The Lean Startup and the Long-Term Stock Exchange (with Eric Ries)

0:00 Um before we start, Eric, I did have to say uh Did you intentionally pick a building with gigantic stone pillars and a marble lobby to start your stock exchange in? Obviously. I was like, What buildings are you talking about? I'm completely blind to that stuff. No, I have not uh I I did not weigh in on the uh on the decor of the place that we are. Welcome to season five, episode ten of acquired.

0:36 the podcast about great technology companies and the stories behind them. I'm Ben Gilbert, and I'm the co-founder of Pioneer Square Labs, a startup studio and early stage venture fund in Seattle. And I'm David Rosenthal, and I'm a general partner at Wave Capital, an early stage venture firm focused on marketplaces based in San Francisco. And we are your hosts. Today we tell the story of an incredibly ambitious undertaking, creating a new stock exchange. A long term stock exchange, that is.

1:04 Earlier this year, the LTSE was approved by the SEC as only the fifth body with such a license, and we have with us today none other than the founder and CEO. Eric Reese to talk about it. Welcome, Eric. Thanks, guys. Thanks for having me on. Yeah.

1:20 Yeah, yeah. Listeners, you may know Eric's name from his popular twenty eleven book, The Lean Startup. The LTSE was actually started from an idea that Eric had while writing the book, and there are a couple paragraphs at the end that explore it. And eight years later, here we are with the LTSC as an approved national securities exchange and having raised sixty eight million dollars from venture funds including Andrees and Harowitz, Founders Fund, Floodgate. And many other top investors. It was super fun. I was on the plane on the way back from uh visiting my family for Thanksgiving.

1:54 Pulled out my Copy uh of uh digital copy of the lead startup. Went through. And there it was. About a page and a half, right at the end. Right at the end. The very last idea in the book, practically. Yeah. Yeah, and uh you know, I knew it was gonna be polarizing from the start. When I was writing the book. So this is now go back to 2010, before the book even came out. This is you know when the idea hatch for me.

2:17 And part of writing the Lean Startup you can imagine I felt. a lot of pressure to eat my own dog food and use the techniques of lean startup. in writing the book. So it was very iterative process and I did a ton of testing and experimentation and A B testing. And one of the final stages was I sent the full manuscript out to a lot of test readers from different audience archetypes of people I wanted to influence. And I'll never forget one of the test readers wrote me back. He said the book is fine. Except that there's one thing you have to take out.

2:45 There's this idea at the end of the book about this stock exchange thing. And listen, you basically piss away the credibility you've carefully built up over two hundred and ninety nine preceding pages. You just you flush it all away in one in one page it's that bad. You must take it out of the manuscript. So That was its auspicious it's auspicious first reaction, uh from a test reader. So that's when I knew I was onto something. Yeah. That reminds me of the um The Google story where uh Larry and Sergey were working out of the Rujicki's garage and an investor came by to like a friend of the Rujickies to Meet them and they said like hey, we got this like company working out of the garage, you want to do things like no sneak me out the back. I don't want to talk to you Yeah, yeah, every once in a while.

3:26 You know, the conventional wisdom really Serves you very, very poorly. And and it's funny now because So always been very polarizing, but what people don't remember is that lean startup was very polarizing in the early years. Now everyone's like, Oh obviously of course we're gonna Or at least pay lip service to it, whether people actually do it or not, is it does it for a different conversation. Yeah, Eric, did your did your book coin the phrase minimum viable product? You know, I had never heard that phrase before, but in the years since people every once in a while will dig up like an academic paper from nineteen eighty four or whatever where somebody used the apparently it has been used

3:58 has been used before. But I think I r I'm primarily the one to blame for the overuse of the phrase MVP. So I I apologize. Anyone who's sick and tired about hearing about pivots or whatever, that's that's also my wave portfolio companies. Yeah, so to all your portfolio companies, I apologize. It's worth knowing before we dive in, the LTSC 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. So we're excited to explore some of the company's disruptive and as Eric, as you pointed out, controversial ideas today. and discuss sort of will it be a decade from now as widely accepted as the the lean startup has. So listeners, we had an awesome LP episode with Vlad Magdalene, the founder and CEO of Webflow this past week. As with many of our LP shows, we went deep with him on the nitty gritty of company building and what he's learned on his journey from building the no code.

