NewCo Shift Forum 2018
The author of the New York Times bestseller The Lean Startup wants to reinvent how stock markets work. Everyone thinks he’s nuts. But we currently fund US innovation with Russian mafia money and autocratic sovereign wealth funds, so….
Equity markets are literally the beating heart of capitalism, and Eric Ries wants to reinvent them. Is he crazy, or on to something big? Read on (or watch the video) for one of the most stimulating and insight-laden sessions of this year’s Shift Forum.
John Battelle: All right. I’m really pleased that Eric Ries is coming and speaking with me. He has an idea for markets that is very important for all of us to consider. He’s well known, of course, for his book, “The Lean Startup,” and his follow-up to that book.
What we’re going to be talking about primarily is his Long-Term Stock Exchange. Please join me in welcoming Eric to “Shift Forum.”
[applause]
You’ve been around the block a few times.
I guess so.
You wrote a book that sold over a million copies. As an author, I’m not at all jealous of that. Now you’ve decided you wanted to start another company. This was a company of companies in a way, right?
Yeah.
Tell us what the Long-Term Stock Exchange is.
Sure. Let me just say, from a lifestyle point of view, no author ever wants to start a company. This is a significant downgrade. Let me just get that clear.
[laughter]
I was not on the market for another company. This is an idea I first floated in The Lean Startup. If you are one of the 27 people who read all the way to the last page — which, out of a million, that’s not too bad of a ratio — one of the very last things I suggested in The Lean Startup was that somebody really ought to do a bunch of things.
That’s the best part about being an author. “You should do this. You should do that. You should reform education. You should reform public policy, government. While you’re at it, we have to think of a new better way to do capital markets.”
Because if you’re going to do a lean transformation, going all the way back to Toyota, if you study Jeff Bezos or any of the great long-term-oriented CEOs or investors, everyone understands that to do this better management system requires a philosophy of long-term thinking.
Yet at the same time, we’re telling venture-backed companies to go public, to be acquired by a public company, to enter into a corporate governance paradigm that is as short-term as it can be. We can’t reconcile those two things.
Although here in Silicon Valley, people say, “Oh, it’s Wall Street. It’s so short-term. It’s Wall Street’s fault,” investors don’t benefit from this, either. If companies are distracted from fundamental value creation, then they’re worth less money because they’re not doing the right things.
My idea was, “there ought to be a way to change the incentives of managers and investors at the same time. We would call it a Long-Term Stock Exchange or LTSE.” Somebody really ought to build that.
Of all the ideas in Lean Startup, almost every single one, somebody has run with in the intervening years. I never got the phone call from someone, “Hey, can I do the stock exchange one?”
Was that not, maybe, a signal that perhaps you shouldn’t have?
[laughter]
If I had a sensitivity to those signals, I certainly wouldn’t have done Lean Startup in the first place.
That’s a good point.
I’m defective in that way. For whatever reason, it was an idea that just wouldn’t leave me alone for many years. I started to investigate what would it take to build the new exchange. I spent a lot of years with people telling me that it was impossible and crazy. I said, “Oh, I remember that feeling from when I first started talking about lean startups.”
That’s like waving a red flag to a bull, to me, anyway. I wanted to understand, at least, if it’s a bad idea, why is it a bad idea? If it’s impossible, why is it impossible? The more I learned about corporate governance and about the way our capital markets work, I learned that not only is it not impossible, it’s actually, to me, seemed like a pretty reasonable idea.
I wanted to understand, at least, if it’s a bad idea, why is it a bad idea? If it’s impossible, why is it impossible?
Very few people are able to defend the way we currently run companies and the way that we hold them accountable in any first principle’s way other than, “This is just how we’ve done it.” My thought was that there has to be a better way.
We’ve built a company. It’s a real-honest-to-God company. We have raised money and have a petition before the SEC to get their approval to operate a new stock exchange.
Do you think a petition before the SEC to get approval to make a market that the SEC doesn’t probably want to deal with a difficult thing? It’s like you’re trying to invent a new form of nation-state.
People do look at me that way. In Silicon Valley, by the way, this is considered the craziest idea anyone is working on. I’ve had people who are working on quantum computers and immortality tell me that they think this is a crazy idea.
[laughter]
I’m like, “OK, man. I get it.” We have a really myopic view about changing these systems by which we operate. We’ve been working with the SEC for more than two years now quietly behind the scenes to get them ready for this. I’ve actually been very pleased with the policy response to it.
