These companies may smooth startups’ path to the public market — if they don’t kill each other firstMay 11, 2019
This morning, the SEC approved as the U.S.’s 14th stock exchange Long Term Stock Exchange (LTSE), an outfit that was conceived in 2012 by “Lean Startup” author Eric Ries as a place where public market shareholders who hold onto their shares through thick and thin would be rewarded for their loyalty.
Ries thinks such rewards are important because he believes in public markets. Among other things, by establishing a common currency, being publicly traded enables companies to more easily acquire other companies. It enables employees to more freely sell their shares. It also allows retail investors to participate in the growth of tech companies — growth from which they’ve largely been shut out in recent years as the average time a company remains private has stretched to roughly 12 years.
Indeed, Ries’s biggest issue with public market shareholders is their focus on short-term results, citing it as the primary reason that startups remain privately held for so long. After all, it’s hard to innovate when you’re being sued over disappointing earnings.
Whether LTSE can usher in rules that encourage both companies and shareholders to focus on the longer term remains to be seen. LTSE has not received approval over any kind of listings standards. It hasn’t even submitted these yet.
While ideally, the exchange wants to welcome “values-based” companies that limit executive bonuses and grant more voting power to shareholders who hang on for the ride, Ries seems to recognize that he may have to settle for less owing to some pushback, including from the Council of Institutional Investors, a group of institutions that fear long-term voting could empower company insiders at the expense of other shareholders. During a call today, he told us that LTSE won’t necessarily give more voting power to shareholders. “These rewards could be voting or other things,” he said.
Certainly, Ries will benefit if LTSE takes off. While numerous reports today note that famed VC Marc Andreessen is one of LTSE’s financial backers, the biggest shareholder right now is Ries himself, who owns 30 percent of the for-profit company, according to government filings.
Other major shareholders include John Bautista, a cofounder of Long Term Stock Exchange who is also an attorney with the law firm Orrick; Founders Fund, which owns 14 percent of the company; Collaborative Fund, which owns 7.8 percent; and Obvious Ventures, which owns 6.7 percent. The company has raised roughly $19 million altogether to date.
Ries is hardly alone wanting companies to be able to go public sooner without worrying about activist investors. We’d written about the case for tenured voting in late 2017, noting then that concept has been around for decades.
But while it resonates with founders, few others have embraced the idea. Back in the 1980s, for example, U.S. stock exchanges determined that tenured voting was unnecessarily complicated and too hard to track. Bankers don’t like the idea because anything that looks different to the market is harder to sell.
Meanwhile, another Andreessen-backed startup to make headlines this week — Carta — seems like a bet that LTSE won’t realize its vision completely. The seven-year-old, San Francisco-based startup largely helps private company investors, founders, and employees manage their equity and ownership. But it just raised $300 million in Series E funding at a $1.7 billion valuation led by Andreessen Horowitz largely to become what Carta CEO Henry Ward describes as the world’s largest marketplace for private company shares.
Carta paints the evolution as a natural one given the needs of aging private companies, as well as the fact that so many startups and institutional investors use its platform already.
In fact, Ward, like Ries, talks about democratizing access to more of today’s up-and-coming companies on Carta’s platform. Still, Ries seems more interesting in getting shares into the hands of people who haven’t been able to access them in recent years; Carta seems more interested in more efficiently allowing startups and institutional investors to trade shares amongst themselves, using Carta as a hub. (Carta also has exponentially more funding than LSTE, having raised $447 million altogether from VCs.)
Whether either company realizes its bold ambitions will take time to know. Much depends on external factors, like the macroeconomy, and whether outfits like SoftBank keeps showering privately held companies with funding.
In the meantime, it will be interesting to understand whether LTSE and Carta can together create a safer, smoother path for startups that are looking to go public. It’s certainly one plausible scenario.
Another is that the two wind up locked in a kind of battle for fast-growing startups, with Carta enticing them to stay private, while LTSE pushes for them to get onto its exchange — and out into the broader world.
We’d be curious to know what Andreessen Horowitz imagines will happen. We asked the firm earlier today; we’re still waiting on a response.