John Battelle: All right.
I'm really pleased that Eric Ries is coming and speaking with me.
He has an idea for markets that is very important for all of us to consider.
He's well known, of course, for his book, "The Lean Startup," and his follow-up to that
book.
What we're going to be talking about primarily is his Long-Term Stock Exchange.
Please join me in welcoming Eric to "Shift Forum."
[applause]
JB: Hey, man.
How are you doing?
Eric Ries: I'm good.
How are you?
JB: Good.
ER: Good to see you.
JB: Good to see you, too.
ER: It's been too long.
JB: It has been too long.
The only time we meet is here.
ER: I know, on stage.
[laughs]
JB: This is not exactly social.
[laughter]
JB: You've been around the block a few times.
You started a few companies.
ER: I guess so.
JB: You wrote a book that sold over a million copies.
As an author, I'm not at all jealous of that.
[laughter]
JB: You decided you wanted to start another company.
This was a company of companies in a way, right?
ER: Yeah.
JB: Tell us what the Long-Term Stock Exchange is.
ER: Sure.
Let me just say, from a lifestyle point of view, no author ever wants to start a company.
This is a significant downgrade.
Let me just get that clear.
[laughter]
ER: I was not on the market for another company.
This is an idea I first floated in The Lean Startup.
If you are one of the 27 people who read all the way to the last page -- which, out of
a million, that's not too bad of a ratio -- one of the very last things I suggested in The
Lean Startup was that somebody really ought to do a bunch of things.
That's the best part about being an author.
"You should do this.
You should do that.
You should reform education.
You should reform public policy, government.
While you're at it, we have to think of a new better way to do capital markets."
Because if you're going to do a lean transformation, going all the way back to Toyota, if you study
Jeff Bezos or any of the great long-term-oriented CEOs or investors, everyone understands that
to do this better management system requires a philosophy of long-term thinking.
Yet at the same time, we're telling venture-backed companies to go public, to be acquired by
a public company, to enter into a corporate governance paradigm that is as short-term
as it can be.
We can't reconcile those two things.
Although here in Silicon Valley, people say, "Oh, it's Wall Street.
It's so short-term.
It's Wall Street's fault," investors don't benefit from this, either.
If companies are distracted from fundamental value creation, then they're worth less money
because they're not doing the right things.
My idea was there ought to be a way to change the incentives of managers and investors at
the same time.
We would call it a Long-Term Stock Exchange or LTSE.
Somebody really ought to build that.
Of all the ideas in Lean Startup, almost every single one, somebody has run with in the intervening
years.
I never got the phone call from someone, "Hey, can I do the stock exchange one?"
[laughter]
ER: Because who wants to try to criticize it.
JB: Was that not, maybe, a signal that perhaps you shouldn't have?
[laughter]
ER: If I had a sensitivity to those signals, I certainly wouldn't have done Lean Startup
in the first place.
JB: That's a good point.
ER: I'm defective in that way.
For whatever reason, it was an idea that just wouldn't leave me alone for many years.
I started to investigate what would it take to build the new exchange.
I spent a lot of years with people telling me that it was impossible and crazy.
I said, "Oh, I remember that feeling from when I first started talking about lean startups."
That's like waving a red flag to a bull, to me, anyway.
I wanted to understand, at least, if it's a bad idea, why is it a bad idea?
If it's impossible, why is it impossible?
The more I learned about corporate governance and about the way our capital markets work,
I learned that not only is it not impossible, it actually, to me, seemed like a pretty reasonable
idea.
Very few people are able to defend the way we currently run companies and the way that
we hold them accountable in any first principle's way other than, "This is just how we've done
it."
My thought was that there has to be a better way.
We've built a company.
It's a real-honest-to-God company.
We have raised money and have a petition before the SEC to get their approval to operate a
new stock exchange.
JB: Do you think a petition before the SEC to get approval to make a market that the
SEC doesn't probably want to deal with a difficult thing?
It's like you're trying to invent a new form of nation-state.
ER: People do look at me that way.
In Silicon Valley, by the way, this is considered the craziest idea anyone is working on.
I've had people who are working on quantum computers and immortality tell me that they
think this is a crazy idea.
[laughter]
ER: I'm like, "OK, man.
I get it."
We have a really myopic view about changing these systems by which we operate.
We've been working with the SEC for more than two years now quietly behind the scenes to
get them ready for this.
I've actually been very pleased with the policy response to it.
This solves a bunch of problems that the policymakers themselves want to see fixed but haven't quite
figured out how to fix.
Companies are going public far too late, compared to any previous era before, which means that
ordinary, everyday retail investors are absolutely locked out of the opportunity to invest in
growth companies.
