The Lean Startup and the LongTerm Stock Exchange (with Eric Ries)

In the fifth season, tenth episode of the "Acquired" podcast, co-hosts Ben Gilbert and David Rosenthal, along with guest Eric Ries, founder and CEO of the Long-Term Stock Exchange (LTSE), delve into the creation and vision of the LTSE. Approved by the SEC as the fifth national securities exchange, the LTSE aims to address issues in public markets such as short-termism and lack of transparency in shareholder identities. Ries, also known for his influential 2011 book "The Lean Startup," discusses the LTSE's origins from an idea in his book and the journey to raising $68 million from top venture funds. The episode touches on the polarizing nature of new ideas, the evolution of the lean startup methodology, and the LTSE's ambitious goal to align financial infrastructure with the values of a new generation of companies and investors.

• Eric Ries is the founder and CEO of the Long Term Stock Exchange (LTSE).
• The LTSE was approved by the SEC as the fifth national securities exchange.
• The LTSE aims to address issues in public markets such as short-termism and unstable governance.
• Eric Ries is also known for his 2011 book "The Lean Startup," from which the LTSE idea originated.

"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."

The quote outlines the episode's focus on the LTSE and its approval as a significant new player in the national securities exchange landscape, emphasizing the ambitious nature of the undertaking.

• The LTSE concept was a polarizing idea at the end of "The Lean Startup" book.
• The idea was initially criticized by test readers for potentially undermining the book's credibility.
• Despite criticism, the LTSE concept was pursued because of its potential to challenge conventional wisdom.

"You basically piss away the credibility you've carefully built up over 299 preceding pages. You flush it all away in one page. It's that bad, you must take it out of the manuscript."

This quote from a test reader highlights the initial skepticism and perceived risk associated with the LTSE concept presented in "The Lean Startup."

• Eric Ries used lean startup techniques in writing his book.
• He is attributed with popularizing the term "minimum viable product" (MVP).
• The Lean Startup methodology was also initially polarizing but has since become more accepted.

"I think I am primarily the one to blame for the overuse of the phrase MVP."

Eric Ries acknowledges his role in popularizing the MVP concept, which is now a cornerstone in startup development practices.

• LTSE aims to address problems in public markets, such as short-term focus and lack of shareholder transparency.
• The exchange's vision is considered controversial and disruptive.
• The goal is to see if LTSE's ideas will become as widely accepted as The Lean Startup principles.

"The LTSE has an ambitious vision to fix many of the problems that they see in the public markets today, from short-termism, abrupt changes in governance, from so-called tourist investors and visibility into who a public company's shareholders really are."

The quote summarizes the LTSE's mission to address fundamental issues in the current public market system, highlighting its ambitious and reformative goals.

• Eric Ries's entrepreneurial journey began with a failed startup during his time at Yale.
• He joined a startup called There, which experienced significant investment but ultimately failed to capture the market.
• Ries learned from the experience and applied those lessons to his next venture, Imvu, and the development of The Lean Startup.

"I was originally in the class of 2000, so the .com bubble swept through the world while I was an undergrad."

Eric Ries contextualizes his early entrepreneurial experience within the .com bubble era, illustrating the high-risk, high-reward environment of that time.

• Steve Blank, an investor in There, introduced Ries to the concept of customer development.
• Ries audited Blank's class at Berkeley, which influenced his thinking on product development and customer feedback.
• The collaboration between Ries and Blank helped shape the Lean Startup methodology.

"He was a their investor. So I was very lucky. I mean, honestly, I don't deserve any of this. I was very fortunate."

Eric Ries acknowledges the role of serendipity and the influence of Steve Blank on his career path, highlighting the importance of mentorship and learning from experienced entrepreneurs.

• Eric Ries reflects on the unpredictability and financial risks involved in entrepreneurship.
• He stresses the importance of looking forward and developing equanimity in the face of uncertainty.
• The entrepreneurial ecosystem is now seen as a valid career path with its own form of job security.

"If you're going to make entrepreneurship and the entrepreneurial ecosystem a career, which is really like, that's a new thing possible in history."

