Before we start, Eric, I did have to say, did you intentionally pick a building with gigantic stone pillars in a marble lobby to start your stock exchange in?
Obviously. I was like, what building is he talking about? I'm completely blind to that stuff. No, I did not weigh in on the decor of the place.
Welcome to season 5, episode 10 of Acquired, the podcast about great technology companies and the stories behind them. I'm Ben Gilbert and I'm the co-founder of Pioneer Square Labs, a startup studio and early-stage venture fund in Seattle.
And I'm David Rosenthal and I'm a general partner at Wave Capital, an early-stage venture firm focused on marketplaces based in San Francisco. And we are your hosts. Today we tell the story of an incredibly ambitious undertaking creating a new stock exchange, a long-term stock exchange that is. Earlier this year, the LTSE was approved by the SEC as only the fifth body with such a license. And we have with us today none other than the founder and CEO, Eric Ries, to talk about it. Welcome, Eric.
Thanks, guys. Thanks for having me on.
Listeners, you may know Eric's name from his popular 2011 book, The Lean Startup. The LTSE was actually started from an idea that Eric had while writing the book. And there are a couple paragraphs at the end that explore it. And 8 years later, here we are with the LTSE as an approved national securities exchange and having raised $68 million from venture funds including Andreessen Horowitz, Founders Fund, Floodgate, and many other top investors.
It was super fun. And I was on the plane on the way back from visiting my family for Thanksgiving. Pulled out my digital copy of The Lean Startup, went through and there it was about a page and a half right at the end.
Right at the end, the very last idea in the book practically.
Yeah. And you know, I knew it was going to be polarizing from the start when I was writing the book. So this is now go back to 2010 before the book even came out. This is, you know, when the idea hatched for me and part of writing The Lean Startup, you can imagine I felt a lot of pressure to eat my own dog food and use the techniques of lean startup in writing the book. So it was a very iterative process and I did a ton of testing and experimentation and A/B testing. And one of the final stages was I sent the full manuscript out to a lot of test readers from different audience archetypes of people I wanted to influence. And I'll never forget one of the test readers wrote me back. He said, 'The book is fine except that there's one thing you have to take out. There's this idea at the end of the book about this like stock exchange thing.' And listen, you basically piss away the credibility you've carefully built up over 299 preceding pages. You just flush it all away in one page. It's that bad. You must take it out of the manuscript. So that was its auspicious first reaction from a test reader. So that's when I knew I was on to something.
Yeah, that reminds me of the Google story where Larry and Sergey were working out of the Wojcicki's garage and an investor came by, a friend of the Wojcickis, to meet them and they said like, 'Hey, we got this like company working out of the garage. You want to meet?' He's like, 'No, sneak me out the back. I don't want to talk to them.'
Oh man. Yeah. Every once in a while, you know, the conventional wisdom really serves you very, very poorly. And it's funny now because this has always been very polarizing, but what people don't remember is that lean startup was very polarizing in the early years. Now everyone's like, 'Oh, obviously, of course, we're going to at least pay lip service to it.' Whether people actually do it or not is a different conversation.
Did your book coin the phrase minimum viable product?
You know, I had never heard that phrase before, but in the years since, people every once in a while will dig up like an academic paper from 1984 or whatever where somebody used it. So apparently it has been used before. But I think I am primarily the one to blame for the overuse of the phrase MVP. So I apologize to anyone who's sick and tired of hearing about pivots or whatever. That's also my fault.
Mostly Wave portfolio companies.
So sorry. So to all your portfolio companies, I apologize.
Well, listeners, it's worth knowing before we dive in. The LTSE has an ambitious vision to fix many of the problems that they see in the public today, from short-termism, abrupt changes in governance from so-called tourist investors, and visibility into who a public company's shareholders really are. So we're excited to explore some of the company's disruptive and, as Eric, as you pointed out, controversial ideas today and discuss sort of will it be a decade from now as widely accepted as The Lean Startup has. So listeners, we had an awesome LP episode with Vlad Magdaline, the founder and CEO of Webflow this past week. As with many of our LP shows, we went deep with him on the nitty-gritty of company building and what he's learned on his journey from building the no-code website builder that has taken the industry by storm. You can become an Acquired limited partner to get access by clicking the link in the show notes or going to glow.fm/acquired. And if you stick around after this episode, you can hear an excerpt from that show.
All right, listeners, now is a great time to talk about a new partner of ours here on Acquired, Lora, the agentic operating system that is redefining how the world's best legal teams work.
Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Lora took that insight and asked the question, 'What if you really built something with that power from the ground up for the legal industry?'
