When Silicon Valley entrepreneur Eric Ries floated the idea of a new long-term stock exchange in the epilogue of his 2011 bestseller ‘The Lean Startup’, critics branded it “repugnant”, “anti-capitalist” and “un-American”. “It’s hard to express just how crazy and controversial the concept seemed to people at the time,” says Ries. “But I just couldn’t let it go.”
Ries’s lightbulb moment for a revolutionary new stock exchange, which prioritises long-term thinking instead of short-term gains, came while he was researching his book. “We all know that companies with a long-term mindset consistently outperform their industry peers across almost every financial measure that matters,” he says.
“Yet in all my conversations with business leaders, I kept hearing about the immense Wall Street pressure to pursue short-term results. CEOs would complain about innovation hampered by boom-bust cycles, abrupt changes in governance, struggles to maintain constancy of purpose, and the difficulty for public companies in knowing who their long-term shareholders even are.
Starting from scratch
Ries never actually expected to build a stock exchange from scratch himself, but no one else stepped forward. “Everyone kept telling me it was impossible. I thought, ‘Maybe if I learn a bit more about how the system works, I’ll understand why – and then the idea will finally leave me alone.’"
He started to do his homework, spending several years trying to figure out how to form a stock market from the ground up, assemble the right expertise and understand all the legal and technical issues. “It was hugely complex,” he admits. “There aren’t any books on this stuff. As an outsider, you can’t just rock up, say you’re planning on reforming the entire system, and expect help. It’s a very closed world. But that wasn’t a good enough reason to stop trying.”
Eventually, he discovered the lengthy SEC form 1, the application to establish a national securities exchange. That, says Ries, was the moment he started to turn a vague concept into a concrete proposal: “There’s a saying that a journey of a thousand miles begins with one step. I just took one step at a time, until things started to snowball.”
In November 2015, Ries formed a company and started fundraising, attracting around USD 90 million in three rounds from investors including Founders Fund, Collaborative Fund, Andreessen Horowitz, Obvious Ventures, Uprising, and Initialized Capital. The SEC officially approved the exchange in 2019 and, a year later, the Long-Term Stock Exchange (LTSE) launched as the 14th member of the National Market System, operating alongside the likes of Nasdaq and NYSE.
Market is a matter of principles
LTSE takes what it calls a ‘principles-based approach’. Companies that wish to list must create policies around the following:
- a long-term strategy, with metrics that measure progress towards meeting those goals
- a stakeholder engagement plan for the community, employees, and the environment, along with a diversity and inclusion plan
- a blueprint for engaging with long-term investors
- board oversight responsibility for long-term strategy
- executive and board-level compensation that is tied to that strategy.
Ries hopes this listing criterion, which has a strong focus on corporate governance, will attract companies by acting as a prized stamp of approval for investors. “We couldn’t be too prescriptive: we had to find a system that would work for the smallest-cap company as well as the Googles of this world,” he explains.
“We want companies to focus on the fundamentals instead of managing to the quarter.”
According to Garry Tan, Managing Partner and Founder of Initialized Capital, this approach actively works against the capital-seeking yield mentality that permeates the market today. “LTSE creates a reasonable mechanism for management control, allows start-ups to go public earlier and transparently, empowers retail investors to participate in tech gains, and prevents short-term corporate raiders from strip-mining small-to-mid cap IPOs,” he says.
“Long-term shareholders get to – rightfully – maintain control, and yield-seeking flippers are neutralised.”
Tech trailblazers make the leap
In August 2021, the first two companies listed their shares on LTSE: California-based tech firm Twilio and workplace software company Asana, which is run by Facebook co-founder Dustin Moskovitz. Ries hopes their decision will encourage like-minded businesses to follow suit.
Bentley Hall, CEO of organic food delivery service Good Eggs, which is working to develop exactly the kind of multi-stakeholder, long-term-vision company that LTSE encourages, believes there’s a real demand for this kind of market.
“History has shown that great companies – especially those that are as committed to doing good as they are to doing well – rarely spring up overnight. They are carefully built piece by piece, goal by goal, year by year. LTSE feels like a great home for companies who believe that,” he says.
Hall hopes that Good Eggs, which delivers ‘absurdly fresh’ groceries to San Francisco’s Bay Area in the States, employs 700 people and pulls in revenues of more than USD 100 million, will endure decades from now. “That’s honestly harder than a flash-in-the-pan,” he says.
“LTSE could help limit unnecessary short-term distractions and amplify the incentive to make high-impact, long-term investments. For stakeholders, that should help create more value, more consistently, over longer time periods.”
What’s the perceived risk?
The ‘novelty factor’ of LTSE is enough to put other business leaders off, however. “The truth is that for many companies, this is something new so it feels risky,” admits Ries. “There are concerns around liquidity, for example, but many people don’t realise that securities are traded across markets: there’s equal liquidity, regardless of listing venue.”
Shaking off short-termism altogether is going to be tough. “The reasons companies act in short-term ways are multiple. It’s not just because of quarterly reporting. It’s also down to executive compensation structures, CEO tenure, culture, and balance sheet considerations,” comments investor and entrepreneur Colette Ballou, who was named one of the 50 most influential women in the start-ups and venture capital space by the web publication ‘EU-Startups’.
“For investors, less frequent reporting reduces transparency and opportunities for inquiry into the ongoing operations of the business.”
While Ballou applauds LTSE’s efforts to drive longer-term investments into company growth and create more sustainable governance structures, she says the issues need to be fixed across all capital markets, “not just in a special corner created for that purpose”.
Ries hopes that, eventually, every company that lists will consider LTSE. “Employees, customers, investors, and communities are increasingly scrutinising businesses and asking: ‘What kind of company are you? What do you stand for? Are you repairing our world or part of the continued degradation of it?’
"We’re putting companies to the test. We’re making them live up to their rhetoric. Ultimately, LTSE will act like a global BS detector.”