JB: Because they're going late at very high valuation...
ER: Very high valuation.
JB: ...so people don't get to ride that.
My favorite example is Microsoft, which went public at $600 million.
Can you imagine getting some of that stock?
ER: Amazon raised $56 million in their IPO in 1997, which we would call a large Series
B now.
It's totally crazy.
I was talking to Steve Case, who is one of our supporters.
He was talking about founding AOL.
He says people still come up to him on the street and thank him for helping them put
their kids through college.
They invested in the AOL IPO.
I can't remember.
I think they went public at a $70 million valuation or something close to zero, whatever.
Not even 10 years later, it was one of the biggest companies in the world to people who
rode that.
We live in a low-growth world from a policy point of view.
For the first time in history, we're asking people to invest in order to support their
own retirement.
Yet, we're saying, "Also, at the same time that you need to invest to support your own
retirement, you're not allowed to invest in growth companies."
Who's filling that gap?
Where are these companies being supported by, at least, for a while?
It was mutual funds and pension funds.
As the check sizes have gotten bigger than those, can you imagine check sizes bigger
than a mutual fund or a pension fund can afford to make?
Who's filled the gap?
It's Russian oligarchs and sovereign wealth funds.
We've said, "OK.
We'd rather have oligarchs fund growth in America than everyday investors."
That actually doesn't make a lot of sense as a policy outcome.
I can't find anyone to defend that as a policy outcome that we would want.
[laughter]
JB: Certainly not on record.
ER: It's certainly not.
Obviously, now that we know -- thanks to the Panama Papers -- that some of that money came
from Kremlin's strategic fund.
JB: Which may or may not be related to any number of other things that have occurred
in the last few...
ER: Certainly not.
[crosstalk]
ER: It's outrageous to suggest that there would be any relationship between those two
events.
[laughter]
ER: It's crazy.
Forgetting whether anything nefarious actually occurred, just from an optics point of view.
This has been a bad time for Silicon Valley, as you've already said.
Plus, on top of all that, because companies are going public too late, there's tremendous
pressure on their illiquid private securities to trade to what are called "secondary markets."
There are the most crazy, unethical transactions going on before companies go public.
We don't even need to go there.
It's just totally nuts.
I just feel like my grandparents lived through the Great Depression and the Holocaust, that
whole era.
They would look at the way that we govern ourselves in this and many other areas.
They would have said, "What are you doing?
We built you this beautiful house and this incredible foundation to do this, based out
of our extremely painful experience of getting it wrong.
You're just, never mind.
Why?"
[laughter]
ER: Seriously, why do we do it this way, instead of the way that they taught us to do it?
That just seems crazy to me.
JB: Let me ask you how you would do it.
I'm still a bit unclear.
ER: Sure.
JB: I've started a number of companies.
Pitch me.
Why should I list?
ER: It's easy.
[laughter]
ER: Listen.
This is conceptually very simple.
The value proposition to a CEO is we can give you the complete same access to liquidity
of today's capital markets without the short-term pressure.
The reason it's taken me more than five years to figure out how to implement this from a
technical, legal point of view, is we had to square that circle.
You have to be able to say to people, "If you do an IPO through this mechanism, if Starbucks
were to transfer onto our platform...
JB: You're going to do transfers as well?
ER: Eventually.
JB: Were you talking to Kevin in the screen room there?
Eight billion dollars of liquidity.
ER: I'm trying to resist.
The SEC has asked us to begin with IPO, so we're starting with IPOs.
You want to have complete access.
For a long time, I was pitching this idea as a separate market, independent from capital
markets.
I would say, "You would have almost the same level of liquidity as a traditional IPO."
People would say, "What do you mean, 'almost'?"
[laughter]
ER: I say, "It's like 99 percent the same."
You're saying, "So it's not the same?"
[laughter]
ER: That does not work.
You have to guarantee people the exact...If you do an IPO on the Long-Term Stock Exchange,
literally, the very next day after your IPO, if a random person walks into that random
broker's office anywhere in the country and says, "Hey, I saw that thing on TV.
I want to buy a share of it."
They just type in the ticker symbol in their terminal.
No one has to know that anything's different.
It's completely integrated into what they call the National Market System at the SEC.
Most people don't know even today, whether you list on NYSE or Nasdaq, whichever aspect
of the duopoly you subscribe to, your stock still trades everywhere across all 11 public
markets we have today.
That same thing is true for LTSE.
It's so much integrated that you can even dual list.
You can be listed on NYSE and LTSE at the same time.
We implement a series of reforms.
Like I said before, a two-sided bargain between managers and investors to give everyone incentives
for long-term behavior.