So the founders did exactly what great founders do: operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts, and it pulls every key term into a grid a lawyer can actually work with. Lora's bet here is interesting, since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time. And they recently launched Lora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Lora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Lora now has over 100,000 lawyers on the platform from 200 legal teams in 50 countries. And crazily they went from $1 million to $100 million in ARR in about 18 months. Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at lora.com/acquired and just tell them that Ben and David sent you. And now onto the long-term stock exchange.
But before that, before The Lean Startup, you worked at a couple pretty fat startups.
Oh yeah. Much has been written and said, of course, about your history and how the lean startup movement got started. But when you studied CS at Yale, right?
And then you graduated and you joined a startup at the time called there.com which was an early virtual world. And I believe, if I'm getting my history right, it operated for three or four years without launching a product, just hiring tons of people, raising tons of cash, and then burst out into the world. Like, how did you, you know, you're a senior at Yale. How did you decide, oh, I'm going to go join this crazy thing?
So, all right, first of all, you got to go back in your time machine. I was originally in the class of 2000. So the dot-com bubble swept through the world while I was in undergrad, but New Haven, Connecticut was like basically the last stop on the train before the whole thing imploded. So I dropped out of school and I did a startup from my dorm room which, you know, could have, would have, should have been Facebook but we didn't exactly know what we were doing. So we had kind of like the first half of the movie The Social Network experience.
Was it actually a social network or was that here?
I'll tell you our idea and tell me if you think this is a good idea. We thought that college students from top universities, you know, Ivy League universities, should create online profiles for the purpose of sharing.
Sounds like a terrible idea.
Which, that wasn't so bad. What was so funny about it, I mean now I can joke about it, of course at the time this is horrible, but we thought that they should use those profiles for something serious, you know, a real business. So we thought they should create profiles for getting a job and we should create a resume database and share the profiles with employers who wanted to hire them. So we were very focused on...
Sort of like an evergreen Monster.com type.
Well, it wasn't job postings, but a resume database. It was weird, like in some ways it was not like, it's really not a crazy idea, like we could then do analytics on it to match the right people to the right jobs and, you know, like there was a certain like sensibleness to it. But first of all, if we had actually understood the concept of a pivot and if someone had even suggested to us the idea that we could pivot into being Facebook, we would have been totally dismissive because we were like, no, no, we're going to build a real business. And we didn't really understand what a real business was. So we had no concept, like the idea that there's like the idea of a digital marketplace or that, you know, an attention-based product would be valuable. We had none of that insight. And, you know, it was very, very much of a moment when people were building digital technology without a clear purpose as to why. Right, we just saw that everyone was doing it and it's just that's what we wanted to do and so we did it.
This is a total aside, but it fits right into that. Were you at Yale at the same time as Matt Kohler?
I remember when he was a McKinsey consultant trying to talk... we had coffee one day, he's like, 'Should I, you think I should join the technology industry?' And we were thinking about some things he could work on. So yeah, it's a small club of people from that world who went on to do good things. And Matt would of course be one of the first employees at LinkedIn and then one of the first employees of Facebook.
Yeah. One of the most important Facebook early employees on the business side really, and is a great VC now.
Yeah. But anyway, that's funny. You were building a social network for college students focused on recruitment and he would go to LinkedIn.
Yeah. Exactly. Right. If we'd had any sense at all, we would have called... what should we do? What should we do? But yeah, I remember when he first went to work at LinkedIn, too. And I was like, I already know about social networks and it's never going to be anything, right? Like the biggest problem in entrepreneurship is you learn what's not going to work.
That's not something that can ever be learned. Yeah. Because just because it didn't work before doesn't necessarily mean it won't work the next time. And that's what drives the hardest thing in venture investing too.
That drives us all crazy. You overfit on the data that you have access to. Anyway, long story short, I went back, the startup failed. So unlike the Facebook founders, I went back to school and finished my degree. If you've ever watched one of those movies about entrepreneurship where like the plucky protagonist goes back to the people who said it would never work and they're like, 'You were wrong. I was right.' You know, rah. In real life, you get to be the one to go back and be like, 'Remember when you said I should not drop out of school because nothing will ever come of it? You were right. I'm back. Thanks for that advice.' What's my homework? Yeah, it's a totally brutal and awful experience, but I love the process of being able to translate ideas into products so quickly and the rapid pace and iteration of a startup. So when I graduated, I was thinking about what to do next and I was just applying to jobs. I didn't know if I would do a startup or I would go to a big company. I looked at a lot of stuff and my resume came across the desk of this crazy virtual reality startup in Menlo Park and they flew me out and, you know, we'd all read Snow Crash and the same sci-fi books and they...
It's coming, it's coming next year for sure.
