The Exchanges

Q And what were some of the core principles of a lean startup?

A So I've kind of already told you the story indirectly, but now I'll tell it to you formally. The most famous ones are things like minimum viable product. So MVP is a bit of jargon that if you've heard in the business world, that's my fault. Sorry. The idea is you have a business plan. We're used to thinking of business plans as forecasts of what's supposed to happen in the future, but they're not. They're hypotheses. What we call leap of faith assumptions about what might happen if our theory is correct. So rather than try to build the best possible product, the most perfect product according to the hypotheses, we want to run the best possible experiment. Best possible experiment is what we call the minimum viable product. So a smaller, simpler, initial version of the product that allows us to start that learning discovery process sooner. Then we call that process the build, measure, learn feedback loop. We measure the time it takes between when we have an idea, and when we validated that idea, and the next idea, and the next idea, so a highly iterative way of working, scientific way of working. If the leap of faith assumptions turn out to be incorrect, instead of having the company go out of business, as I did in my early career, instead, we have enough runway, we save enough money, that we're able to pivot, have a change in strategy without a change in vision. It sounds so ob…

AI assessment note: “The most famous ones are things like minimum viable product.”

Q And then is this a sliding scale? Is it the long-term bucket and the short-term bucket? Like, how do you figure all that out?

A Yeah, we provide all that software. It's built into the exchange itself, which is part of what, like, people have tried things like this before, but they've always been too cumbersome. We have found a way to do it that's quite automatic. So I'll give you an example. So the specific formula of exactly how the reward works is still at the company's discretion. We don't force them to have a one-size-fits-all. But imagine someone said, well, I want to pay a progressive dividend that's proportional to holding period when I eventually do dividend. So in the far future, when I'm going to pay out a dividend, people who've held longer will be first in line, and they'll get a disproportionate share of the dividend, and then it will meter down for a little less. So we can track all that ownership. That's no problem. We can keep track of who's held for what amount of time is built into our platform. But we also, we're integrated with this very obscure SEC system. The SEC system is really smart. If somebody changes the beneficial ownership of the security, the individual share is automatically deregistered from the company's books. So it's not just if you sell your position, if you trade out of your position, obviously you forfeit the reward. But like, let's say you build a total return swap, or you loan the shares out for shorts, or you do any activity that builds a derivative out of the e…

AI assessment note: “the specific formula of exactly how the reward works is still at the company's discretion”

Q So how did you get started on the entrepreneurial path?

A Certainly was not any kind of master plan, let me tell you that. I grew up programming computers. I love technology from an early age. My dad brought home a beige IBM XT, you know, with a five and a quarter inch floppy disk when I was a kid, and that's all I ever wanted to do was program computers. So I was a computer science major. I was in college during the dot-com bubble. I had just done an internship at Microsoft. I was a precocious computer science programmer. That was my whole thing. And the dot-com bubble hit and all of a sudden everybody wasn't go work at a big company. Everyone was starting their own company. And so some friends of mine in my dorm, rather than become summer interns again, that whatever year that was, 1999, we decided we'll start a software company. That's what everyone's doing. So I got bitten by the bug during the bubble. Didn't go very well in retrospect. One of my new investing rules is by the time the bubble gets to New Haven, Connecticut, it's a little bit towards the tail end of things. So if you've seen the movie The Social Network, I got to have the first half of the movie experience, not quite the second half where we needed to sue each other because we didn't make any money. And it was a fascinating, and now I can laugh about it. Of course, at the time, I was devastated. Dotcom bubble crashed. All of our investors went bankrupt. Company coll…

AI assessment note: “friends of mine in my dorm... we decided we'll start a software company”

Q You also have this differentiation with Index funds and passive investors and active investors. So in that framework, if you think about a Vanguard or BlackRock or State Street, they are, by design, going to be very long-term owners, and yet some people say, well, they're passive owners, that's not really the kind of ownership you want. How do you think about that?

A This is a point of great controversy right now, because many of those funds outsource their governance to third parties, and there's a big debate about whether that's appropriate or not. What I think is interesting is the whole logic of passive investing is that you're free riding on the price discovery of others. That's by design, and that's why it works. And yet, spending on governance-related research is a, it's a cost center for the passive guys that they don't really want. So if there was a way for them to free ride on the governance decisions of the other long-term investors, they'd probably be happier with that if it drove their cost structure down for their investors. So I think that's ultimately, we'll have to find some way, To accomplish that. In the short term, I don't expect that most passive investors will do this registration that we're talking about, because they don't care about the governance side of companies. It's just not a big part of their important thesis, but again, it would be up to them to choose.

AI assessment note: “spending on governance-related research is a, it's a cost center for the passive guys”

Q So what were those early mistakes that you remember telling at the time?

