Silicon Valley Aims to “Break” Wall Street Control of Stock Markets
Eric Ries, 37 anni, the author of the best-selling entrepreneurship manifesto “The Lean Startup,” floated a very provocative idea in the Epilogue: Someone should build a new, “long-term” stock exchange.
He wrote, Its reforms would amend the Quarterly cycle to encourage investors and companies to make better decisions for the years ahead. He was told to “lay off” then.
That was 5 years ago, now Mr. Ries is laying the groundwork to prove people wrong.
To bring the Long-Term Stock Exchange to life, he has assembled a Team of engineers, finance executives and attorneys and raised a seed money round from more than 30 investors, including venture capitalist Marc Andreessen, technology evangelist Tim O’Reilly, and Aneesh Chopra, the former CTO of the US.
Today, I learned that Mr. Ries has started early discussions with the US Securities and Exchange Commission.
Notably, wannabe exchanges go through months of informal talks with the SEC before filing a draft application, which LTSE (Long Term Stock Exchange) plans to do yet this year.
Regulators can then take months to decide whether to approve or delay applications.
If Mr. Reis and his backers have their way, the LTSE could be the stock exchange that fixes what Mr. 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 are not even thinking of an IPO. “Everyone’s being told, ‘Do not go public, as The most common conventional wisdom now is that going public will mean the end of your ability to innovate.”
To Mr. Ries the public markets encourage self-destructive behavior.
He sees their dynamics as a Key reason why the number of US Wall Street listed public companies has fallen by 50% since its peak in Y 1996.
Once companies go public, employees “are on Yahoo Finance (NASDAQ:YHOO) every day, and it is 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 exit, and the stock dives.
Managers, hoping to avoid such shocks, spend too much time focusing on short-term performance. Mr. Ries said he has heard that story many times: halfway through a Quarter, an executive realizes the company is not on track and starts slashing innovative projects to meet the targets.
In his book, Mr Ries 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 Mr. Ries a revered name among Silicon Valley entrepreneurs.
While readers flocked to his lessons, no one picked up his stock market proposal, as it was very polarizing. So, 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 said.
Undeterred, he spent 3 years recruiting a team and weighing different ideas. And eventually, the LTSE settled on 3 reforms that: 1) address how executives are paid, 2) how companies and 3) investors share information & vote.
A company that wants to list its stock on Mr. 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.
Mr. 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. He wants to encourage companies to adopt stock packages that continue vesting even after executives have left the company, which will push them to make healthy long-term moves.
The LTSE wants to drive companies and investors to share more information, such as detail on R&D spending.
To get investors to participate, the exchange has to tempt them with a reward, so LTSE plans to use voting rights as the “carrot”. If investors divulge the real name of the beneficial owner to management, as opposed to hiding behind a “street name” they will start to gain more voting rights the longer they have held their shares.
LTSE hopes to make money mostly by selling software tools to companies and collecting listing fees, which could be a difficult business, given most companies list on either NYSE or NASDAQ in the US and often choose based on a trusted reputation.
Though, as Mr. Ries sees it, an LTSE-listed company will have an extra stamp of approval.
“You’re advertising to the markets that you’re willing to be held to a higher standard,” he says. “This is the Gold Standard, the most long-term, the most hardcore version of going public.”
But, his reforms may not have the intended effects.
For example, granting stronger voting rights to long-term shareholders would make takeovers harder, and that could end up protecting complacent managers, says a professor of finance and business economics at the University of Southern California (USC) business school. “The threat of takeover has done far more to get good behavior out of corporations than perhaps anything else,” he says. “I suspect a sophisticated investor may shun” an non Wall Street exchange that creates obstacles to investors who want to shake things up.
Getting SEC approval is a painful process, especially when trying to change the Wall Street status quo.
Eric Ries is trying to address what he sees as the shortcomings of existing markets.
And while Silicon Valley has successfully overturned aka disrupted, many major industries, it has not had any luck with old Wall Street traditions..”
Should he get the go Green Light from the SEC, he will face what may turn out to be his biggest challenge. That being, persuading a company to be 1st to list on LTSE.
If he is fortunate, 1 will be confident enough to be a pioneer, and shun Wall Street.
“There’s a real collective action problem here,” he said. “As an industry, we all want to see these changes happen, but there’s always a little bit of an incentive for any individual actor to say, this isn’t my fight – I’ll wait and let somebody else take it on. I don’t begrudge those people. But if everyone does that, change does not happen.”