5:00 website builder that has taken the industry by storm. You can become an acquired limited partner to get access by clicking the link in the show notes or going to glow.fm slash acquired, and if you stick around after this episode, you can hear an excerpt from that show. All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora. The agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

5:45 So the founders did exactly what great founders do. operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagora's Bet Here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work.

6:18 and do higher value work. And this means that the pie can grow even as each individual task takes less time. And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lagora numbers essentially speak for themselves. When they have a head to head pilot with their top competitor, they win seventy percent of the time. Legora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries. And crazily, they went from one million

7:08 to a hundred million in ARR. In about. Eighteen months. truly insane numbers. And that is the real test.

7:16 Plenty of things demo well, but the question is whether a busy associate actually reach for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at Lagora.com/slash acquired. And just tell'em that Ben and David sent you. And now? Onto the long term stock exchange.

7:41 But before that, before the lean startup You worked at a couple of pretty fat startups. Oh yeah. Um much has been written and said, of course, about your history and how the lean startup movement got started, but Uh when you studied CS at Yale, right? Yeah. And then you graduated and you joined a startup uh at the time called There.com, which was an early virtual world. Oh yeah. And I believe I'm getting if I'm getting my history right. operated for three or four years without launching a product.

8:11 Just hiring tons of people, raising tons of cash. And then burst out into the world. Like how how did you you know, you're a senior at Yale How did you decide oh I'm gonna go Doing this crazy thing. So all right, first of all, you gotta go back in your time machine. I I was originally in the class of two thousand.

8:28 So the dot com bubble swept through the world while I was an undergrad. But New Haven, Connecticut was like basically the last stop on the train before the whole thing imploded. So I did a I dropped out of school and I did a uh startup from my dorm room, which, you know Could've woulda should've been Facebook, but we didn't exactly know what we were doing. So we had kind of like the first half of the movie, the social network experience. Tell you think this is a good idea. We thought that college students from top universities, you know, Ivy League universities should create online profiles for the purpose of sharing. Sounds like a terrible idea. Which you're not going to do. That wasn't so bad. What was so funny about it. I mean, now I can joke about, of course, at the time this is horrible, but we thought that they should use those pro profile for something serious. You know, real business. So we thought they should create uh profiles for getting a job.

9:17 Yeah. We should create a resume database and share the profiles with employers who wanted to hire them. So we were very focused on sort of like an evergreen monster.com type. Well, it wasn't job postings, but resume database. It was we're like in some ways it was not like really not a crazy idea. Like we could then do analytics on to fake to match the right people to the right jobs and You know, like there was a certain like sensibleness to it. But first of all, if we had actually understood the concept of a pivot, and if someone had even suggested to us the idea that we could pivot into being Facebook, we would have been totally dismissive because we were like, No, no, we're trying to build a real business. Yeah. And we didn't really understand what a real business was. So we had no concept. Like the idea that there's like the idea of a digital marketplace or that you know, then attention based product would be valuable. We had none of that none of that insight. And you know, it was very very much a of a of a moment when people were building digital technology without a clear purpose as to why. Yeah. We just saw that everyone was doing it and it's just that's what we wanted to do. And so so we did it. This is a total aside, but it fits right into that. We were you at Yale at the same time as Matt Kohler?

10:15 Was that I was, yeah. I remember I remember um when he was uh uh a McKinsey consultant. Uh trying to I we we had we had coffee one day. He's like, should I you think I should join the technology industry? And he was thinking about some things he could work on. So yeah, that's It's a small club of people from that from that world who went on to to do good things. And Matt would of course be one of the first employees at LinkedIn and then first employees at Facebook. Yeah, one of the most important Facebook early employees on the business side, really. Uh Uh, and it's a great V C now. Yeah. Um But anyway, that's that's funny. You were building a social network for college students focused on recruitment. And he would go d LinkedIn. Yeah. Yeah, exactly. We could if we'd had any sense at all, we would have called that. What should we do? What should we do? But yeah, I I remember when he went to work when we first went to work at LinkedIn too, and I was like, Oh yeah, well, what's and I was like, Well, I al I already know about social networks and it's it's never gonna be anything, right? Like the biggest problem in a being in in in entrepreneurship is you you learn what's not gonna work.