A At the time, I really didn't understand. I can't imagine. I remember when someone asked me, what mistakes did you make at the level of strategy? And I said, oh, we didn't have the right product. They're like, no, no, no, but at the level of strategy. And I realized in the moment of the job interview that I didn't know what the word strategy really meant. I didn't know how to answer the question. I was like, I don't know. We didn't have a strategy. So how could we have made a strategy mistake? So it gives you a sense of the level of sophistication. But to twenty-year-olds, we really didn't know what we were doing. But I would talk about the fact that we had mis-underestimated what the level of Paid consumer demand would be. We had this product that was free to use, and then businesses were gonna pay us for access to it, and we got the free to use part down, but the paid part didn't quite follow. We got that wrong. We built this very sophisticated business plan. I mean, you would weep to read it. We treated it like a PhD thesis. So we were very high IQ, very well-prepared students. What we were prepared to do was build spreadsheets and documents, and we had this beautiful business plan, and it had an incredibly sophisticated Financial model attached to it, including data drawn from the census and from like the root cause data, really all the way down to the ground built up. And s…

AI assessment note: “we had mis-underestimated what the level of Paid consumer demand would be.”

Q So how do you think of that as a competitive business model?

A It's interesting. People always want to know, are we going to go burn that building in New York to the ground? I'm like, first of all, it's made out of marble, so, so probably not. But you know, like, are we going to have our own building? Are we going to have our own animal in the front? It's like, no, we don't think of it that way. We're not antagonistic towards the legacy exchanges. They're going to need to continue to exist. Philip Morris needs to be listed somewhere. You know, that's not our business. Our business is to help this next generation of companies. And so if People want to continue to do the incumbent listing. Great. No problem. If they want to try to maximize trading volume, you know, that's not our business. We're not trying to get in the way of that. We hope our trading platform will be the premier venue for infrequent traders, right? If you trade three times a year, we're your platform. We want to have the best trade execution and superior pricing for you. If you're a high frequency or quantitative firm, We're not opposed to that, just, we're not the right platform for you. And so we think of our business as a high margin, low volume business. We're happy to make money by selling services, data, technology, directly to companies and their long term investors.

AI assessment note: “we think of our business as a high margin, low volume business.”

Q And how'd you go learning what the right ideas would be?

A Well, a lot of trial and error. So I tried it the conventional way very hard. Several of us who were refugees from that failure started another company together. And all we wanted to do was make new mistakes. We were just like, okay, the conventional thing has really let us down. Let's just try some things that were different. And I look back on that now, and I was still very young to be trusted as a co-founder of that company. I was the technical co-founder. And I said, guys, I think we should try to use the scientific method and apply experimentation to everything we do with technology, which at the time was a very radical idea. I thought that customers should be involved in our development with us. From the early months of the company not waiting until years later. I thought that we should ship the software, get it into production faster than was considered normal. We practiced something that we would now call continuous deployment. And I had all these funky ideas about how the company should be run. And I look back on that. I say, what a leap of faith of my co-founders not to strangle me, but to say, all right, let's try it a different way. And so we built that company in a very different way. It was considered really strange by our contemporaries, but we'd been burned. So we were open to try something different. And we got a really different result. All of a sudden, those …

AI assessment note: “Well, a lot of trial and error. So I tried it the conventional way”

Q One of the other key things you hear about disclosure in the public markets is the quarterly cycle and increasingly earnings forecasts and what that does for the behavior and the financial metrics of the company. How do you address that?

A We will have subject to SEC approval. I should be saying that more often probably in this conversation. Obviously everything I'm talking about is subject to regulatory approval. We will have very strict limits on guidance. I think quarterly guidance is very dangerous and it's not actually Like people do it for good reasons. They start doing it for good reasons. If you talk to companies, they say, why do you give guidance? Especially companies that haven't done it before. Why do you start? They're trying to help analysts produce better consensus forecasts of how the business is doing. But the problem is that once you start giving quarterly guidance, the temptation is there to start sandbagging the guidance so as to beat it. Analysts start offsetting that sandbag with an offset. And then you're like playing this game with each other where no one believes anything that's being reported and it eventually leads into a destructive path. So our view about guidance is twofold. One, there are better ways to educate analysts than guidance. So if you're going to take guidance away, you can't, like, none of our rules, we never take any disclosure away. We're trying to maximize transparency and create more disclosure. So we just think it's more effective, rather than just say arbitrarily this is the guidance for the quarter, to educate analysts about the long-term leading indicators of futu…

AI assessment note: “We will have very strict limits on guidance. I think quarterly guidance is very dangerous”

Q I want to turn to some closing questions, but before I do that, if you had an ask for the people listening to this, generally a population of managers and allocators on both sides of this equation to kind of help you build the brand and get knowledge and awareness out there, what would that ask be?