Long-term investors get more voting power than short-term investors.
We have a series of governance performance...
[crosstalk]
JB: I think that's a good example.
Can you unpack that?
ER: Sure.
JB: Just the idea of tenured voting.
ER: It's actually a very simple idea.
If you come to the United States on a tourist visa, and you happen to be here on Election
Day, you don't get to vote for president.
That's not unfair to the tourist.
It's just saying that a tourist is in a different category.
It has a different level of interest in the success of the company than a citizen.
Why should that be any less true in a corporate setting?
Our view is if you buy a share of Starbucks, and you intend to be a long-term holder, you
can register that share and say, "I want to be a long-term holder."
You reveal at that time the name of the beneficial owner of the security to the company.
It's a two-way disclosure.
The company knows who its long-term investors are.
Starting on the date of that registration, you start to accrue more voting power per
share.
If you hold it for 10 years continuously, you would have 10 votes per share, whereas
someone who just bought it would have one vote per share.
If you're familiar with how Silicon Valley does do a class or monarchy-type shares, where
the CEO is emperor for life.
This has a certain conceptual similarity in that there's different voting power.
JB: Only Silicon Valley and China do that.
[laughter]
ER: Thank you for that excellent compliment.
Everything's fine.
Everyone will say, "Everything is fine."
The idea that shareholders should be locked out of governance permanently, that doesn't
strike us as quite right.
Standard governance is also crazy because anyone can borrow money, buy shares, and cause
you all manner of problems that I hope everyone in this room considers to be obvious.
We think we found a principled path, a middle way where we say, "Look.
It's not anarchy.
It's not monarchy.
It's a constitutional republic with the citizens who have a say in governance, which everyone
should be relatively familiar with, from the place that we live."
[laughter]
ER: Again, it's not a grand, conceptual breakthrough.
It's just, "Why don't we take the same ideas that we consider to be obvious in political
science and apply them in a governance context?"
JB: If you have questions for Eric, please come to the mic.
We have a few minutes left.
I want to make sure if you have questions, you're given a chance.
ER: Yes, please.
Thank you.
JB: I have one final question before we get to you, sir.
B corps...
ER: Love them
JB: When I first heard about the Long-Term Stock Exchange a few years ago, I thought,
"I guess that's where the B corps will list."
ER: We hope.
JB: Tim O'Reilly once said to me, "I don't like B Corps because all companies should
be concerned about this issue, not just the ghetto over here for the B Corps."
ER: I didn't say that.
For those who are breaking outside, I didn't say that word.
JB: Are you concerned that this just might be the do-gooder stock market?
ER: We're concerned about it.
We're very careful.
You got to understand.
Here I can talk about this as a socially responsible thing with positive impact.
When I'm in New York, I do not say anything like that.
[laughter]
ER: I'm not talking about that.
This is the most mercenary thing you could possibly believe.
JB: What do you say in New York?
You're going to get rich.
Dammit!
ER: Listen.
Companies are literally less valuable because they're being governed idiotically.
Let's make more money by not doing that.
If you look at the trend, the data about this is unambiguously clear.
The total number of public companies in the United States now, compared to 20 years ago,
is literally half.
It's not an exaggeration.
If you watch that graph, think about all the interesting things that have happened macroeconomically
in the last 20 years.
This graph is a straight line down.
You can't see anything on this graph.
You can't see the dot-com bubble.
You can't see the Great Recession.
This trend has been impervious to all macro events.
We're just hemorrhaging companies out of the public markets.
The real question is what's the plan if you keep extrapolating this trend?
Are there going to be no small companies, public, left at all?
All growth is going to happen privately.
There'll be seven conglomerates that own everything.
What's the plan?
There's my plan.
Maybe, it's not a good plan.
What's the other plan?
[laughter]
ER: That's the question I have for somebody.
[laughter]
ER: What's the alternative plan?
Is there something?
Thank you.
[laughter]
[applause]
ER: That's all I wanted to say.
JB: Question here.
Then we'll go to you.
Cat Posey: Hi, Eric.
ER: Hi.
CP: I'm Cat Posey at Capital One and founder of Tech Superwomen.
I know you're familiar with USDS work, the United States Digital Service, which I was
a part of.
ER: A huge fan.
CP: I'm curious.
So much of that innovation pattern was, what can tech bring to government?
As you know, the biggest transformation was actually how it changed those of us technologists
to better appreciate what government does.
When you're thinking about this work, what's that reverse insight that you have, in terms
of what we can learn more about what has made the governance model that we've had so important?
What needs
to be strengthened?
ER: I
love that question.
It's