11:08 That's not something that can ever be learned. Yeah. Cause just because it didn't work before doesn't necessarily mean it won't work the next time and that's what drives it. That's the hardest thing in venture investing, too. That drives us all crazy. You you overfit on the data that you have access to. Anyway, long story short, I went back and the startup failed. So I uh unlike the Facebook founders, I went back to school and finished my degree. If you've ever watched one of those movies about entrepreneurship or like the plucky protagonist goes back to the people who said it would never work and they're like, You were wrong, I was right, you know, rah, rah. In real life. You get to be the one to go back and be like, Remember when you said I should not drop out of school'cause nothing will ever come of it? You were right. Yeah. I'm back. Uh thanks for that.

11:45 Yeah, it's it's it's a totally brutal and awful experience. But I love the process of being able to translate ideas into products like so quickly and the rapid pace and narration of a startup. So When I graduated I was thinking about what to do next and I you know, I was just applying to jobs. I didn't know if I would do a startup or I would go to a big company. I looked at looked at a lot of stuff and my resume came across the desk of this crazy virtual reality startup in uh in Menlo Park. And they flew me out and you know, we'd all read uh Snow Crash and the same sci-fi books and they're coming. It's coming next year for sure. It's been coming for a long time and they sold me on this incredible vision. You know, a pretty small company at the time that I joined. They had really high quality venture capital backers, and I wanted to apprentice myself to the best entrepreneurs I could find. So I was like, this is an incredible management.

12:32 eighteen these people really know what they're talking about. You're gonna learn exactly. I'm gonna learn exactly what to do. All the things I did wrong, I'll learn how to do it right. And what's what's quaint about the story now is that by modern standards, it wasn't even that big of a disaster. We raise so much more money now from the three. Fifteen years, right? Like it yeah, it didn't you know it didn't didn't die right away, but like you know, I remember I used to tell people when my like when I first talked about Lean Startup, I'd be like the joke of There are comments that raised fifty million dollars. With no customers.

13:01 So And people will be like ooh. And now it's like what was that the seed round? Yeah. Right. Like, oh was that what is that a lot? Like I've I talk to like students now and they're like They don't get the joke. They're just like, right. Then what happened? I'm like, no, that's that's the lot of money that we set on fi and they're like, What? So you know, it's a very different era. But unlike today, we did not have any of the vocabulary or so we had no concept of minimum about product pivots, you know, continuous deployment, none of that stuff. So self consciously waterfall style development.

13:30 By the time the product launched, I remember we had almost two hundred employees. We had a whole warehouse full of customer service reps to handle the NCAA demand that all the advantage of the consumer product. Uh you know, big nationwide launch TV and everything and The only problem was that the customers never read the business plan. So they didn't know what to do. Other than that, it was a brilliant thing. And it was an incredible team. That team has gone on to found an incredible array of startups and they've created generated so much value in the world. Um so it was really a very talented group of people. But what companies came out of it?

14:05 Um Arista the Oh yeah, yeah. Network equipment company the the CTO there, uh and and founder was the was CTO of of their Well, I I shouldn't be name dropping a lot of cool people. Yeah. And I'm like everyone I don't mention will be met but a bunch of the very early Asana people uh were were there, folks. Actually, and then a lot of their people were early Google employees because as as their did rounds of layoffs The earlier you got laid off from there, the earlier you wound up at Google. So the the first people to get laid off made the most money by far. So it's just funny funny how this how this world works. And uh no one should ever take investment advice from me because I've I had many friends that who went to go work at pre IP at Google. They're like, Hey, you should come check this thing out. It's Can't tell you exactly why, but you should come and I'm uh Google what's it?

