The LTSE is Here, But Do We Need It?
It’s good to question everything. Given that this newsletter focuses on venture finance and startups, it makes sense that I’ve spent the last few weeks questioning how we raise capital with topics like rolling funds vs traditional funds and venture debt vs “Securitizing SaaS.” This week, I wanted to question a core piece of the venture-backed startup equation: liquidity. Aside from M&A deals, IPOs are the prized outcome for any venture-backed company.
On Wednesday, Lean Startup author Eric Ries announced that the Long Term Stock Exchange can now begin trading U.S. exchange-listed stocks and will be able to list new companies as well (none have listed directly with the LTSE so far). The exchange, backed by the likes of Andreessen Horowitz, Founders Fund, and Initialized Capital, represents Silicon Valley’s disdain for the short-term thinking and execution that traditional stock exchanges often incentivize.
Many VC’s have been arguing for years now that the traditional IPO is a ripoff and large private businesses should seek direct listings (the SEC is finally coming around to expanding direct listing options). Meanwhile, everyone and their mother is spinning up a SPAC to avoid the IPO debacle altogether. Ries had a bigger vision than just altering the rules of stock exchanges and wanted to instead build an entirely new one from scratch. In May of 2019, that vision got approved by the SEC and is now live for trading as of last week.
The LTSE is comprised of institutional investors who share the exchange’s vision of empowering long-term focused companies, calling themselves the Long-Term Investor Coalition (LTIC). Their website states, “It's a chance to build a new relationship between companies that are built to last and the stakeholders who believe in them.”
Some tech investors and CEO’s argue that the most meaningful private companies that exist today live on a time horizon that the public markets simply can’t stomach. How do you discount the cash flows of colonizing Mars? What about eliminating aging, or creating near-infinite energy sources?
What the LTSE Wants
The LTSE’s plan is to augment standard listing rules and encourage companies to adopt a set of governing practices that focus on a long-term outcomes, rather than short-term spikes in price. As Ries puts it, “Companies that operate with a long-term mindset tend to outperform their peers over time. But going public can pressure even the most visionary founder into a short-term mindset.”
They have a set of guiding principals that outline how companies on the exchange must behave. None of them are strict rules exactly, but in order to be listed, the company needs written policies in place that cover a range of topics. They include things like:
Considering a broader range of stakeholders, and the role they play in the company’s success. They want exchange listed companies to focus on understanding environmental stakeholders, developing a concrete approach to D&I, creating a strong employee compensation/incentive plan, and more. Last year this view was echoed when the Business Roundtable Redefined the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans.’
A policy regarding how the company will measure success in the long term. All companies are still required to make quarterly filings with the SEC by law, but the LTSE wants their listed companies to have additional strategic plans and filings that favor long-term thinking.
Companies listed on the LTSE would be discouraged from tying executive compensation packages to stock price or other similar measures. Instead, their compensation would be tied to longer-term vesting schedules and outcomes.
“A policy explaining the engagement of the company’s board of directors in the company's long-term focus, including discussion of whether the board and/or which board committee(s), if any, have explicit oversight of and responsibility for long-term strategy and success metrics.”
A thoughtful plan for how these long-term companies should engage with their long-term stakeholders. This could mean perhaps a special class of shares for long-term oriented investors gets a special set of voting rights.
Is it Necessary?
A lot of critics point out that you don’t really need a brand new exchange to make these ideas a reality, and plenty of massive companies have been greatly rewarded for thinking long term on regular exchanges. Bezos’s leadership has always favored long-term results and investors have historically rewarded him well for it. However, I think Amazon is a bit of an outlier here.
Companies listing on LTSE also don’t have to trade exclusively on it. They can be listed on other exchanges simultaneously. It seems like less of a new system of listing stocks and more of a “stamp of approval” that the company is dedicated to long-term value creation. In that sense, it’s a bit similar to something like a B Corp. There’s no financial benefit to becoming one, and it’s difficult to stay one, but doing so is undoubtedly better for the company and society in the long term.