It's been coming for a long time and they sold me on this incredible vision. You know, it was a pretty small company at the time that I joined. They had really high quality venture capital backers and I wanted to apprentice myself to the best entrepreneurs I could find. So I was like, this is an incredible management team. These people really know what they're talking about. I'm going to learn exactly what to do. All the things I did wrong, I'm going to learn how to do it right. And what's quaint about the story now is that by modern standards, it wasn't even that big of a disaster.
We raise so much more money now. Actually chugged along for like 15 years, right?
Like it didn't die right away, but like, you know, I remember I used to tell people when I first started about Lean Startup, I'd be like, the joke of there.com is that it raised $50 million with no customers. And people would be like, 'Ooh.' And now it's like, 'What was that? The seed round, right?' Like, 'Oh, is that a lot?' I talk to students now and they don't get the joke. They're just like, 'Right, then what happened?' I'm like, 'No, no, that's a lot of money that we set on fire.' And they're like, 'What?' So, you know, it's a very different era, but unlike today, we did not have any of the vocabulary of lean startup. So we had no concept of minimum viable product, pivots, you know, continuous deployment, none of that stuff. So it was self-consciously waterfall-style development. By the time the product launched, I remember we had almost 200 employees. We had a whole warehouse full of customer service reps to handle the anticipated demand. This is a consumer sort of product, you know, big nationwide launch, TV and everything. And the only problem was that the customers never read the business plan.
So they didn't know what to do.
Other than that, it was a brilliant thing. And it was an incredible team. That team has gone on to found an incredible array of startups and they've generated so much value in the world. So it was really a very talented group of people, but...
What companies came out of it? Arista, the network equipment company, the CTO there and founder was the CTO of there.com.
Well, I shouldn't be name-dropping a lot of cool people and everyone I don't mention will be mad at me. Very early Asana people were there.com folks actually. And then a lot of their people were early Google employees because as there.com did rounds of layoffs, the earlier you got laid off from there, the earlier you wound up at Google. So the first people to get laid off made the most money by far. So it's just funny how this world works and no one should ever take investment advice from me because I had many friends who went to go work at pre-IPO Google. They're like, 'Hey, you should come check this thing out. I can't tell you exactly why, but you should come.' And I'm like, 'Google, what's it?' Matt Kohler told me, 'I'm doing this LinkedIn thing.' 'What is that? Facebook, is that really going to be a thing?' So I have turned down all the big opportunities in this era.
And now you can pitch them to come list with you.
Yeah, and actually it turned out to be for the best because I wound up on a path that I wouldn't trade for anything. But it certainly, I mean, you know, if you're going to work in this business and especially if you're going to be in Silicon Valley, you will have to confront like the financial cost of the road not taken like every day, every year, all the time. And if you get ego attached and you're motivated by the financial, it is a really horrible way to live. So it kind of forces you to...
Well, you can do that although I think that can be pretty stressful too, or try to develop actual equanimity about the outcomes here. You don't really have control over what's going to happen and the uncertainty is so high you can't predict and you have to come to accept that if you're going to make entrepreneurship and the entrepreneur ecosystem a career, which is really like, that's a new thing possible in history. Like that was not...
It's even really new in the last 10 years. The time you're talking about, like you were the crazy one to come out. No parent is proud, you know, until 10 years ago that their kid is leaving a great education, turning down the job at the big company and making no money and starting a... That's a new phenomenon.
Yeah. It can be hard for the family and others to understand. But I think now we're starting to build up this idea that it can be a valid career and therefore it can have a certain kind of job security attached to it even though the individual companies may fail. So I do think that's a very exciting development.
So you leave there as it's all imploding around you and you start another company, IMVU, and one of your investors is Steve Blank. How did you meet Steve? He was their investor.
Ah, so I was very lucky. I mean honestly I don't deserve any of this. I was very, very fortunate. The refugees from there.com, you know, a couple of them picked me to be a co-founder of another company and they were the ones that had the prestige and the relationships. I was just a junior guy on the engineering team, you know, what did I know? And so they recruited Steve and a bunch of other investors like, 'Hi, this is a very Silicon Valley thing.' It's like, 'I know we just lost you a ton of money, but how about you give us some more money and this time we'll actually make you some money.' And you know, most of the investors, like if you're going to be a good investor and you have an entrepreneur that you like, you can't let the fact that they lost your money deter you from making the next investment. They did that. He was one of them. But Steve's idea was, 'Hey guys, I don't mind setting some more money on fire here, but how about you guys audit my class that I'm just starting to teach...
At Berkeley at the time, right?
Yeah. We were in the very first or second year he was teaching what he called customer development at Berkeley and my co-founder and I leapt down from Palo Alto.
And that was a new phrase at the time. I mean, now I've heard that phrase before, the whole discipline, but...