A We want people to join our coalition. This is a project that needs allies. I don't know if people listening really appreciate the extent to which the forces of the status quo are fierce and powerful, and they love it. We have all these intermediated forces. They love it when we fight with each other. So like when companies and long-term investors fight about dual class, a lot of people are real happy about that. Keeps us at each other's throats instead of being partners. And what we have done is ask people, Would you like to be inside the tent helping us design these standards? Or would you like to be outside subject to these forces? And most of the financial system is oriented around broker dealers and traders setting the rules for the rest of us. And we want to have one venue, just one institution, one venue where we could do it differently. So if anyone is interested, please get in touch. We welcome the opportunity to partner with and get more input from people who are on the front lines of These issues come, come join our coalition. And that's a great entry point in to see what we're all about. I obviously can only talk about certain things. We're highly regulated. So there's only so much I can speak about in a public forum like this. There's some other stuff that's pretty cool that we can talk about.

AI assessment note: “We want people to join our coalition. This is a project that needs allies.”

Q How did you take the lessons and apply it to your next startup?

A The next idea I had was I'll apprentice myself to better entrepreneurs than me. First company I joined in Silicon Valley had, at the time I joined, I was like employee number Maybe raised tens of millions of dollars from really good venture capitalists, had an amazing team. People who were involved in this company went on to found many, many billions of dollars worth of other startups. We all learned very valuable lessons, but not this one didn't quite make it. Company was a virtual reality company way ahead of its time. And the business plan was as follows. We would spend five years in stealth R and D, no customers, no outside input, The business plan for this company, also beautiful artifact, had to be checked out of the company library. Every copy was numbered. You had to check it back in. It was paranoid about leaks. So five years stealth R&D, no customer feedback, and then big global worldwide launch, after which the hockey stick would commence. And I remember shortly after the launch, we were looking at the results, numbers, and we said, wow, this business plan is genius. We're right on plan on budget. It says here at this month, on this day, at this time, We should have almost no customers and almost no revenue. We're on plan on budget. Outstanding. Hockey stick to commence imminently, and then it didn't. And if customers had read the business plan and done what it said,…

AI assessment note: “The next idea I had was I'll apprentice myself to better entrepreneurs than me.”

Q How have you applied the lean startup principles to your own business this time around?

A This is a high degree of difficulty startup. It combines the worst of a multi-sided marketplace because you need a single value prop that works for the buy side, the sell side, for VCs, for companies and regulators all at the same time. Very difficult. It's highly regulated, maybe the most highly regulated kind of business you can build. It is technically quite difficult. It has a tremendous upfront cost before you can start operations, so it's a little bit like building a semiconductor fab or launching rocket ships to Mars, only it's completely intangible. You can't see it. At least when you build rocket ships, you get to show off those videos of the rocket ships taking off. When we got our SEC approval, nobody knew. The SEC just posted it to their website. You know, it wasn't like no one could see it. So it's a very difficult business. So when I first started doing Lean Startup, people used to say, oh, well, sure, Lean Startup works It works for this, but not for that. Yeah, it'll work for consumer, but it could never work for enterprise. It works for unregulated, but could never work for regulated. It works in America, but it couldn't work in Japan. But because I've had 10 years now of working with every kind of company you can imagine, I've seen all these pieces before. So I've done Lean Startup in financial services, in regulated environments, in multi-sided marketplaces. …

AI assessment note: “whoever learns fastest wins. That's our bedrock belief.”

Q So what are the criteria that a company has to meet in order to get a listing on LTSC?

A So there are financial and technical criteria that are the same as the incumbents. Everything we do is a superset of the legacy exchange standards. Then we have a series of principles, and I'll just give you one example, that we then translate into policies, which then become binding on the company's operations. So starting with a high level principle, let me walk you through from the principle all the way down to like the market microstructure, what the consequences are. The principle is that companies Should know who their long-term investors are and reward them accordingly, which sounds kind of obvious. Now, I talk to private company CEOs, they're like, yeah, duh, how could you run a company if you don't know who your investors are? But public companies don't know. It's hilarious. They pay for a service, which I think is the most funny name of a product ever, called stock surveillance. Like, they're spies. You gotta hire the CIA to go surveil your investors to find out who they are. Stock surveillance can tell you approximately who your investors probably were 90 days ago. It's time delayed. It's not very accurate. It's not what is needed. To have true partnership, you need to know who's on your cap table. And if you want to provide rewards, it has to be accurate data. So we allow companies to really understand who their long-term investors are by creating a mechanism for in…

AI assessment note: “there are financial and technical criteria that are the same as the incumbents.”

Q You start with long term ownership, which is kind of the incentives of long term of the holders. What about the incentives of company executives?

