- People laughed at Eric Ries, startup guru and author of the Lean Startup, when he first pitched the idea of a long-term stock exchange.
- Initially Ries wanted someone else to run with his idea, he told Business Insider. But when no one did, he decided to start the Long-Term Stock Exchange, a competitor to Nasdaq and the New York Stock Exchange that requires companies to look beyond quarterly earnings.
- On May 10, the Securities and Exchange Commission approved the LTSE’s application. Now it can finally get to work.
- Read more on the Business Insider homepage.
Eric Ries knows a thing or two about thinking long-term.
Nearly a decade ago Ries, the author of the Lean Startup, purposed an idea for a new stock exchange that would force companies to think and act based on how decisions would impact investors 10, 25, and 100 years down the road.
The best companies that had ever lived all had long-term, purpose-driven visions, he reasoned, and a highly-regulated entity like a stock exchange would keep companies and their executives accountable.
“People literally laughed at me and said this can’t be done,” Ries told Business Insider. “I had a test reader of the Lean Startup manuscript tell me I had to take it out of the manuscript, it was such a bad idea, it destroyed all of my hard-earned credibility from the preceding 299 pages. But I couldn’t really understand why.”
So when nobody else volunteered to start the Long-Term Stock Exchange, Ries decided to launch it himself.
SEC approval took three years
On May 10, nine years after the Long-Term Stock Exchange was dreamed up, and three years after it first engaged with regulators, the Securities and Exchange Commission approved its application.
“There’s nothing in this world quite like speaking an idea out loud for the first time, and then some number of years later — in this case nine years later — seeing it become a reality,” Ries said.
Officially, the company started five years ago with just Ries and a few advisors. LTSE raised a friends-and-family funding round in 2015, then went on to raise more money from venture capital firms including Andreessen Horowitz, Greylock, Founders Fund, Collaborative Fund, and Obvious Ventures.
Read more: A Silicon Valley stock exchange backed by Peter Thiel and Andreessen Horowitz just got SEC approval
The exchange also managed to recruit some industry heavyweights. Chief Policy Officer Michelle Green jumped on board out of a career at the NYSE and the US Department of the Treasury, and Chief Commercial Officer Martin Alvarez joined out of investment banking roles at Piper Jaffray and Morgan Stanley.
With 20 people working between San Francisco and New York City, LTSE has mostly focused on building out its cloud stock exchange software and a product for private companies. Without SEC approval, LTSE wasn’t able to solicit IPO clients or engage in its main line of business, taking companies public.
Until the SEC sanctioned the exchange, it wasn’t so clear that things would work out.
In April 2018, The SEC received impassioned letters of support from a cohort of the tech elite like Marc Andreessen, Sam Altman and Ev Williams, as well as long-term investors like CalPER’s Marcie Frost.
“We’re facing a dangerous trend in our public markets,” Andreessen wrote. “IPOs have been falling drastically and companies are staying private longer.”
As with any company with limited revenue streams, LTSE was burning through its reserves.
In a public filing, the LTSE exchange disclosed $0 in revenue and expenses, and just $10 in assets for 2018. Its holding company, LTSE Holdings, reported $5.4 million in losses on $10,900 in revenue for the same period. At the end of the year, the holding company had around $6.6 million in cash thanks to investors — just over half of the $11.8 million in cash reserves it had the year before.
Read more: Uber wanted to IPO with a $120 billion valuation but ran into trouble when some of its biggest shareholders held out for a lower price
Now that it’s on the books, LTSE is among an exclusive group of around a dozen exchanges in the US that are allowed to list public companies. Like the New York Stock Exchange and Nasdaq, LTSE will make money on trading fees and data fees, listing fees, and tools and services. Ries expects that many of LTSE’s clients will dual list with other exchanges.
The big difference, Ries said, is that the LTSE will require companies to follow through on their commitment to long-term investors. It will give long-term investors like pension funds and endowments a guarantee that companies won’t over emphasize quarterly results at the expense of the future. And it will give company executives structural and regulatory support to make decisions with the long-term in mind, he said.
“The way one long-term investor put it to me, anything a company can voluntarily adopt they can voluntarily un-adopt whenever they feel like it,” Ries said. With the LTSE, “they’re not just taking a pledge or putting out some kumbaya statement, but taking an binding commitment to do the right thing,” he said.
That said, many of the LTSE’s ideas for ensuring that companies adhere to a long-term business approach — such as tying voting power to the amount of time someone has owned shares — must still be approved by regulators in a separate process.
Two weeks in, but no IPOs yet
For Ries, SEC approval means the LTSE can finally get to business.
While there’s zero chance that any of the companies planning to go public in the near term will list with LTSE, regulatory approval means the LTSE can start to solicit potential clients from the next cohort of IPO candidates, he said.
Many, but not all, of those companies will be in tech, Ries said. But that doesn’t mean they will all be based in Silicon Valley.
“People have this vision that we’re going to conjure a marble building with a bull and stick it on Market Street,” Ries said. “But the reality is, not even the NYSE is in that building anymore. The servers are in New Jersey. So people have a very outdated model of what a stock exchange is.”
The LTSE instead will live in the cloud. Companies will list on the exchange from all over the country. And then in 100 years — if everything goes as planned — those companies will deliver long-term value to shareholders.
“The value that is created by capital markets comes through the process of capital formation. When patient and visionary investors are able to really back and partner with visionary entrepreneurs, that’s where the magic happens,” Ries said. “Everything else is just dividing up the spoils.”
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