I was in the room when a room full of Berkeley MBA students every class session would argue with him and push back and be like, 'This is the stupidest thing I've ever heard.' So imagine that happening. And what was funny is that he came from an enterprise background. People don't remember Epiphany now, but it was a big enterprise software dot-com phenomenon. And he would be presenting stories from Epiphany and the MBAs, like whatever you present to MBAs, they'll be like, 'Sure, it would work for X, but it'll never work for Y.' Like whatever X and Y is doesn't matter. So they'd be like, 'Sure, old man, that works for enterprise, but how would it ever work for consumer?' And of course we then did it at IMVU and then I would be teaching in business class. He would often sometime invite me to guest lecture in his class or whatever. And if I meet with MBAs they're like, 'Well sure, of course it's going to work for consumer, but how would it ever work in the difficult world of enterprise?' And just like, pick a lane, pick a criticism that you want to have. No, that's not how it is. But it was considered completely crazy. Steve, even among Silicon Valley people, they thought it was nuts.
And the crazy notion at that time for him was that you need to aggressively listen to your customers and that it's not about your vision, it's about what they tell you and then you need to inform your product roadmap based on customer discovery.
He was arguing for a parallel discipline to product development. He had his really raw thinking about what do you do if you're the head of marketing for a waterfall-style engineering company that is absolutely convinced that their product is going to work after they set all the money on fire and do the big launch. Like what can you do about that? I remember reading it and I was in his class like, 'You're being very derogatory towards engineers. This is not, Steve, this is not how engineers behave.' And of course he's like, 'Yeah, it is.' I was like, 'No, but there's like a new generation and we do agile and do this.' And you know, he had never heard of that stuff. He was from a different time. So it was a very cool meeting of the minds eventually where he was coming at this from a marketing view where you should have these customer conversations in a very disciplined way and he was trying to bring some rigor to that marketing activity so that engineers would take it seriously. That was really the whole point of it is like how do you sit down with a very technical team and tell them, listen, with all due respect, we're building the wrong product. Yeah, it might be technically excellent but it's the wrong product. And you know, now we have much better terminology and theory and we've come a long way since those original...
Was Steve, in his thinking about this, was he influenced by Crossing the Chasm?
Yeah. He was very into Crossing the Chasm and The Innovator's Dilemma.
You think about Geoffrey Moore and of course Steve and like I didn't think about this till now. They're marketers, like they're coming at it from a marketing background. And I wanted to ask you how you got inspired and I presume worked with Steve to then write The Lean Startup after like The Four Steps to the Epiphany was already out there. What was the insight of hey this can be bigger and brought to a broader audience?
You know, I was just frustrated that I had never had a master plan to do this. I just like, I remember buying copies of The Four Steps to Epiphany for like everyone on my team and be like, 'Well, everyone read this on Friday, come into the office on Monday and we're doing it starting Monday.' That was my theory of change when I was at IMVU. It was my job to try to explain why we did things the crazy way that we did them because I came from engineering practice. So I was focused on speed of deployment, right, continuous deployment, what we would call now single piece flow from lean manufacturing applied to software development itself, viewing designed but undeployed features as work in progress inventory and therefore a liability. Untested, unvalidated assumptions are inventory and are bad, not good. So you don't want to build that stuff up, you want to flush it out as soon as you can. So I would try to explain and I would make up theories and I was constantly trying to come up with a language and a theory for why. But yeah, I certainly have been advocating for kind of like somewhat dubious and unpopular ideas. I have the staying power for that and it took me a long time to even give it a name. Lean Startup isn't even the first try. It took me a long time to find a way to talk about this that I could get civilians interested in, like process junkies and people who are in demand, like those people are easy...
Academics, you know, whatever. But like actual people who work for a living who are like, 'I'm just trying to get my job done today, I don't really want to hear about your 92-step process to whatever.'
I don't want this thing to fail but I do have a job to do.
Yeah. And so it took me a long time first to... I ran the employee orientation at IMVU, like just explain to our own employees why do we do things in such a crazy way. So I'd been at IMVU for like five-ish years and you know, they brought, it's like very old classic, they brought a professional CEO. We didn't totally get along. I was like, 'You know what, I'm not going to be the founder who has to be kicked out. I'll voluntarily transition out.' So I was thinking about what do I do next? All these VCs were calling me, 'Hey, you should come be an EIR.' And yeah, you know, I didn't know what the career path in Silicon Valley was like. And so I was like, this is all very interesting and I was thinking about what to do next and this funny thing started happening where VCs would ask me to come meet with portfolio companies that were going too slow because I had this reputation because of IMVU's engineering prowess that I could magically make engineering teams work. It's totally how the mind of a circa mid-2000s era VC worked, which is just like, 'Oh, these guys, they got some fairy dust. I don't know how this thing works, but like you just go sprinkle that over there.' You got it exactly right. And I would be like, 'No, no, no. Actually, I'm not special at all. I just have this superior theory.' And they'd be like, 'Sure, sure, sure. But could you just do the dust anyway?' So I go and have these meetings and the meeting would go like this. The VC would tell the company, 'This guy can really help you. You should invite him for a meeting.'