14:49 Yeah, good. I met my Matt caller told me it's like I do this LinkedIn thing. What is that? Facebook. Is that really gonna be a thing? So I I have turned down all the big uh all the big opportunities uh in this era. And now you can pitch them to come list with you. Yeah, so and it's actually, but it turned out to be for the best because uh because I I went up on a path that I wouldn't I wouldn't trade for anything. But it certainly I mean, you know If you're gonna work in this business and especially if you're gonna be in Silicon Valley, you will have to confront like the financial costs of the road not taken like every day, every year, all the time. And if you're mo if you if you get ego attached and you're motivated by the financial results, like uh it is a really horrible way way to live. So it it kind of forces you to um only look forward. Well, you can do that, although I think that can be pretty stressful too. Or or try to develop actual equanimity about the outcomes here. You don't really have control over what's gonna happen and the uncertainty is so high, you can't predict and you have to come to accept that. That's uh

15:43 If you're gonna make entrepreneurship and the entrepreneurial ecosystem a career, which is really like that's a new Think it's possible in history. Like that wasn't It's even really new in the last ten years. Very very much. You are the crazy one to come out. No parent is proud, you know, until ten years ago that their kid is leaving a great education, turning down the job at the big company and making no money and starting a company. That's a new phenomenon. Yeah, yeah, it can be hard for the family and others to uh to understand. But I think now we're starting to build up this idea that it can be a valid career.

16:15 And therefore it can have a certain kind of job security attached to it, even though the individual companies may fail. So uh I do think that's a very exciting a very exciting development. So you leave there as it's all imploding around you. Uhhuh. And you start Another company. Mm-hmm. I am the U. And one of your investors is How did you meet the

16:36 Steve. He was a their investor. Oh so I was very lucky. I mean, honestly, I don't deserve any of this. I was very, very fortunate. Uh the refugees from there, you know, a couple of them picked me to be a co founder.

16:51 And they were the ones that had the prestige and the relationships. I was just a junior guy on the engineering team, you know, what what what did I know? And so they recruited Steve and a bunch of other investors like hi, this is a very Silicon Valley thing. It's like I know we just lost you a ton of money, but how about you give us some more money and this time we'll actually make you some money? And you know, most of the investors like if you're gonna be a good investor and you have an entrepreneur that you like, you can't let the fact that they lost your m uh money deter you from making the next investment. They did that. He was one of them. But he Steve's idea was, Hey guys, I I don't mind Setting some more money on fire here, but how about you guys audit my class? That I'm just starting to teach you. Berkeley at the time, right? Yeah. Yeah. Yeah. We were in the very first or second year he was teaching what he called customer development.

17:31 at Berkeley and uh and my co founder and I which leapt down from Palo Alto. And that was a new phrase at the time. I mean now the whole discipline. But I was in the room when a room full of Berkeley MBA students every class session would like argue with him and push back and be like, This is the stupidest thing I've ever heard. I can so imagine that happening. And what was funny is that he came from an enterprise background. People don't remember Epiphany and it was a big enterprise software, you know, dot com phenomenon. And he would be presenting stories from Epiphany and the in the MBAs, like whatever you present to MBAs, they'll be like

18:05 Sure it would work for X, but it'll never work for Y. Like whatever X and Y is doesn't matter. So they'd be like, sure, old man, that works for enterprise, but how would it ever work for consumer? And of course, we then did it at MVU, and then I would be teaching in business call. He would often somehow have to invite me to guest lecture in his class or whatever. I and if I meet with MBAs they're like, Well, sure. Course it's gonna work for a consumer, but how would it ever work in the difficult world of enterprise? And just like everyone can just pick a lane, pick a pick a criticism that you wanna have. No, that's not how it is. But it was considered completely crazy. Steve, I you know, e he even among Silicon Valley people, they thought he was nuts. And and the the crazy notion at that time for him was that y you need to aggressively listen to your customers and that it's not about your vision, it's about what they tell you, and then you need to to inform your product roadmap based on customer discovery. He was arguing for a parallel discipline to product development.