This quote reflects on the changing perception of entrepreneurship as a career choice, noting its evolution into a recognized and sustainable path.

• Eric Ries discusses the challenges of naming and communicating the concept of Lean Startup.
• It took multiple attempts to find a way to engage a broader audience beyond those already interested in management processes.
• The concept wasn't immediately embraced by everyone, especially those more focused on daily work tasks.

"Lean startup isn't even the first try, by the way. 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 into management."

The quote explains the iterative process Eric Ries went through to refine the Lean Startup methodology into a format that was accessible and interesting to a wider audience, not just management enthusiasts.

• Eric Ries describes his transition from an operational role at IMVU to advising other companies.
• After leaving his CEO position, he was approached by venture capitalists to help their portfolio companies.
• His reputation for engineering efficiency made him a sought-after advisor for speeding up development processes.

"I 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'm just going to voluntarily transition out."

This quote highlights Eric's decision to step down proactively from his CEO role to avoid a forced exit, a common scenario in the startup world.

• Eric Ries faced resistance when sharing his methods with other companies.
• Management teams were often skeptical or outright hostile to the idea of rapid software deployment, which was a core part of Ries's approach.
• The resistance led to the idea of writing down his experiences to avoid confrontational meetings.

"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 three person team, but it could never work for a six person team or whatever size n they were."

This quote illustrates the skepticism Eric Ries encountered when advocating for frequent software deployment, a practice that was unconventional at the time but central to the Lean Startup methodology.

• Eric Ries began blogging about his experiences and theories without revealing his identity.
• Blogging was not common among startup circles at the time, and the community was small enough that new bloggers were quickly noticed.
• His blog, "Startup Lessons Learned," gained attention and prompted him to formalize his theories.

"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."

The quote humorously describes the naming of his blog, emphasizing the passive acquisition of knowledge by startups through experience.

• The 2008 financial crisis created a demand for cost-cutting and efficiency, aligning with the principles of the Lean Startup.
• Founders sought advice on reducing burn rates and were introduced to the Lean Startup's build-measure-learn feedback loop.
• The crisis underscored the need for practical, theory-based approaches to entrepreneurship.

"Yeah, it's hard to remember now, but ten years ago was a financial crisis. Remember rip, good times and the 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."

Eric Ries reflects on the timing of the Lean Startup's rise to prominence, coinciding with a period where cost-efficiency was a critical concern for companies due to the financial crisis.

• Eric Ries discusses his current work with the Long-Term Stock Exchange (LTSE), aimed at addressing short-termism in capital markets.
• The LTSE is designed to support companies with long-term goals and a commitment to stakeholders beyond just shareholders.
• The exchange encourages companies to reward long-term investors and make decisions with a broader impact in mind.

"LTSC 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."

This quote explains the mission of the LTSE, which is to create a financial infrastructure that aligns with the values of new-generation leaders who prioritize long-term goals and social impact.

• The public markets have undergone significant changes, with algorithmic trading and index funds reducing the number of active human voices.
• These trends have led to a market environment where short-term interests can disproportionately influence company decisions.
• The LTSE proposes alternative structures, such as rewarding long-term shareholders with progressive dividends or additional voting rights.

"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."

David Rosenthal comments on the reduced number of active participants in the public markets, setting the stage for the LTSE's proposed changes to encourage long-term thinking.

• The LTSE requires companies to make binding pledges to operationalize principles of long-term focus and stakeholder consideration.
• Companies can be penalized for violating these pledges, ensuring only those truly committed to long-term values participate.
• The LTSE allows for different classes of equity with varying terms to reward long-term investors.

"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."

Eric Ries emphasizes the importance of a principles-based approach in the LTSE, where companies make concrete commitments to support and reward long-term investors.

• Seed stage activity is currently high, but it could be exponentially higher.
• Transactions are frozen, which hinders the potential growth in seed stage activity.
• Founders often do not support the idea of perpetual, dual-class control but feel pressured by poor standard governance.

"Even though we have a lot of seed stage activity right now, we could have exponentially more if we would unfreeze all these transactions."