Yeah. A friend of the firm. The worst. So then they have to do it. So they call me, 'Would you do us a favor and come have a meeting?' Sure. Come meet the whole management team assembled for me. And I would start telling them stories about what had worked for us at IMVU. And I would say, 'We ship software to production 40 times a day on average.' And they'd be like, 'Sure, that could work for like a three-person team, but it could never work for a six-person team' or whatever size N they were. 'It could never work for size N times two.' And I'd be like, 'No, no, no. We doubled and doubled what we're doing.' And they would start to get angry and they would yell. I would get yelled at in these meetings. They'd be like, 'That's crazy. That could never work.'
Because they didn't ask you for the meeting in the first place. So some shirts.
I didn't know what was going on. I thought I was just really bad at having these meetings. They would go so badly and the people would hate my guts and I'd basically be ejected.
You're like, 'You know what I need to do? I need to write a book about this because it's going so well.'
So I wish I had that. So at the end of the meeting, I'd be like, 'Listen, you called me for this meeting. You asked me here as a favor and now you're mad at me. And I'm not telling you a theory. I'm just telling you a story of what I witnessed with my own eyes. You think I'm lying? Like what?' So that kept happening to me and I had this great idea. If I write some of these stories down, then the next time somebody calls me for one of these meetings, I can say, 'Hey, why don't you read this first and if you think I'm crazy, maybe let's not have the meeting and then I don't get yelled at.' This was my genius plan. Okay, that's how far ahead I was thinking. So the other thing you don't understand about that time is startup people didn't blog.
Nobody had... I was one of those. I can tell you all the bloggers who were writing in Silicon Valley at that time because when I started blogging they all reached out to me because I showed up in their HTTP referral logs and these blogs were so low traffic they could tell when a new person entered the scene. Dave McClure, Sean Ellis and Andrew Chen all called me within a month of my starting to blog to be like, 'What's up? Who are you?' And of course they were asking who are you because I did not put my name on my blog because I was embarrassed about it. It was anonymous.
What was your blog called?
It was called Startup Lessons Learned in the passive voice, not by anybody. They had been learned. The startup had learned its own lesson somehow mysteriously. And that's how it started. And then people wanted to know who I was and they wanted to hear what I had to say. And I was like, well, I better give this theory a name. And I started talking about it as lean startup.
And with the concepts of MVPs and pivots, had you already started to crystallize those at this point or did that come through?
Yeah, I did, but it wasn't like crystal clear. It was like I had this constellation of concepts, some of which have been long since left behind. Like I was every bit as excited about teaching people about engagement loops, which is the retention flip side of viral loops, which nobody wanted to hear about that. Viral loops were too complicated, right? And it was like, but that's just as important. And so, you know, the concept that really landed for people...
Is actually still a failing of startups today is everyone focuses on getting your CAC down. So few people focus on retention and even less people focus on like revisiting pricing strategy. Like you have all these different levers.
These things are unbelievably mispriced. I've never worked at a startup where a very simple set of experiments around pricing hasn't revealed dramatically different economics. It's embarrassing. You know, it was just a very special time where there was an incredible hunger for new ideas about entrepreneurship and this thing wound up taking over my life. It was a wild experience.
I know we're spending a bunch of time, but this really changed the fabric of the ecosystem. Like in reflecting back on it, can you identify like what were some of the winds that were in the air at that point in time that people were hungry for this different way of thinking about startups?
Yeah, it's hard to remember now, but 10 years ago was a financial crisis. Remember RIP Good Times and that whole thing. So first of all, it was very convenient to be known as the lean startup guy at a time when Sequoia Capital is telling everyone to cut costs. And I got a lot of phone calls from founders who would be like, 'Hey, I heard you can help me get out of my office lease. How can you help me with repo on furniture? Like, how do I get rid of these Aeron chairs to lower my burn rate?'
Yeah. And what's funny is I would tell people who would call me for advice on burn. I said, 'Listen, the build, measure, learn feedback loop. The reason it's important is we can analyze every dollar you spend. And we can ask ourselves, is that dollar helping us learn critical things that you need to know right now about your company or not? If it is, it's worth spending on. And if it's not, you should cut it whether it's a crisis or not. It's pure waste. So just don't do it.' And you can imagine the furniture guys would be like, 'Thanks. Thanks for that really helpful advice, buddy.' Like, anyway, but my office, right? Like, I don't want this... people are not very theory oriented. So it took me a long, long time to figure out how to make this practical for folks that they could actually do it. And I really never dreamed that it would have the kind of impact that it did. It's quite a moving thing, actually.
