(Bloomberg Businessweek) -- Two years ago, Silicon Valley entrepreneurial guru Eric Ries hatched a plan to bring one of his boldest ideas to life. His Long-Term Stock Exchange, which he first suggested in the epilogue to his 2011 bestseller, The Lean Startup, would address the investor shortsightedness that drives startup founders crazy. Over time he sketched out rules. Companies listing on the exchange would give more voting power to shareholders who stuck around longer. They wouldn’t be allowed to link executive pay to quarterly earnings. It turns out, however, that selling Wall Street on a more patient stock market can’t be done in a hurry.
Compared with the technology sector, where “move fast and break things” has been the motto, in the realm of exchanges the attitude is more like “move painstakingly slowly and make sure nothing breaks, ever.” LTSE has yet even to file a stock exchange application with the Securities and Exchange Commission, though it’s taken a step forward by partnering with a small stock market, IEX Group Inc. Ries has faced skepticism not only from Wall Street veterans but also from the tech world. “In Silicon Valley, people don’t think change is possible here,” says Ries. “People think it’s more likely we’ll discover time travel.”
LTSE recently moved into an office in San Francisco, keeping the neon lime-colored couches and swivel chairs left by the previous tenants. On a recent March day, the cubicles were almost bare, decorated only by copies of Ries’s latest book, The Startup Way, a guide for large companies to thinking like scrappy upstarts. The LTSE project still exists more as a philosophy than as a business at this point, says Ries, who speaks in the carefully paced manner of a person who’s accustomed to holding audiences rapt over PowerPoint presentations. “It is taking a long time,” he says. “It has to.”
Ries helped popularize the concept of the minimum viable product—a fast, cheap initial innovation to unleash on the market and improve later. But it can’t really exist for exchanges: Every aspect of LTSE’s model will need approval from the SEC, and the process can easily take more than a year, with regulatory inquiries and public comment.
The LTSE is supposed to be a place where companies and investors can communicate better. Ries is betting companies will pay a premium price—he hasn’t said how much—to list on LTSE. The big exchange operators, NYSE Group and Nasdaq Inc., charge tens or hundreds of thousands of dollars for a listing. Some market forces may be at odds with his idea: Among money managers, quantitative stockpicking has gained ground. The importance of communication between management and investors has dwindled, according to Larry Tabb, founder of Tabb Group LLC, a capital markets research firm. “It’s less about, ‘I sat and I looked the CEO and management team in the eye and I trust them,’ ” Tabb says. “It’s more towards, ‘Show me the data, buddy,’ and as soon as the data moves against them, they’re out of there.” At one level, LTSE is designed to insulate companies from such traders. But what if Ries is trying to give investors something they don’t want?
Still, his plan alone has been enough to attract $19 million in funding from the likes of venture capitalist Marc Andreessen and Aneesh Chopra, former chief technology officer of the U.S. in the Obama administration. To get things started, LTSE is working with IEX to add a category on that exchange called LTSE Listings on IEX. The proposed standards for listings were filed with regulators in March. Along with the executive pay standards, voting rights, and other rules, they would require companies to have a board committee focused on long-term growth and to make disclosures about investment in research and development.
IEX is in some ways a cautionary tale. It rode to fame in Michael Lewis’s book Flash Boys and championed a different kind of stock market reform—curbing the ability of the fastest traders to gain an edge. After a hard-won battle to turn itself into an exchange in 2016, IEX hasn’t increased its market share beyond 3 percent of U.S. equity trading volume.
For now, stocks traded on IEX are listed elsewhere. Although IEX once said it could be ready to start its own listings as soon as October, that’s been delayed. The biggest executive who said he’d transfer his company listing to IEX, casino mogul Steve Wynn, was ousted from his CEO role at Wynn Resorts Ltd. Sara Furber, head of listings for IEX, said in a statement that “our engagement with public companies continues to be strong and positive,” and that its push for trading reforms “demonstrates what a different kind of exchange can achieve.”
Ries waves away IEX’s challenges. He says he’d consider LTSE a victory if it gets even one company to list. LTSE is focused on wooing initial public offerings and some dual listings, so it doesn’t necessarily need to get companies to switch from their current exchanges. But if the big exchanges “thought raising listing standards would lead to more listings and business, I would expect them to give it a try,” says Tyler Gellasch, executive director of Healthy Markets Association, an investor advocacy group. “So far, they haven’t. In fact, they’ve kind of done the opposite.” For example, NYSE President Tom Farley told lawmakers regulation is making it too difficult to raise money through IPOs.
If it’s approved, LTSE will need to comply with strict rules around cybersecurity, manipulative trading, and other threats. Ries says LTSE is a proving ground. “One of the things I like about this process is that it forces me to address all these misconceptions” about his lean startup concept, he says. “Like you can’t do lean startup in a highly regulated world, or you can’t do lean startup if the thing takes a long time.” —With Alex Barinka
To contact the author of this story: Annie Massa in New York at amassa12@bloomberg.net.
To contact the editor responsible for this story: Pat Regnier at pregnier3@bloomberg.net.
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