‘It was the one idea that would keep me awake at night. It was so radioactive that no-one wanted to go near it. But it wouldn’t leave me alone.’
American author and entrepreneur Eric Ries is talking about his latest ‘startup’ - the Long-Term Stock Exchange (LTSE), a revolutionary new stock exchange that aims to remove the short-term pressures that plague today’s public markets and, instead, reward long-term thinking.
Ries’s lightbulb moment came seven years ago while he was working on the book that would become his best-selling entrepreneurship manifesto, The Lean Startup. ‘In that book, I recommended that people should try to emulate Toyota by building companies that will last generations. But how can they do that with the way our current stock markets are structured?’ Short-term pressure, he says, acts as ‘a malignant gravitational force, warping and distorting the management system of an organisation’ and thwarting innovation.
‘We’ve seen a roughly 50% decline in the number of public companies from 1996 to 2016, a triple digit increase in CEO compensation from 1978 to 2014, and a spike in activist investor campaigns. Businesses suffer - and so does our economy.’
Ries’s ‘wild idea’ was to create an entirely new US stock exchange designed to stop destructive short-term thinking and overhaul the way firms publicly list their shares. ‘No-one else would touch the idea so I started to do my own homework. It’s hugely complex. It’s taken me years to figure out how to build a stock exchange, assemble the right expertise and understand the legal and technical issues. I realised that the reason no-one else is doing this is because it’s incredibly hard. Frankly, that isn’t a good enough reason not to try.’
The LTSE weights corporate governance power to long-term investors who have more of a say than short-term investors; ties executive pay to long-term business performance; and has additional disclosure requirements that allow companies to focus on ‘the fundamentals’ instead of managing to the quarter.
‘People in Silicon Valley treat the financial system like a given but we’re building a new ecosystem that encourages people to be thinking about their businesses in years and decades, not months and weeks.’
Ries has assembled a team of 15 full-time employees, including veterans of the NYSE and US Treasury Department. The LTSE is backed by the likes of LinkedIn co-founder Reid Hoffman, America Online co-founder Steve Case and PayPal founder Peter Thiel. Ries is working to get approval from the Securities and Exchange Commission and says LTSE is on track to open as a new public markets option in 2018.
Ries studied computer science at Yale and co-founded Catalyst Recruiting in his spare time. When the company folded, he moved to There.com as a senior software engineer before starting IMVU, which he describes as ‘the most intense and most rewarding experience of my professional life’. He’s worked as an advisor or board member for more than a dozen startups and penned The Lean Startup in 2011. It was Ries who made the term ‘pivot’ part of the business vernacular.
He admits he got ‘dragged’ into entrepreneurship: ‘I’m not one of those people who grew up wanting to be an entrepreneur. My focus was always on technology: I’ve been programming for as long as I can remember. I went to college during the dotcom bubble and that’s when I got hit by the entrepreneurial bug... I got sucked into the vortex!’
He describes himself as the ‘black sheep’ of his family. ‘I come from a family of doctors. When I got into tech, my parents referred to it as "playing". They said "Do that for a few years until you’re ready to settle down and have a real career." When we get together for Thanksgiving dinner, I’m still the only person at the table (other than the babies) without an advanced degree.’
In his latest book, The Startup Way, published in October, Ries aims to break the myth that only ‘scrappy startups’ can be innovative. ‘We assume you need to be in Silicon Valley, work in tech, wear trainers and hoodies and look like Mark Zuckerberg to be a "real", disruptive entrepreneur. That’s so profoundly wrong. I’ve met entrepreneurs in every conceivable sector and country. And I’ve realised that even the biggest, most established businesses can adopt a culture of entrepreneurial management.’