This solves a bunch of problems that the policymakers themselves want to see fixed but haven’t quite figured out how to fix. Companies are going public far too late, compared to any previous era before, which means that ordinary, everyday retail investors are absolutely locked out of the opportunity to invest in growth companies.
Because they’re going late at very high valuation…
Very high valuation.
…so people don’t get to ride that. My favorite example is Microsoft, which went public at $600 million. Can you imagine getting some of that stock?
Amazon raised $56 million in their IPO in 1997, which we would call a large Series B now. It’s totally crazy. I was talking to Steve Case, who is one of our supporters. He was talking about founding AOL.
He says people still come up to him on the street and thank him for helping them put their kids through college. They invested in the AOL IPO. I can’t remember. I think they went public at a $70 million valuation or something close to zero, whatever. Not even 10 years later, it was one of the biggest companies in the world to people who rode that.
We live in a low-growth world from a policy point of view. For the first time in history, we’re asking people to invest in order to support their own retirement. Yet, we’re saying, “Also, at the same time that you need to invest to support your own retirement, you’re not allowed to invest in growth companies.”
Who’s filling that gap? Where are these companies being supported by, at least, for a while? It was mutual funds and pension funds. As the check sizes have gotten bigger than those, can you imagine check sizes bigger than a mutual fund or a pension fund can afford to make?
Who’s filled the gap? It’s Russian oligarchs and sovereign wealth funds. We’ve said, “OK. We’d rather have oligarchs fund growth in America than everyday investors.” That actually doesn’t make a lot of sense as a policy outcome. I can’t find anyone to defend that as a policy outcome that we would want.
[laughter]
Certainly not on record.
It’s certainly not. Obviously, now that we know — thanks to the Panama Papers — that some of that money came from Kremlin’s strategic fund.
Which may or may not be related to any number of other things that have occurred in the last few…
Certainly not.
[crosstalk]
It’s outrageous to suggest that there would be any relationship between those two events.
[laughter]
It’s crazy. Forgetting whether anything nefarious actually occurred, just from an optics point of view. This has been a bad time for Silicon Valley, as you’ve already said. Plus, on top of all that, because companies are going public too late, there’s tremendous pressure on their illiquid private securities to trade to what are called “secondary markets.”
There are the most crazy, unethical transactions going on before companies go public. We don’t even need to go there. It’s just totally nuts. I just feel like my grandparents lived through the Great Depression and the Holocaust, that whole era.
They would look at the way that we govern ourselves in this and many other areas. They would have said, “What are you doing? We built you this beautiful house and this incredible foundation to do this, based out of our extremely painful experience of getting it wrong. You’re just, never mind. Why?”
[laughter]
Seriously, why do we do it this way, instead of the way that they taught us to do it? That just seems crazy to me.
Let me ask you how you would do it. I’m still a bit unclear.
Sure.
I’ve started a number of companies. Pitch me. Why should I list?
It’s easy.
[laughter]
Listen. This is conceptually very simple. The value proposition to a CEO is we can give you the complete same access to liquidity of today’s capital markets without the short-term pressure.
The reason it’s taken me more than five years to figure out how to implement this from a technical, legal point of view, is we had to square that circle. You have to be able to say to people, “If you do an IPO through this mechanism, if Starbucks were to transfer onto our platform…
You’re going to do transfers as well?
Eventually.
Were you talking to Kevin (Johnson, CEO of Starbucks) in the green room there? Eighty billion dollars of liquidity….
I’m trying to resist. The SEC has asked us to begin with IPO, so we’re starting with IPOs. You want to have complete access. For a long time, I was pitching this idea as a separate market, independent from capital markets. I would say, “You would have almost the same level of liquidity as a traditional IPO.” People would say, “What do you mean, ‘almost’?”
[laughter]
I say, “It’s like 99 percent the same.” You’re saying, “So it’s not the same?”
[laughter]
That does not work. You have to guarantee people the exact…If you do an IPO on the Long-Term Stock Exchange, literally, the very next day after your IPO, if a random person walks into that random broker’s office anywhere in the country and says, “Hey, I saw that thing on TV. I want to buy a share of it.” They just type in the ticker symbol in their terminal.
No one has to know that anything’s different. It’s completely integrated into what they call the National Market System at the SEC.