Also, it seems like the biggest problem with short-term decision making by executives might not be as much about company leadership as it is about investor behavior, and this exchange doesn’t change anything about investor behavior yet. Your company can still get shorted or you could get bullied by an activist investor. Regardless, it’s an interesting model and I’m excited to see what the first batch of companies listed on the LTSE will look like.
Eric did an AMA on Hacker News and the comments bring up a lot of other thoughts, ideas, and criticisms.
Stuff I’m Reading:
VC Financing Deals:
London and Boston-based Snyk just raised $200M in Series D funding from Lee Fixel’s Addition at a $2.6B+ valuation. Utilizing open source software can rapidly accelerate a business’s software development timeline, but developers have to inherit the potentially vulnerable code that comes along with it. The five-year-old company helps open source developers within enterprises continuously identify security vulnerabilities in this code.
Lightforce is a Cambridge-based dental technology company that makes 3D-printed brace brackets and bite-correction trays. They just raised a $14M Series B led by Tyche Partners, with participation from Matrix Partners and AM Ventures. The company claims that 3D printed brackets are cheaper and more accurate, which leads to less patient visits and higher profits.
Back in March, I highlighted where Zapata Computing sits within the budding Quantum Computing ecosystem when they raised an undisclosed strategic investment from Honeywell. According to a new Form D, the company has now raised close to $30M out of a $40M round.
Zapata is building a middle-layer software solution for companies building workflows on near-term quantum computers. With this latest investment, the company will have raised $60M+ from previous investors including Comcast Ventures, Prelude Ventures, Pillar VC, The Engine, Founders Fund, and several other deep-tech VCs.
“The world will generate 160 zettabytes of data in 2025. That’s more bytes than there are stars in the observable universe. Conventional storage media like flash-drives and hard-drives do not have the longevity, data density, or cost efficiency to meet the global demand. CATALOG is building the world’s first DNA-based platform for massive digital data storage and computation.” — Catalog
Apparently even current-day hard drives only have a storage-to-size ratio of 30 million gigabytes per cubic meter, which adds up quickly as we continue to ramp up data center development worldwide. Catalog can store 600 billion gigabytes into the same volume by encoding data onto DNA. Last year, they filmed a short documentary on their process of putting the entirety of Wikipedia into DNA.
Cambridge-based Squadle, a hardware and software developer creating solutions for fast food operations, just raised a Series A of an undisclosed amount. The seven-year-old company has previously raised $3.8M from investors including Bolt, BOSS Syndicates, 500 Startups, Walnut Ventures, and Companyon Ventures. They help multi-unit restaurant owners simplify operational tasks that are usually done using paper manager playbooks. Bringing them online into a dashboard helps owners monitor things like compliance, food safety, and store performance across all facilities. They’ve experienced a 700% jump in ARR in the last 12 months, according to the funding announcement.
Orig3n, a Boston-based company that uses DNA tests to recommend lifestyle changes, is currently raising $29M. They offer a variety of DNA tests that can be used to create personalized vitamin kits, nutrition guides, fitness routines, skin complexion profiles. They’ve already raised $50M+ from a handful of biotech investors including Hatteras Venture Partners, Syno Capital, and Haitong International.
Three-year-old digital transformation company Solo.io just raised $23M in Series B funding, according to a new Form D. They’ve previously raised $13.5M from investors including True Ventures, Redpoint, Haystack, and WestWave Capital. Solo is for enterprises with large, complex legacy applications that would be difficult to completely replace overnight. Instead, they use Solo’s API to easily deploy microservices on top of their application network as an “edge application.”
Customer insights platform Tally Street just raised a $750K seed round from Launchpad Venture Group. The company’s low-priced product integrates with accounting software like Quickbooks and automatically uncovers customer trends. They focus on analyzing SMB accounting data to show businesses which of their customers are the most valuable for future revenue generation.
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