Something dramatic is happening to the public markets. Since 1997, the number of publicly listed companies in the US has declined by 45%. This trend has been consistent — downward — through extreme cycles of boom and bust. Fewer companies are choosing to IPO, and the companies that do IPO tend to make that choice later in the company’s life. Experts continue to debate the many causes of this trend, but I am confident about one of them: today’s best companies dread going public.
Decline in US publicly listed companies, 1997–2015.
The Lean Startup movement has given me the opportunity to meet thousands of entrepreneurs — from founders of early stage startups to managers of the world’s largest companies. In these conversations, I always hear the same thing: managers are concerned. Concerned about losing control of their company. Concerned about having to manage to the quarter. Concerned about compromising the company mission. Concerned about the distractions that take energy away from serving customers and creating value. Concerned about being punished by the markets for investing in anything other than driving short-term metrics.
In 2011, as I drafted the epilogue for The Lean Startup, I decided to raise the issue of short-termism and propose a potential solution: a new public securities exchange designed to promote long-term value creation. I hoped that some brave soul would read my short paragraph, agree that this was an idea whose time had come, and set about making it happen.
‘What is needed is a new kind of stock exchange, designed to trade in the stocks of companies organized to sustain long-term thinking.’
Well, needless to say, none of my readers took the bait, but this idea refused to leave me alone. And so I started to dig. As a founder myself, I started by examining the company perspective. Public company CEOs and managers shared stories about entire workforces becoming entranced by the pendulum swings of their stock price. They spoke of the challenge of keeping employees focused on the long-term mission while the markets and financial media relentlessly commented on immediate results. They expressed deep regret about starting to play the guidance game. They spoke of the pressure to manage to Wall Street vanity metrics instead of the leading indicators that drive future growth.
As my curiosity grew, I started to spend a significant amount of time with long-term institutional investors. I was surprised to learn just how deeply concerned they were by the state of public capital markets. They, too, saw short-termism as a threat to value creation and could recite countless instances of bad behavior by companies obsessed with the short-term. They found it outrageous that Silicon Valley would suggest that they were to blame. How about all of those Silicon Valley companies and VCs who were out for a quick payday? From their perspective, management compensation was terribly misaligned. Above all, these investors were tired of watching great management teams overreact to market volatility and optimize for the short-term. They had seen too many companies that had previously touted long-term strategies ‘eat the seed corn’ or engage in financial engineering in an attempt to move their stock price — instead of serving customers.
And my research continued. I spoke with investor relations officers who told me that it was becoming harder and harder to make sense of movements in their companies’ stock prices. If the stock dropped a point, was that random volatility, or a signal that large investors were losing faith in the company strategy and starting to sell? I spoke with traders who seemed unaware of the impact a moving stock price had on a company’s management and employees. Shorting a stock was simply a way to make money. A stock, however, is not simply a ticker symbol on a screen. It represents the life’s work of thousands of human beings. They deserve better.
I am not the first person to notice the decline of public markets, and there have been many solutions proposed — everything from deregulation to tax reform to better enforcement to more regulation. And yet, year after year, the problem persists. This is a complex problem and one that involves many stakeholders, including some who are quite happy with the status quo. In order to make a change, we need collective action.
As I passed through an airport recently, I heard the news that my airline had just been acquired by a public company. During check-in, I asked the gate attendant how she felt about it all, and she shared that she was concerned. She worried that the airline would lose sight of the things that had made the business a success and fixate solely on the financials. She left me with these words: ‘I guess that’s what it means to be a public company. It’s all about the money now.’ In her mind, this news signaled the beginning of the end. Stories like these have left me convinced that it is time to make a change.
Over the past few years, I have been assembling an incredible team to make this change a reality. We call our new company the Long-Term Stock Exchange (LTSE), and I am honored to serve as CEO. The LTSE will seek to encourage long-term thinking through listing standards, guidance, tools, and services aimed to give all parties the incentive to focus on the long term.
I am more convinced than ever that the only player in the ecosystem that can drive the change needed is a national securities exchange. Exchanges regulate over $100 trillion of annual capital flows globally and wield incredible influence over the public company and investor experience. By building an exchange, we have the opportunity to craft a new bargain between great companies and long-term-oriented investors that share the collective goal of innovation and value creation.
The LTSE is a natural extension of my work on The Lean Startup. My mission all along has been to improve the innovation ecosystem and empower people and companies to do their best work. This is the next step in that process because some of the needed changes are simply not internal to each company — they have to be made at the ecosystem level. Building this new company has already required support from every part of the ecosystem. We have raised capital from some of the best investors in the world, not just in Silicon Valley, but from a broad base of supporters who believe in our mission.
Creating a new exchange requires extensive engagement with regulators and host of other key stakeholders. In the coming months, we will be heads-down as we build those relationships (and quite a bit of software, too). We are excited to bring forth a better option for innovative companies to access the public markets.