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Oh, so what am I doing now?
Yeah. What is the LTSE? So,
one of the privileges of getting to work with so many companies, I mean, I have, you name an order of magnitude of company from like two founders in a garage up to the biggest multinationals and governments in the world, and I've had the privilege over the last 10 years of working with all of them
because once The Lean Startup hits and becomes a thing, it's not just startups that want to talk to you, right?
No, I mean huge, huge companies and nonprofits and NGOs. Like we can talk about, there's a whole community of people that study lean startup for national defense within the Five Eyes intelligence alliance across nations. I mean, it's crazy how many places this thing has gone. And in particular, many of the early startups who were just two people in a garage when they first heard about lean startup, they grew and got to product-market fit. So I mean, it was really a privilege to get to work with some of these companies as they scaled up and then to be called into these much bigger companies. And it's like there are some things that are different at 10 people, 100, 10,000, 100,000, 300,000, you know, a million or more, but there's some things that are very consistent. And so I had had this experience and to me it felt like being issued a backstage pass to capitalism. Like I get to see how business... I've lived in California practically my whole life and now here I am traveling the world and getting to see all these problems. And no matter where you go, no matter who you talk to, if you say like, what are the problems that afflict your organization, like everyone's like, short-termism, we're living quarter to quarter, you know, we can't make the right investments, we're not really focused on the long term, we have bad ownership, they don't have constancy of purpose, like it's just an epidemic problem.
Read Elon Musk's Twitter feed here or wherever. I mean, it's just, it's something, it's like one of the very few things that pretty much everyone in business agrees on.
And yet, if you ask people, 'What are we going to do about it?' It's like asking, 'What are we going to do about gravity?' You're not going to do anything about it. It's just a fact of life. It's like, who do I complain to about gravity? Nobody. You just fall down when you fall down. Like, that's just how it goes. And so like we've attributed, especially in Silicon Valley, we treat the facts of our capital markets and the infrastructure of our financial reality as facts of nature when they are in fact human creations and they're changeable. And for whatever reason, this always struck me as wrong. So LTSE is our attempt to fix that problem by aligning ourselves with the next generation of leaders of companies who have a very different value system than what's come before. And their employees are activists. They care a lot about sustainability, diversity, and equality. They genuinely believe, diluted or not, you know, like they genuinely believe that companies can be a force to change the world for the better. And they want financial infrastructure that supports that vision, and there isn't any.
Yeah. And so this is a crazy... I know that the LTSE as a regulated body is very flexible in the type of guidelines. They defer to the entrepreneur. You let the company sort of pick a lot of the mechanics that they want to bring in. But what are some example ideas that you've had of mechanics that can change these things for the better that companies who list on the LTSE versus the NASDAQ, or in conjunction with the NASDAQ or New York Stock Exchange? What mechanics could fix this stuff?
Yeah. So, this is a very careful balance. You know, I've learned this over many years now of testing and testing and testing and refining this
Really, you of all people [laughter]
without which we would definitely be dead. That we need to have a principles-based approach here. So, we need companies to say, 'I'm willing to sign up to these principles.' For example, that the long-term investors are my valued partners and should be rewarded accordingly. That I'm going to treat all of my stakeholders as first-class members of my decision-making process: my employees, my community, my vendors and suppliers, my customers. You know, the acid test of certain companies in recent years is when you discover that there's scientific research that shows that your product is unhealthy and addictive for your customers, are you going to do anything about it or are you going to bury the research? And like, think how different our world would be if certain companies had made certain choices that are different than they did make. Versus like, think about an older generation of leaders, like when you know Tylenol famously had to recall all the pills off every shelf in America and how like the short-term pain... They didn't even need to, but they did.
They did it because they might have been necessary.
Because they understood that earning the public's trust over the long run is far more important than the short term.
This is value creative for all shareholders.
Exactly. Right. So, you can just pledge those principles like and be like, rah.
whatever. Put it in your S-1 and be like, we're going to be so great and all this stuff.
Every S-1, it's like, it's unbelievable, right?
Right, and that's the problem. Investors take those aspirations and then they just put it in the shredder. Yeah. So like, this isn't even worth the paper you print it on because how do I know that you're serious about it?
So the idea of LTSE is companies should commit to these principles by making a binding pledge to operationalize each one. And the flexibility that we have created is so that it doesn't have to be one-size-fits-all. Every company does exactly the same thing, but every company has to do something real, and we act as the certifying body to say, yeah, that's real or it's not. So you make it by sort of registering the implementation of such a pledge with you, it then becomes like a securities violation to break it.