18:54 He'd had his like really raw thinking about What do you do if you're the head of marketing for a waterfall style engineering company? that is absolutely convinced that their product is going to work after they set all the money on fire and do the big launch. Like what can you do about that? I remember reading it and I was being in his class like you're being very derogatory towards engineers. This is not Steve, this is not how engineers behave. And of course he's like, Oh yeah, it is. I was like, No, but there's like a new generation and we're doing agile and do this. And he had never heard of that stuff. He was from a different a different time. So it was a cool it was a very cool meeting of the minds eventually where

19:26 He was coming at this from a marketing view where you should have these customer conversations in a very disciplined way. And he was trying to give bring some rigor to that marketing activity so that engineers would take it seriously. That's I mean that was really the whole point of it is like how do you sit down with a very technical team and tell them, listen, with I with all due respect, we're building the wrong product. Yeah. You're doing you might it might be technically excellent. But it's the wrong product. And you know, now we have much better terminology and theory, and we've come a long way since those original. Was you know, was Steve in in his thinking about this, was he influenced by crossing the chasm? Yeah, yeah, yeah. He he was very into crossing the chasm and uh Uh the innovator's dilemma. Yeah. Yeah, you think about Jeff Moore and and of course Steve and like I didn't think about this till now. They're marketers. Like they're coming out from a marketing background and like

20:10 I wanted to ask you how you got inspired And I presume work was deep to then write the lean startup. after like Four Steps to the Epiphany was already out there, what was the insight of Hey, this can be bigger and you know, brought to a broader audience. You know, I was just frustrated. That I had never had a master plan to do this.

20:29 I just like I remember buying copies of four steps of the Epiphany for like everyone on my team and be like, Well, everyone read this. On Friday. come into the office on Monday and we're doing it starting Monday. That was my like theory of change. When I was at Inview, it was my job to try to explain.

20:45 why we did things the crazy way that we did them. 'Cause I came up from the engineering practice. So we I was focused on speed of deployment. Right, continuous deployment, sing like what we will call now single piece flow from lean manufacturing applied to software development itself, viewing designed but undeployed features as work in progress inventory and therefore a liability. Untested, unvalidated assumptions are inventory and are bad, not good. So you don't want to build that stuff up. You want to flush it out as soon as you So I I would try to explain and I make up theories and I was constantly trying to come up with a language and a theory for why. But yeah, I certainly advocating for kind of like somewhat dubious and unpopular ideas. Like I I have the I have the staying power for that.

21:26 And it took me a long time to even give it a name. Lee Startup isn't even the first try, by the way. It took took took me a long time to find a a way to talk about this that I could get civilians interested in. Like Process junkies and people who are into man like that, those people are easy. Academics. Academics, you know, whatever, but like actual work people who work for a living. who are like, I'm just trying to get my job done today. I don't really want to hear about your ninety two step process to win. I don't want this thing to fail, but I do have a job to do. Yeah. And so it took me a long time first to I ran the like employee orientation and in view, like just explain to our own employees why do we do things in such a crazy way? Why like why?

22:04 Yeah, so I've been in MV for like five ish years and Yeah, they brought it's like very old, like classic. So they brought a professional CEO. We didn't totally get along. And I was like, you know what, I'm not gonna be the founder who has to be kicked out. I'm just gonna I'll v voluntarily transition out. So I was thinking about what do I do next, and all these VCs were calling me, Hey, you should

22:21 Come be M B I R I didn't know what the career path in Silicon Valley was like. And so I was like, it's all very interesting. And I was thinking about what to do next. And this funny thing started happening where VCs would ask me. To come meet with Portfolio companies. That we're going too slow. because I had this reputation because of inview's engineering prowess.

22:43 that I could magically make engineering teams work. That's totally how the mind of a you know, circa mid two thousands era V C worked, which is just like Oh like these guys they got some fairy dust. I don't know what it I don't know how this thing works, but like you just go sprinkle that over there. You got that's you got it exactly right. And I would be like, No, no, no, actually I'm not special at all. I just have this superior theory and they'd be like, Sure, sure, sure, but could you just do the dust anyway? So I I go and have these meetings and and meet him go like this. The VC would tell the company, this guy can really help you. You should invite him for a meeting. A friend of the firm. Yeah, a friend of the firm, uh the worst. So then

23:20 They have to do it. So they invite call me, would you do us a favor and come have a meeting. Sure. Come meet the whole management team assembled for me. And I would start telling them stories about what had worked for us at Infue. And I would say, We ship software to production uh forty times a day on average. And they'd be like, That sure that could work for like three a three person team, but it could never work for a six person team or whatever. Like whatever size N they were, it could never work for size N times two. And I'd be like, No, no, no, we we doubled and double doing and and they would start to get angry.