Most people don’t know even today, whether you list on NYSE or Nasdaq, whichever aspect of the duopoly you subscribe to, your stock still trades everywhere across all 11 public markets we have today. That same thing is true for LTSE. It’s so much integrated that you can even dual list. You can be listed on NYSE and LTSE at the same time.
We implement a series of reforms. Like I said before, a two-sided bargain between managers and investors to give everyone incentives for long-term behavior. Long-term investors get more voting power than short-term investors. We have a series of governance performance…
[crosstalk]
I think that’s a good example. Can you unpack that?
Sure.
Just the idea of tenured voting.
It’s actually a very simple idea. If you come to the United States on a tourist visa, and you happen to be here on Election Day, you don’t get to vote for president. That’s not unfair to the tourist.
It’s just saying that a tourist is in a different category. It has a different level of interest in the success of the company than a citizen. Why should that be any less true in a corporate setting?
Our view is if you buy a share of Starbucks, and you intend to be a long-term holder, you can register that share and say, “I want to be a long-term holder.” You reveal at that time the name of the beneficial owner of the security to the company. It’s a two-way disclosure. The company knows who its long-term investors are.
Starting on the date of that registration, you start to accrue more voting power per share. If you hold it for 10 years continuously, you would have 10 votes per share, whereas someone who just bought it would have one vote per share.
If you’re familiar with how Silicon Valley does do a class or monarchy-type shares, where the CEO is emperor for life. This has a certain conceptual similarity in that there’s different voting power.
Only Silicon Valley and China do that.
[laughter]
Thank you for that excellent compliment. Everything’s fine. Everyone will say, “Everything is fine.” The idea that shareholders should be locked out of governance permanently, that doesn’t strike us as quite right.
Standard governance is also crazy because anyone can borrow money, buy shares, and cause you all manner of problems that I hope everyone in this room considers to be obvious.
We think we found a principled path, a middle way where we say, “Look. It’s not anarchy. It’s not monarchy. It’s a constitutional republic with the citizens who have a say in governance, which everyone should be relatively familiar with, from the place that we live.”
[laughter]
Again, it’s not a grand, conceptual breakthrough. It’s just, “Why don’t we take the same ideas that we consider to be obvious in political science and apply them in a governance context?”
If you have questions for Eric, please come to the mic. We have a few minutes left. I want to make sure if you have questions, you’re given a chance.
Yes, please. Thank you.
I have one final question before we get to you, sir. B corps…
Love them
When I first heard about the Long-Term Stock Exchange a few years ago, I thought, “I guess that’s where the B corps will list.”
We hope.
Tim O’Reilly once said to me, “I don’t like B Corps because all companies should be concerned about this issue, not just the ghetto over here for the B Corps.”
I didn’t say that. For those who are breaking outside, I didn’t say that word.
Are you concerned that this just might be the do-gooder stock market?
We’re concerned about it. We’re very careful. You got to understand. Here I can talk about this as a socially responsible thing with positive impact. When I’m in New York, I do not say anything like that.
[laughter]
I’m not talking about that. This is the most mercenary thing you could possibly believe.
What do you say in New York? You’re going to get rich. Dammit!
Listen. Companies are literally less valuable because they’re being governed idiotically. Let’s make more money by not doing that. If you look at the trend, the data about this is unambiguously clear. The total number of public companies in the United States now, compared to 20 years ago, is literally half. It’s not an exaggeration.
If you watch that graph, think about all the interesting things that have happened macroeconomically in the last 20 years. This graph is a straight line down.
You can’t see anything on this graph. You can’t see the dot-com bubble. You can’t see the Great Recession. This trend has been impervious to all macro events. We’re just hemorrhaging companies out of the public markets.
The real question is what’s the plan if you keep extrapolating this trend? Are there going to be no small companies, public, left at all? All growth is going to happen privately. There’ll be seven conglomerates that own everything. What’s the plan? There’s my plan. Maybe, it’s not a good plan. What’s the other plan?
[laughter]
That’s the question I have for somebody.
[laughter]
What’s the alternative plan? Is there something? Thank you.
[laughter]
[applause]
That’s all I wanted to say.
Question here. Then we’ll go to you.
Cat Posey: Hi, Eric.
Hi.
CP: I’m Cat Posey at Capital One and founder of Tech Superwomen. I know you’re familiar with USDS work, the United States Digital Service, which I was a part of.
A huge fan.
CP: I’m curious. So much of that innovation pattern was, what can tech bring to government? As you know, the biggest transformation was actually how it changed those of us technologists to better appreciate what government does.