A So I've been talking about only one of our principles, just to show you how deep the stack goes. We won't even get into how long-term investors can have superior trade execution and pay lower trading fees, and we take it all the way down to the microstructure. But yeah, we have a principle around executive compensation. Executive compensation is out of control, and many companies are being destroyed by the toxic waste of bad comp. I was just with a private company a couple days ago, and I was doing an all-hands meeting with the founder, who I know. Talking about Lean Startup and LTSC, and this is a company with, you know, 1200 employees. They will be public two or three years from now. So it's not like they're urgently going public, but there are odds on there on their minds, on there. Employees have a lot of illiquid net worth. All of a sudden, this is a topic of conversation. And yet, the founder said to me, our biggest competitor is a public company. In the last five years, they have spent a 120% of earnings on buybacks. But I don't understand why. Why would they do that when we're coming for them? And they know it. Shouldn't they be investing in technology to modernize their operations? He's like, I love it. I'm glad they're doing that, but can you explain it to me? And I said to him, I was in front of all his employees, I said, look, I don't even know the name of the compa…

AI assessment note: “we have a principle around executive compensation. Executive compensation is out of control”

Q What are some of the other key principles?

A It's funny. I get accused sometimes of sounding too idealistic, and then other times, like, is it practical enough? Is it idealistic enough? Like, we have this bifurcation in our world of people who pursue, like, principles and philosophy, and then people who pursue, like, technical solutions, and we're trying to do both. So, we think that investors are best served when companies have a multi-stakeholder focus. And I was just talking to someone who was like, multi-stakeholder always makes me nervous. Well, it sounds like a bunch of do-gooders. Then he read our actual filing with the SEC. He's like, I'm suspicious, but this sounds pretty good. Because it's all about the long term. He's like, what's the catch? I'm like, there's no catch. Investors do better. When companies consider the impact that they have on their employees, and their communities, and their customers, and their partners, vendors and suppliers. This is like a Deming idea going back almost a hundred years now. You squeeze your suppliers too much, you wind up with low quality. You destroy the communities in which you operate, you know, the public comes for you. You build products that are unhealthy for human beings, you come to regret it in the long run. So, the question I've always asked is, Why do human beings care about financial metrics? People are always like, oh, the middle managers are obsessed with EBITDA,…

AI assessment note: “we think that investors are best served when companies have a multi-stakeholder focus.”

Q So let's pivot a little bit to what you're doing now. And where did the idea of the long-term stock exchange come from?

A Well, since we have time, I'll tell you the real story. This is exactly how it happened. So in 2010, I signed a book contract to write a book called The Lean Startup. Well, I wound up really changing my life when it finally came out in 2011. But during the process of writing the book, I didn't know how this was all going to turn out. And I felt a real sense of obligation to make the book as rigorous as I possibly could. I did two things. One is I was traveling constantly that year. 18 months, however long it was, testing the ideas in the book. I did constant workshops and speeches and working with startups of all different kinds and traveling to different regions, and I, I was just testing the ideas. I would try to explain it to people, see if they understood it, see how that kind of feedback I got. I had lots of people in the early days who just didn't understand it, or they took it too far, or they, you know, like all kinds of misconceptions that you can address that way. And then when I was on the plane, or, you know, anytime I had downtime, I was reading business books. I read every business book, every economics book, I mean, everything I get my hands on, because I was terrified that someone had already said what I wanted to say, and I would finally, one day I'd read a book, and I'd be like, oh, well, this is pointless. I'm not gonna write this book after all. Someone alre…

AI assessment note: “I'll tell you the real story. This is exactly how it happened.”

Q So let's dive in a little bit on what the exchange is from the company perspective. What's required of companies to be listed on the long-term stock exchange?

A Yeah, so we are a national securities exchange. We're in the same regulatory category as NYSE or NASDAQ. So this is on an alternative exchange or a venture exchange. This is the real thing. We want companies who list with us to be real public companies. So like the core idea is that companies need to go public again. All growth companies, the average time to becoming public has gone way, way, way up. That means that the great public has been blocked out of the ability to invest in growth, and everyone, I'm sure your listeners know this phenomenon very well, but it's a travesty. And like, this is a policy outcome that no one should tolerate. So our view is to make being a public company, a true public company, More attractive to the kind of the next generation of companies that really have a long-term multi-stakeholder view of what their mission is. So we do that by being different in three ways. We have a different business philosophy than the incumbents. We have a different value proposition that we offer to companies, and then we have a different business model. We want to be able to say to a long-term investor, to a long-term company, you're the customer, not traders. So the listing standards require companies to Adhere to a set of principles around long-term thinking, around sustainability, around diversity, around multi-stakeholder governance, and in order to do that, that…

AI assessment note: “listing standards require companies to Adhere to a set of principles around long-term thinking”