This quote emphasizes the idea that unlocking frozen transactions could significantly boost seed stage activities in the market.

"Very few founders can actually justify perpetual, dual class control of a company."

This quote highlights the skepticism among founders regarding the justification of maintaining dual-class control structures within companies.

• Dual-class structures were once tightly coupled with economics and governance, except in media companies where it was necessary for independence.
• There has been a rise in separated classes, leading to founders having disproportionate control.
• Common shareholders sometimes have no voting rights, which is problematic.

"For a long time, economics and governance were really tightly coupled, except for companies like media companies, where there was a reasonable argument of why a dual class structure should exist."

This quote explains the historical context in which dual-class structures were acceptable and the exception of media companies due to the need for editorial independence.

"We see this incredible rise in massively separated classes where the founders own everything."

This quote points out the recent trend of founders retaining significant control over their companies, often to the detriment of other shareholders.

• A compromise could involve allowing long-term investors to earn their way into a privileged voting class.
• This would align the interests of long-term stakeholders with the company's long-term success.
• The concept of rewarding long-term stock ownership with increased voting power is suggested.

"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 privileged class."

This quote proposes a solution where long-term investors can gain more influence over time, aligning with the founder's interests in the company's longevity.

"Every quarter that you hold the stock at adding some multiplier to the amount of votes you get."

This quote introduces a specific mechanism for increasing long-term investors' voting power based on the duration of their investment.

• Current governance systems allow for manipulative practices like borrowing shares before a proxy contest to gain extra votes.
• There is a need for experimentation with governance models to find the most equitable system.
• The idea of a progressive dividend as an incentive for long-term investment is mentioned.

"So there's kind of a big debate about what's the best system."

This quote acknowledges the ongoing debate about the most effective and fair governance system in the context of shareholder voting rights.

"We don't want to mess around with vote. Voting control isn't even really our issue."

This quote suggests that for some companies, the primary concern is not voting control but creating incentives for long-term investment.

• Quantitative traders are described as amoral with respect to company governance, focused solely on financial gain.
• The disconnect between short-term trading gains and long-term company strategy is highlighted.
• The impact of stock prices on company management decisions, such as the acceleration of Disney Plus, is discussed.

"He's genuinely a tourist in the best sense of the word. He does not care."

This quote characterizes quantitative traders as disinterested in company governance, viewing their trading activities as purely transactional.

"Your employees are generally your longest term shareholders and so they're watching the ticker."

This quote reveals the impact of stock price volatility on a company's employees, who are often long-term shareholders.

• The attractiveness of staying private has increased due to the ability to raise capital with fewer obligations.
• There is concern over the lack of transparency and accountability in private market transactions.
• The push for companies to adopt good governance early on is emphasized.

"If private companies can raise unlimited capital on whatever terms they want, whenever they want, with no disclosure requirements, no accountability, no publicity, why would they go public?"

This quote questions the incentive for companies to go public given the freedom and lack of stringent requirements in the private markets.

"We run by far the largest corporate governance platform for startups."

This quote illustrates the speaker's involvement in promoting good governance practices among startups through a governance platform.

• LTSE has acquired SEC approval and aims to solicit companies for listing in 2020.
• The LTSE model allows for dual listing and does not penalize liquidity.
• The company's mission includes preparing startups for public listing through good governance practices.

"We should begin operations in 2020, and then we will be legally authorized to begin the process of soliciting companies to list on LTSE."

This quote outlines the timeline for LTSE to start its operations and begin engaging with potential companies for listing.

"We're trying to move the industry in a good direction."

This quote encapsulates the LTSE's goal to influence the industry towards better governance and long-term thinking.

• LTSE is designed to prioritize long-term investors and companies over short-term trading.
• The focus is on selling products and services that add value to customers (companies) and their long-term investors.
• LTSE's revenue comes from services provided to companies and investors, not from trading volume.
• The exchange aims to be the premier venue for infrequent traders and long-term investors.
• LTSE offers services for capital raises that protect companies from issues like front-running.
• The exchange has a suite of products for companies at different stages, including pre-IPO.

