Sunday, February 23, 2020

"Silicon Valley Is Quietly Building Its Own Wall Street"

From Marker at Medium:

Can a new stock exchange backed by the Bay Area’s most powerful players take on the NYSE and Nasdaq?
This story is part of The New Rules of the IPO, a multi-part special report.
Illustrations: James Clapham
On a drizzly San Francisco day in December, Eric Ries is stationed inside the Succession-worthy offices of Orrick, Herrington & Sutcliffe. Here, at the billion-dollar law firm — whose clients include Oracle, Microsoft, Intel, Cisco, Pinterest, and Stripe — guys dressed VC chic in V-neck cashmere sweaters and soft loafers shush across carpeted floors. It’s a frictionless world, all potential irritants engineered away. If you want to be where it happens in Bay Area tech, this is a good place to start.
Ries, in black glasses and a chinstrap beard, looks like a poli sci professor who’s wandered in from Berkeley. The 41-year-old’s 2011 bestseller, The Lean Startup, introduced the masses to product/market fit, minimum viable product, and the pivot. It also vaulted Ries into nerd celebrity status, a coach and mentor to Silicon Valley’s elite. Between his speaking gigs — which now earn him upwards of $40,000 a pop — book royalties, and consulting work for companies like Procter & Gamble and GE, “Lean Startup Inc.” could have allowed Ries to carry on in low-key rich mode indefinitely. Instead, Ries is now focused on his most ambitious — and risky — venture yet: a new stock exchange called the LTSE, or Long-term Stock Exchange.

Ries’s words and time are now tightly guarded by a personal assistant and the LTSE’s head of communications, Steve Goldstein, whose last job, as Rex Tillerson’s Under Secretary of State for Public Diplomacy and Public Affairs, ended in dismissal via presidential tweet. (Ries, for the record, was a prominent supporter of “Nerdz 4 Hillary,” a 2016 tech-world fundraiser for Hillary Clinton.) Today, Ries is at Orrick — his LTSE cofounder, John Bautista, is a partner at the firm — for a full day of closed-door meetings with CEOs and institutional investors, talking up the LTSE.
The LTSE is a controversial new exchange that, Ries argues, will create a fundamental shift in the capital markets. Founders and CEOs will be able to focus on long-term value creation, innovation pipelines, and sustainability goals, while retaining tighter control over the destiny of their companies. But to its critics, the LTSE is either an unnecessary marketing exercise for a handful of Silicon Valley players, or a ploy to let companies profit from public markets while avoiding the accountability of market forces.

When it launches — sometime late in the first quarter of this year, Ries hopes — the LTSE will be the 14th U.S. exchange registered for trading securities, but only the third active exchange that is approved for both trading and listing of public companies. That means, instead of IPO’ing on the NYSE or Nasdaq, companies will now have the option of listing shares, aka “going public,” on the LTSE. Ries has been in roadshow mode for the past year, but since May 2019, when the Securities and Exchange Commission green-lit the LTSE’s application to operate a public exchange, he’s shifted into high gear — pitching the LTSE at trending, still-private companies, and hosting, so far, three of these daylong “investor coalition” meetings in San Francisco.
Generally, they run something like today’s event. The people in the room are a combination of mostly private-company founders and public-market investors “who are very long-term for whatever reason,” Ries says, including a contingent of retirement-fund managers from flyover states who don’t typically get to rub shoulders with Silicon Valley types. Ries gives a five-minute “big themes” talk, which is followed by a workshop covering some nuts-and-bolts aspects of becoming a publicly traded company. “It may be the first time anyone’s talked to them about the mechanics of how public markets work,” Ries says. The rest of the day is devoted to one-on-one meetings between companies and investors — not hard-sell LTSE meetings, says Ries, but information-sharing sessions, with “both sides sharing things they want to know from each other. Our mission is to bring these constituencies together and help them get more aligned” — specifically, around the virtues of financial “long-termism.”
Ries has lined up powerful backers — friends, former coworkers, clients, and investors that he has collected through his varied career. The LTSE has raised $70 million from a who’s who of Silicon Valley VCs: Andreessen Horowitz; Collaborative Fund; Peter Thiel’s Founders Fund; Initialized, the firm run by Reddit cofounder Alexis Ohanian; and Obvious Ventures, an early-stage VC firm co-founded by Ev Williams (founder and CEO of Medium, which Obvious is also an investor in). LinkedIn co-founder Reid Hoffman, now a partner at venture firm Greylock Partners, is also in, along with AOL founder Steve Case. But Ries himself is the biggest shareholder in the for-profit exchange; before the LTSE’s most recent funding round, he held a 29% stake.
If companies and investors buy into Ries’s big idea, that the public markets are broken and a fundamental change is needed, there is a giddying upside. Not just for Ries and his investors — running a securities exchange can be a very lucrative business — but for every striving startup founder and Main Street investor. But, as we’ve seen before with other new stock markets, there’s also a very good chance the whole thing could fizzle.
Ries founded his first company, a career site for college students, while studying computer science and philosophy at Yale. Part Facebook, part LinkedIn — but too early — it failed. After arriving in Silicon Valley in 2001, Ries worked as a software engineer at a virtual-world company called There, and cofounded IMVU, an avatar-based 3D social network (think, Second Life), in 2004. After raising about $29M, he left the business in 2008 (he remains a shareholder.) Ries then spent a short time at VC firm Kleiner Perkins before turning to blogging and writing about his business-world experiences, which provided the seeds for his book, The Lean Startup, which would go on to become a New York Times bestseller and the unofficial bible of Silicon Valley.

He first proposed something like the LTSE in its final chapter, riffing on it for less than a page. “I wanted to talk about the broader social implications of the startup movement — what we as a movement should aspire to beyond just making a quick buck by selling to big companies,” he says. “One of the things was this idea about changing capital markets.”

He conceived of an exchange that would allow companies to benefit from the sale of common stock, while insulating them from short-term stock-market pressures, which he saw as destructive to corporate innovation. “I never dreamed that I would have to be the one to do it,” he says. But the idea stuck with him, reinforced by seeing the challenges that many of his consulting clients were facing. “You name any industry, from 10 employees to thousands — when a company has a bad quarter, the first projects to be canceled are the innovation projects, even though that’s irrational,” Ries says. “It doesn’t make the company more efficient to eat the seed corn.”
Short-termism has social consequences, too. Ries offers the “acid test” of a company that finds out its product is harming customers or their community. “It’s like the great moral quandary of capitalism,” Ries says. “Do you bury the research because that will be profitable for the short-term, or do you do the right thing? Most companies fail that test, in the name of serving shareholders. But is it really serving shareholders to destroy your company? And you should see what happens when the activist campaigns show up.”

In 2018, according to Harvard Law Review, activist hedge funds such as Elliott Management and Starboard Value deployed a record $65 billion across 250 campaigns aimed at influencing business strategy, obtaining board seats, urging or discouraging a sale or merger, and forcing so-called “balance-sheet actions,” such as returning cash to shareholders through dividends or share repurchases. Target companies included Campbell Soup Company, United Technologies, and Pernod Ricard....
....MUCH MORE
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