When you’re thinking about this work, what’s that reverse insight that you have, in terms of what we can learn more about what has made the governance model that we’ve had so important? What needs to be strengthened?
I love that question. It’s just very deep. First of all, for those who don’t know USDS, I’m just going to put a plug. Please look up USDS. They’ve done incredible work. We should all be very grateful to them as citizens. Thank you for your tour of duty there.
When I’m not talking about LTSE, I spoke of a startup way. I talk about bringing entrepreneurial management into large organizations. I talk about USDS. There’s a lean startup community in the national defense and intelligence communities. You see it in all these really exotic places, not just tech companies now.
What they all have in common is a governance model that says, “Every person in this organization should have the opportunity to contribute innovation.” We all say that we want that. When you really think through the implications of what would be required, that’s a very radically democratic idea.
The human talent, the creativity of every person in the organization is too precious of a resource to be squandered. We all want that superficially. When you actually dig into, from a management point of view, from an incentives point of view, from a board level conversation point, what is actually required to make that happen?
It’s a really radical restructuring of how companies are organized. I love the theme of the event here. The answers are not that confusing. Do we actually have the courage to do it? To me, this is not to use inappropriate language. It’s a great litmus test for how serious are we about those outcomes? I appreciate the question.
JB: Last question here.
Angelo Paparelli: My name is Angelo Paparelli. I’m a partner in Seyfarth Shaw. I co-chair our blockchain technologies team. I’m just wondering. Do you align with legitimate blockchain ICOs that are compliant with the securities laws, or are you in opposition to them?
OK.
[laughter]
You put “legitimate.”
[laughter]
Who could be opposed to legitimate blockchain ICOs?
JB: Is there an initial coin offering, another way to raise money?
The only question is whether it’s an empty set or a positive set?
[laughter]
I’m not expert enough to know. Because I have other business before the SEC, I might decline to comment on that topic. [laughs]
Let me just say, if someone figures out how to do coin-based securities in a way that’s compliant with securities law, such that we could then safely bring those to the general public without running into the problem of scams, and frauds, and not have to explain, we would be delighted to list them on the Long-Term Stock Exchange. There’s a few steps to be accomplished before then.
AP: It’s a journey, but I’m heartened by your answer.
Good. I’m glad. As an engineer, I read the bitcoin paper when it was originally published. The idea that we have a technical solution to what’s called the “Byzantine Generals’ Problem,” it’s an impressive technical breakthrough.
I couldn’t be more excited about the possibility to do something with that technology. I don’t think we’ve gotten super-clear on what the something is yet. Once we are, then I’m sure it’s going to be awesome.
[laughter]
JB: That’s a very Valley answer you gave.
[laughter]
JB: OK, Bob, but keep it short.
Bob Hambrecht: I’m Bob Hambrecht, WR Hambrecht + Company.
I’m on it.
BH: We’ve been working on the Reg A-plus IPO three or four years with the SEC after the JOBS Act, to get to the point where it’s out in the market. I’d just love to get your thoughts on the A-plus IPO, where it might fit into the world where we might work together, honestly.
Listen. We should take that conversation offline. I’d be delighted. Listen. I was just there. I was just with Chairman Clayton and his staff. They were just complaining to me about how the various kinds of deregulations that they added as a part of the JOBS Act, including A-plus, which were designed to cause there to be more IPOs. I don’t want to mischaracterize what they said.
Just generally, there was a general level of frustration coming out of the SEC. They’re under so much pressure to get companies to go public again. They’re trying everything that they can with their statutory powers that they have, which are admittedly limited, to make this happen. They were very frustrated that there haven’t been any.
It’s been hard. The over-focus on the IPO, as opposed to what life is like as a public company, is the issue. I have to use the metaphor all the time when I’m in Washington. I’d be like, “Look. The IPO was like your wedding.”
There are all different ways to get married and different wedding planners you can hire. That’s not important. It is, but the purpose of a wedding is to be married for the rest of your life. The reality of what it means to be a public company, that’s where a lot of the issues are.
We have to think more holistically about not just, “What’s the best on-ramp into the public markets?” But, “What does it mean to be a public company in the first place?” If there were a way to do that through A-plus, I’d be delighted. We should definitely talk about that. It would be great.
Please join me in thanking Eric for coming.
Thank you so much. I appreciate it. John, always a pleasure.