Is it possible for a new stock exchange to rival the NYSE and the NASDAQ? Would it make it even more impossible if the new stock exchange were on the West Coast? Author and business consultant Bill Ries believes that it’s time to shake things up a bit with the introduction of a West Coast stock exchange called the Long-Term Stock Exchange (LTSE). Ries’s goal is as ambitious and as risky as it sounds. Other stock exchanges have launched and failed.
What sets the LTSE apart is its goal of getting back to one of the main concepts that got lost in the fear after the financial crisis — long-termism. When the LTSE finally launches, it will go live with a strong emphasis on long-term results.
The LTSE is not without its critics. Only time will reveal whether their concerns are founded or whether Ries’s brainchild hits the mark.
The Long-Term Stock Exchange: Refreshing or Controversial?
Ries argues that the LTSE will create a much-needed fundamental shift in the capital markets. A new exchange could solve the deeply rooted problem of short-termism. What sets LTSE apart is that it will focus on long-term value creation, innovation pipelines and sustainability goals. By its design, it gives owners tighter control over their companies.
Critics contend that the LTSE isn’t needed. Even with all the tech companies in the Silicon Valley, there aren’t enough companies to make it worthwhile. Many believe that it would just be a ruse to allow tech companies to profit from the public markets while being able to skirt much of the red tape and accountability that accompanies initial public offerings (IPOs).
Bill Ries is the author of The Lean Startup, which was published in 2011 and quickly became a best seller. Ries is also a business consultant for major companies like Procter & Gamble and GE. Ries spends the bulk of his time pitching the idea of LTSE at trending private companies and hosting meetings for investors in San Francisco. He has the goal of bringing companies and investors on the West Coast together with the common concern about long termism — something the West Coast has been missing over the last decade or so.
Ries hopes to launch the LTSE during the first quarter of 2020. The LTSE would be the 14th US exchange that’s registered for trading securities. It would only be the third active exchange that is approved for both trading and listing of companies. This means that private companies can go public on the LTSE.
The Securities and Exchange Commission (SEC) gave the LTSE the green light in May 2019. Ries has raised $70 million for LTSE from venture capitalists, including founders from LinkedIn and AOL. Ries has also invested much of his own money and currently holds a 29% stake in LTSE.
Could LTSE Lead the Charge Away from Short-Termism?
Ries has long been troubled by short-termism on Wall Street. While investors understand the premise of long-termism on the whole, they’re still pushing for short-term results. This is a panic reaction that’s been lingering since the fallout of the financial crisis.
Ries believes one bad quarter shouldn’t prompt a company to cancel new projects. He draws the analogy of eating your seed corn. Short-termism is particularly disruptive to companies with long-term innovation cycles, which are common in Silicon Valley. Ries notes that tech companies have product cycles that range from four to seven years at a minimum.
Ries believes the solution to getting back to long-termism is to get companies to commit to a common set of principles that support it. In addition to following the SEC’s rules, companies would have to tell investors how they will promote diversity and sustainability and focus on long-term value creation.
Companies that go public on the LTSE will have to commit to measuring success in years and decades. This will require them to align executive and board compensation with long-term performance, giving boards explicit oversight of long-term strategy, and engaging with long-term shareholders. The LTSE would vet companies for compliance; if they’re significantly out of compliance with LTSE principles, they could be delisted. The concept here is to ensure shareholders that companies are being honest.
Among the many other problems with East Coast stock exchanges, it’s becoming increasingly difficult for startup companies to IPO successfully. As a result, startups are trending toward staying private longer than in the past. According to an article in Marker, the median time for companies to IPO is around seven years, compared to only three years in 2010. During the 1990s, it was common for 500 or 600 companies per year to file for IPOs. Those numbers have plunged to 100 or 200 for most of the last decade.
The LTSE would become the first cloud native exchange, which would also help to reduce its operating costs.
Does Short-Termism Serve a Purpose?
Critics say that activist investing and short-selling have a clear and valuable purpose. They argue that such activities help to discipline managers and to improve the accuracy of pricing. They express concerns that founders and a handful of institutional investors will become too powerful. The Council of Institutional Investors opposes LTSE for these and other reasons. The Council specifically objects to multiclass shareholder voting and they’re in favor of keeping the status quo at one share/one vote.
Can the LTSE Overcome an Active and Powerful Opposition?
Ries is aware that the notion of the LTSE has riled his enemies. He still recalls an early article about the LTSE in which an anonymous hedge fund manager described the LTSE as disgusting. Ries still likes to say that he wears that statement as a badge of honor. The NASDAQ, the NYSE and Cboe Global Markets join the hedge funds as natural enemies of the LTSE. Ries explains that there’s “a cadre of people who make a fortune from the status quo in financial services. You’re always up against their intrinsic suspicion of anything that might disrupt their immense profits.”
Only the future will tell if the LTSE merely becomes a financial play place for industry leaders in the tech space and other companies or whether it will become a force to contend with for the NASDAQ and the NYSE.