A preacher of “fail fast” is designing a stock exchange that rewards patience

▶ ▶ The Long-term Stock Exchange could discourage quick trades and reward better decisions ▶ ▶ “You’re advertising to the markets that you’re willing to be held to a higher standard”

When Eric Ries showed friends a draft of his 2011 book, The Lean Startup, some advised him to get rid of a section proposing the creation of a stock exchange for tech companies that would discourage short-term thinking. It would ruin his credibility, Ries says they told him. Ignoring them, he kept the section in. The book, a guide for building successful companies, went on to be a best-seller and made Ries a cult hero among tech entrepreneurs.

While readers embraced his “fail fast” approach to get a “minimum viable product” in front of customers as quickly as possible, no one picked up on his stock market proposal. So five years later, Ries has started building the Long-term Stock Exchange himself.

At first, bankers, investors, venture capitalists, and regulators told him the idea was too far outside the status quo to work. “People treated me like a barbarian,” he says. Eventually, though, he persuaded a team of about 20 engineers, finance executives, and attorneys to join him and raised money—he won’t say how much—from about 30 investors, including venture capitalist Marc Andreessen and technology evangelist Tim O’reilly.

Launching the LTSE won’t be easy: Getting approval from the U.S. Securities and Exchange Commission could take several years. Ries is in early discussions with the agency. The next step will be to file an official application detailing his proposals, such as the listing standards, followed by a 90-day public comment period. The regulator’s decision whether to greenlight the exchange could take months.

Ries argues that existing exchanges encourage bad decision-making by companies, investors, and

employees. The problem, he says, begins with stock market investors who favor companies that show big increases in sales, profits, users, or other measures every quarter. When a company falls short, investors flee, and the stock plummets. Hoping to avoid such jolts, managers spend too much time focusing on short-term performance. Ries says he’s heard the same story many times: Halfway through a quarter, an executive realizes the company isn’t on track and starts slashing innovative projects to meet his numbers. Once a company goes public, he says, employees “are on Yahoo! Finance every day, and it’s palpable how much that’s affecting the decisionmaking of ordinary managers.”

After many discussions with companies and investors on how to combat those tendencies, Ries decided his exchange would have rules targeting three areas: how executives are paid, how companies and investors share information, and how investors vote. A company that wants to list its stock on Ries’s exchange will have to choose from Ltse-approved compensation plans designed to make sure executive pay isn’t tied to short-term stock performance. Ries complains it’s common to see CEOS or top management getting quarterly or annual bonuses tied to metrics such as earnings per share, which pushes them to goose the numbers with accounting gimmicks or other ploys. Ries wants to encourage companies to adopt stock packagesackages that continue vesting even after executives have left the company.

The LTSE also wants companies to share more information, such as details on research and development spending. And to moderate swings in a company’s stock price and increase the influence of patient investors, shareholders who hang on to their stock would see their voting rights increase over time. As Ries sees it, an Ltse-listed company will have an extra stamp of approval. “You’re advertising to the markets that you’re willing to be held to a higher standard,” he says.

Ries’s reforms may not have the intended effects. For example, granting greater voting rights to long-term shareholders would make takeovers harder, and that could end up protecting complacent managers, says Larry Harris, a professor of finance and business economics at the University of Southern California. “The threat of takeover has done far more to get good behavior out of corporations than perhaps anything else,” he says. “A sophisticated investor may shun” an exchange that creates obstacles to outsiders who want to shake things up.

Getting SEC approval is “a fairly painful process,” says Sang Lee, managing partner at Aite Group. Like Ries, Brad Katsuyama, a hero of Michael Lewis’s Flash Boys, is trying to address what he sees as the shortcomings of existing markets. Katsuyama has spent the better part of a year trying to get SEC approval for IEX, his alternative stock trading system designed to neutralize the impact of high-frequency traders. He faces resistance from exchanges such as the NYSE, whichw slammed IEX’S proposed exchange as “unfair” and “opaque”opaq in a November letter to ththe SEC. If Ries gets the go-ahead from

th the SEC, he will face what may turn out to be his biggest challenge: persuading a company to be the first to list on the LTSE.

Ries isn’t courting Uber, Airbnb, or giants that are still private. Instead he’s connecting with midsize startup founders, some of whom have invested in the LTSE. In the next few years, Ries hopes a handful of these companies will emerge as strong IPO candidates. If he’s lucky, one will decide to take the plunge. “As an industry, we all want to see these changes happen, but there’s always a little bit of an incentive for any individual actor to say this isn’t my fight,” Ries says. “I don’t begrudge those people. But if everyone does that, change doesn’t happen.”

Vimeo is the secondbiggest video-sharing site after Youtube, with 710,000 paid subscribers. Monthly users have tripled to more than 280 million in four years. “My hope is that they will continue to invest along this path. … You’ll see bigger and more ambitious programming.” Kerry Trainor, announcing he’ll step down as chief executive officer of Vimeo after overseeing dramatic growth at the Iac-owned company over the past four years

The bottom line Launching the Long-term Stock Exchange, a new exchange for tech companies, could take several years.