You got it exactly right. So there's real enforcement penalties if you don't do it, and therefore only the good companies would do it. The bad companies would be crazy to do this. So you have like the perfect self-selection. That's what you want. So, for example, one of my favorites is public companies today, generally speaking, don't know who their owners are, which you can't run a private company this way, right? We obsess about getting the smart money on the cap table. And the idea that when you go public and just give it up, like, well, whoever happens to buy it, I guess it's fine. And I've met so many companies who like they literally pay for a service. I love this. This is my favorite like euphemism service.
Stock surveillance. It's like you're [laughter] hiring the CIA to go sus out who owns your... Like, no, you need to know who your investors are. Therefore, know what they want. Make sure that you're actually aligned. So, we believe that every company has the right to know who its long-term investors are, but in exchange for that transparency should reward them, should give them additional voting rights, should give them additional economics, additional superior capital-raising opportunities, that kind of thing. So, that's like, that's a principle that's like very high level, but we drive it down into the market microstructure and make it real.
And so, let's dive into those. What could superior economics mean? So if I hold the stock longer, my stock could become more valuable.
Yeah, you could have a progressive dividend that's paid out preferentially to those who have held longer. You know, if...
There's no, I mean, for well, as far as I know, all of history of equity securities, you know, there's this concept of preferred equity and common equity. There could be other classes of equity. That's correct. And those different classes can have different economic terms, right?
It's actually a very old idea. Yeah. And when you talk to like old-timers in securities law and, you know, corporate structure, they're like, 'Yeah, sure. This isn't like impossible to do. It's just practically speaking, we don't do it because there's so many forces that pressure people into conformity.' And yet, how ironic that we as the industry of innovation are hyperconformist and conservative about how we structure companies and how we bring them to the public. And then now we've kind of stopped doing it. So now we're so unhappy about the public markets, we're taking our ball and going home, and we're not taking companies public until very, very late in their life. And how antisocial is that? [laughter]
I mean, these companies don't go public for 15 years.
You know, when you were saying a minute ago about, I hadn't put two and two together either, which is funny because we bring up the financial crisis so many times on this show. You know, whether it's...
It really happening in our era, everything of this era. I think it's so right to say that shaped the desire for the lean startup movement. There also are like a bunch of trends, similar huge trends in the financial world that have kind of led, I think, to LTSE. So I'll throw them out there. Feel free to, I'd love to hear your thoughts.
One, so first you have the rise of algorithmic trading in the public markets. So you went from whether you were a value investor, a growth investor, like whatever it was, like people were hitting buttons to make trades.
Not that long ago. And now most trading and most ownership in the public markets are not people hitting buttons. It's machines hitting buttons, and they hit them a lot faster, and they care a lot less about the long term. Two, you have the rise of index funds, right? So now you have a whole another class, which is a huge portion of the public equity market, which isn't even anybody making a decision. It's just a passive, you know, this fund is going to track the market.
Oh, now we have the rise of passive funds. We have competing index providers who have different index formulas for what tracking the market is. So the active decision-making has just been moved from the fund manager to the algorithm of the index provider.
Yeah. Abstraction on abstraction.
It's getting wild. So now you have a situation, I think, in the public markets where what used to be a loud cacophony of voices in the marketplace voting on buying and selling shares, the number of active human voices has been reduced hugely. So a lot less information flowing into the market.
A lot less information flowing, and so you can be, if you're a loud activist shareholder, denting voice or whatever, you can now be heard a lot. And if you move the stock, all these passive index and algorithmic trading is going to move with you. You can have a huge impact on a stock.
And importantly, right now governance is tied one-to-one with ownership. And so, you know, you could have these very short-term investors who just arrived who can vote and change control of the company, which makes sense. They own it. But Eric, LTSE allows for a different view on that. So can you talk a little bit about separating economics?
Actually, one thing real quick before that. So then you have Snapchat go public, right? Or you have all these companies going public now with these dual-class, multi-class share structures. Snap is like the most egregious of like, no, you guys get no votes. And I understand it as a founder. You're like, screw this, like, right.
But yeah, what, okay, so what's the other path?
Well, yeah, I mean, like, I get the view that if you can be emperor for life, why not? Pretty good gig. But I think, first of all, I think it's really important that people should see the fact that founders are taking these extreme measures is a reflection of an extreme problem. Like, these are extreme reactions to an extreme problem. And I would point to two of them. First of all, in the old days when I first got into this business, founders were in the biggest rush to go public because their billion dollars about to become fully liquid and they would make a ton of money. The idea that you would put off becoming a liquid billionaire for 10 extra years...
Like, that's not an act of greed.
There's something else going on here, right? People are putting off their own mega payday. Now, you know, of course, there are secondary transactions and people, like, they're not starving or anything, but like...
