Tesla CEO Elon Musk has constantly railed against public-market investors for not believing in the company’s long-term vision — and has frequently insulted them.
To soothe this tension, the LTSE asks both founders and investors to each give a little.
Founders are typically concerned with these Wall Street hijinks that play casino with their babies. Investors are typically concerned that founders are immovable and recalcitrant and don’t want to take their advice.
“A lot of these companies have set themselves up as dictatorial monarchs for life,” Ries says. “There’s got to be a way to have a more constitutional republic vibe to how companies are governed.”
Investors in LTSE-listed firms are asked to commit to the long term — they could disclose to the company that they are planning to be long-term shareholders, so a founder knows during an IPO and afterward which of their stock owners are more interested in its appreciation. Short-selling, or betting that a company would lose value, would still be allowed on the LTSE — and investors won’t have a legal limit on their ability to sell shares at any time. But the idea is that founders would at least have a contract (well, not a contract per se, but at least an understanding) that enough of the company is owned by people willing to stick by them through ups and downs.
Founders are asked, over time, to sacrifice control — that’s the nature of going public. But in return for signaling that these investors are in it for the long run, investors would gain extra voting power. Founders still might not like those terms — after all, they’re the ones that built the damn company, and they tend to believe that they know what’s best for it even once the company goes public.
How exactly the details will pan out will be enshrined in future filings with the SEC. At least one commissioner at the agency thought at first that this arrangement was still too founder-friendly (although his opposition alone wasn’t enough to thwart approval). But Ries maintains that this is a happy middle ground and insists that long-term shareholders and long-term founders actually want to work together.
“There’s got to be some way for power to eventually be shared,” he said. “Let them join you in governing the company together.”
CEOs are too focused on the short term
Part of the reason Ries thinks companies are motivated primarily by short-term incentives is that their executives are motivated by those same short-term incentives. When the leaders of a company get personally wealthy from certain achievements — a certain share price, a certain quarterly performance — the decisions they make tend to follow naturally.
So Ries wants to see executive compensation packages change so they’re not as incentivized by bonuses for beating certain short-term targets but rather through long-term vesting schedules — as long as 10 years. Those are the sort of requirements that companies would have to enshrine to be listed on the LTSE.
The LTSE is also trying to broaden the types of people that CEOs think of as their stakeholders. In Ries’s view, a CEO should be responsible for things beyond just a higher stock price. She or he carries responsibilities to their local communities, to their employees, and to their partners.
So that’s why companies listed on the LTSE are expected to have to have board-wide committees that focus on things like commitments to sustainability or diversity. Corporate boards in Ries’s view are bogged down by boring, menial tasks rather than using their oversight power to force the company to think longer term.
“We want to redirect that power into some things that are more than about audit and compliance,” he said.
The big question: Will it work?
The NYSE and the Nasdaq are dominant for a reason. They have institutional investors that have been trading stocks for decades. They have branding and credibility that bring financing to help founders go through one of the biggest moments in their lives. They have deep relationships with key bankers and lawyers who run Wall Street. And they fiercely compete with one another for clients.
The incumbents are massive: The NYSE has 2,800 companies listed with a market value of $28 trillion. The Nasdaq adds another $10 trillion. The LTSE starts from zero.
For good reason, even Ries isn’t convinced that he can dislodge the incumbents. He says he expects many of the companies that choose to list on the San Francisco-based LTSE to also co-list, or trade in multiple places, on one of the traditional exchanges. He’d do the same if he was a startup CEO, he said, for “the psychological sense of safety you get from having one foot in the old and one foot in the new.”
The bearish case for the LTSE is that this is, essentially, a Silicon Valley vanity project for some celebrity tech investors like Marc Andreessen, who are investing time and money in something that will make little real-world impact. The LTSE has had conversations with candidates that are in the IPO pipeline over the next 18 to 24 months, but it’s quite possible that no one wants to agree to these to-be-finalized requirements. Or maybe they’ll just see the idea of listing on an untested exchange as simply too big a risk for a delicate moment like an IPO.
“Will companies do it? I don’t know. But what I do know is that if they do it, it will be a huge deal,” Ries said.
The other challenge will be getting investors to decide this is worth their attention. Retail investors with Fidelity accounts would be able to invest, too, but the real power comes from the undisclosed institutional investors that the LTSE says have signed up for its investor coalition — a sign-up list of supporters — which Ries says count over $3 trillion in assets under management. But even if they appreciate the idealism of this exchange, they’re making no ironclad commitment to actually trade on it or participate in IPOs. Plus, there could be something of a chicken-and-egg problem: If startups don’t choose to go public on the LTSE, the market will collapse before it’s even born.
So this essentially relies on Wall Street buying into the idea. And Wall Street is not exactly known for running toward innovation.
The reason to be bullish, though, is that, to use the Silicon Valley trope, there is a clear product-market fit. The primary roadblock to the LTSE has long been the regulatory hurdles — which Ries seems to have now conquered with the SEC’s approval. There is little question that Silicon Valley has voiced an interest in an exchange like the LTSE for a long time. And maybe — with co-listing — Ries’s idea is not as scary as it might be to nervous new CEOs.
It’s just a question of whether they’re daring enough to stop complaining and start gambling.
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