"We make our money by selling you products and services that you believe are value add, and we sell some products and services to your long term investors."

This quote emphasizes the LTSE's business model, which is centered around providing value-adding services to companies and their long-term investors, distinguishing it from other exchanges that may prioritize trading volume and short-term gains.

• Traditional financial institutions often prioritize traders over the actual suppliers (companies) and demanders (investors) of capital.
• LTSE seeks to reverse this by focusing on the needs of companies and investors rather than traders.
• Financial services often refer to companies as "issuers," which LTSE sees as a euphemism that overlooks the companies' role beyond just issuing stock.

"We'd like there to be at least one whose main job is to serve its actual customers."

The quote conveys the LTSE's mission to serve companies and investors as their primary customers, challenging the conventional focus of financial institutions on traders.

• Crusoe is a clean compute cloud provider that specializes in AI workloads.
• They partner with Nvidia and utilize clean, stranded, or wasted energy for their data centers.
• Crusoe's data centers are located at energy sites where excess power would otherwise be wasted.
• The company offers cost savings to customers by not relying on the traditional energy grid.
• Crusoe's environmentally friendly approach is a significant selling point.

"Nvidia is one of their major partners, and literally Crusoe's data centers are nothing but racks and racks of a because Crusoe's cloud is purpose built for AI and run on wasted, stranded or clean energy, they can provide significantly better performance per dollar than traditional cloud providers."

This quote outlines Crusoe's partnership with Nvidia and their unique value proposition of using stranded energy for better performance and cost efficiency in AI workloads, highlighting their environmental and economic benefits.

• The grading of LTSE's future is speculative, considering the potential for both high impact and failure.
• An A+ case scenario would be LTSE enabling positive change and innovation, even if it becomes a less profitable business than traditional exchanges.
• The F case scenario acknowledges the possibility of failure due to resistance to change and entrenched interests benefiting from the status quo.

"We are trying to fix a trillion dollar problem in capitalism itself... Whether we capture any of it for ourselves, I don't know. Probably is going to be fine."

This quote reflects the LTSE's ambitious goal to address fundamental issues in capitalism and its indifference towards the monetary gain for the company, focusing instead on the broader impact.

• LTSE faces challenges such as conservative systems, resistance to change, and opposition from those profiting from the current financial system.
• The company has overcome multiple obstacles, including regulatory hurdles and attempts at sabotage.
• LTSE's success depends on companies' willingness to embrace change and list on the exchange.
• The company uses various strategies to validate customer interest, including concierge MVPs and non-binding letters of intent.
• LTSE aims to facilitate direct connections between companies and long-term investors, bypassing intermediaries.
• The company acknowledges that there are numerous technical ways it could fail, which are not discussed in detail.

"We have become so intermediated. It's unbelievable... Having good ownership really is a source of competitive advantage."

This quote discusses the problematic separation between companies and long-term investors due to intermediaries, and how LTSE is working to bridge that gap, emphasizing the importance of direct relationships for success.

• LTSE offers tools for early-stage companies that are free or freemium.
• The company believes in data ownership, providing tools without extracting excessive fees.
• LTSE's suite of tools is available for venture capital firms to offer to their portfolio companies.

"Everything we do on the early stage size is free or freemium, so we're not extracting fees from anybody. We don't think that's right."

This quote highlights LTSE's commitment to supporting early-stage companies without imposing financial burdens, aligning with their mission of fostering long-term growth and innovation.

• Webflow has found success by respecting the core principles of web development with a visual interface.
• The company's tools reflect the actual code structure, offering a shallow learning curve.
• Webflow's timing coincided with advancements in browser capabilities, enabling accurate previews and direct manipulation within the browser.

"Webflow is the very first application that said, okay, here are the core primitives... And what we're going to do is create a pretty shallow abstraction that still forces you to understand those core principles."

This quote explains how Webflow's approach differs from other WYSIWYG editors by requiring users to engage with the foundational concepts of web design, contributing to its effective product-market fit.