Generally speaking, highly capitalistic and competitive people would rather have $1 billion than like $50 million, and they're choosing not to do that.
And you know, the founders are one thing, right? But like the venture investors, right? Like, Ben and I run funds. You know, man, we would really like to distribute returns to LPs so that we can raise new funds, but like...
And that would actually be better for the ecosystem as a whole. Like one of the problems we're having is all these early returns are frozen. They're not being recirculated like they used to be. And so there's not as much, even though we have a lot of seed-stage activity right now, we could have exponentially more if we would unfreeze all these transactions. And similarly, like very few founders can actually justify perpetual dual-class control of a company, right? Even if you're like, I'm the greatest CEO that could ever happen. And it's, but it's like, well, even if you like develop dementia or like even if your children aren't as good a CEO as you, they should inherit the company from you. Like that's called feudalism. Like we have a lot of political experience with these systems and we know that does not go well. And most founders, you know, if you really press them in private, they'll say, 'I don't think this makes that much sense.' But that's how bad standard governance is.
So Eric, what's an example mechanic then where, David, I like the way you painted it that for a long time, economics and governance were really tightly coupled except for companies like media companies where, you know, there was a reasonable argument of why a dual-class structure should exist.
You needed to be independent from the subjects you were covering.
Exactly. Yeah. And so then the last five, eight years, we see this incredible rise in massively separated classes where the founders own everything. There's no way to ever change that. Sometimes the common gets no votes. It's crazy. And what's a way that you could sort of have a middle ground here?
Yeah, I think the compromise that I personally think is best is if you're going to be dual-class organized, I think that's okay, but then you have to have a way for the long-term investors to join you in that privilege class. They have to be able to earn their way into the better class so they can join you in co-determination of the company. That's really in the company's long-term interest because except for the very few of these founders that are investing in immortality, everyone else is planning to die. So there [clears throat] will be another CEO of this company one day, and your dual-class protections will not protect them. So what's the plan for the next CEO? If you're really thinking about I want to create a lasting institution, what's the plan? Why would the next CEO care at all about your ethos of multistakeholder development, of your ethos of long-termism? Like why? They could easily be as good as you are at vetting them. They could just be like, you know what, my incentives are to run quarter to quarter. Screw this. So, we have to rely on all of the long-term stakeholders in the company, including the long-tenured employees, and hopefully this next CEO is himself a long-tenured employee, but also the long-term investors should all have a superior voting opportunity just like you do as a founder. So,
And so you could imagine like every quarter that you hold the stock, it adding some multiplier to the amount of votes you get or something.
Yeah, exactly. Like the LTSE software makes it possible for companies to design programs like this because they can track the long-term ownership in real time, and if you trade out, you...
And if you know who the investors are, the appropriate reward.
So like we don't mandate this specific voting system because, you know, it's controversial and there's some people who they think like one share, two votes. It's like there's a big Wall Street Journal article about this called 'One Share, Two Votes,' which basically like how hedge funds, they borrow extra money like right at the last second before a proxy contest to get extra votes that day and then get it. It's just like, I think that's indefensible, but that's currently allowed under the rules. So there's kind of a big debate about like what's the best system, and I kind of feel like because none of these systems is exactly right, we should just have more experimentation with different models till we find the right one. I happen to like this particular one, but you know, that would make sense for like a Google-type company that really has control and, you know, is founder-owned, and I could see that making sense. I could imagine different scenarios for other companies, and I could imagine a smaller-cap company saying, you know, we don't want to mess around with voting. Voting control isn't even really our issue. The issue is just creating an incentive for people to be long-term investors, and so let's do something like a progressive dividend. So I'm not ideological about it. I just think like neither side can really justify what it's advocating for. And we like this. You see this a lot in ideological battles where everyone's like drawn to more extreme positions because...
They feel like if you give those people an inch, they'll take the whole thing, right? And so not to make any meta commentary here.
What's interesting, I mean, let's just say what it is, like we're making sort of interesting political allegories, and I've heard you describe this before as allowing your long-term shareholders to become citizens of the republic with you, and sort of let's get away from this sort of feudalism mentality and let's say, look, if you want to go on a 20-year journey with us where you continue buying up your position in the company, you know, you help us make good decisions, you own this thing for the long, like, of course you should be more participatory in helping us figure out where it's going next.
Yeah, I think it's actually very logical and really a genuine win-win. So, it's even a win for the quantitative guys. This was a surprise to me.
A bunch of these quantitative traders, like they're not immoral, they're amoral from the point of view of companies. It's not that they're trying to do something harmful, they just don't care. So, I'll tell you a story. I was sitting with a quant trader once and I was like trying to explain the system to him and he was just like, 'I don't get it. Who cares?'