23:47 And they would yell I I would get yelled at in these meetings. They'd be like, That's crazy. That could never be in ask you for the meeting in the first place. I didn't know what was going on. I thought I was just really bad. At having these meetings. They would go so badly and the people would hate my guts and I I'd be basically be like ejected. You're like, you know what I need to do? I need to write a book about this because it's going so well. So I wish I had that. So I at the end of the meeting, I'd be like, listen, you called me for this meeting. You asked me here as a favor and now you're mad at me and you just like And I'm not telling you a theory, I'm just telling you a story of what I witnessed with my own eyes. You think I'm lying? Like what So that kept happening to me and I had this great idea. If I write some of these stories down. Then the next time somebody calls me for one of these meetings, I can say, Hey, why don't you read this first?

24:29 And if you think I'm crazy, maybe let's not have the meeting and then I don't get yelled at. This was my genius plan. Okay, that's how far ahead I was thinking. So The other thing you don't understand about that time is startup people didn't blog. Yeah, blogging was nobody had one of the first I was one of the those I I can tell you all the bloggers who were writing in Silicon Valley at that time because when I started blogging, they all reached out to me. Because I showed up in their HTTP referrer logs. And these blogs were so low traffic.

24:56 They could tell when a new person entered the scene. Dave McClure, Sean Ellis, and Andrew Chen all called me within a month of my starting to blog to be like, what's up? Who are you? And of course they were asking who are you? because I did not put my name on my blog because I was embarrassed about it. It was anonymous. What was your blog called? 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. And uh and that's how it started. And then People wanted to know who I was and they wanted to hear what I had to say and I was like, Why better give this theory a name? And I started talking about it as lean startup and And with the concepts of MVPs and pivots, w had you already started to crystallize those at this point, or did that come through the Yeah, yeah, I did, but it wasn't like crystal clear. It was like I had this constellation of concepts, some of which uh have been long since you know left behind. Like I I I was every bit as excited about teaching people about engagement loops, which is the retention uh flip side of viral loops, which uh nobody wanted to hear about that. Viral loops were too complicated, right? It was like I was like, but that's just as important. So you know the concept that really landed for people. It's actually still a failing of startups today is everyone focuses on getting your CAC down. So few people focus on

26:07 retention and even less people focus on like revisiting pricing strategy. Like you have all these different levers. These things are unbelievably mispriced. I've never worked at a startup where a very simple set of experiments around pricing hasn't revealed dramatic differently economics. Yeah. It's uh it's embarrassing. You know, it was just a very special time where there was an incredible hunger for new ideas about entrepreneurship and this thing wound up taking over my life. Wow. I knew we're spending a bunch of time, but like this like this really changed the fabric of the ecosystem. Like in reflecting back on it. Can you identify like what were Some of the winds that were in the air at that point in time that like people were hungry for

26:45 This different way of thinking about startups. Yeah, it's hard to remember now, but ten years ago was a financial crisis. Yeah. Yeah. Remember RIP good times and that 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. And I got a lot of phone calls from founders who would be like, Hey, I heard you can help me get out of my office lease. Uh the point Can you help me with repo on furniture? Like how do I get rid of these Eron chairs to lower my burn rate? Different lean, buddy. Yeah. And and what's funny is I would tell people he would call me for these for advice on on burner, I say, listen, the build measure learn feedback loop, the reason it's important is we can analyze every dollar you spend and we can ask ourselves, is that dollar helping us learn? critical things that are ne you need to know right now. about your company or not. If it is, it's worth spending on.

27:31 And if it's not, you should cut it, whether it's a crisis or not. It's pure waste. So just don't do it. And you can imagine the furniture guys would be like, uh thanks. Thanks for that really helpful advice, buddy. Like anyway, but my office leader, like I don't want this like third people not very theory oriented. So it took me a long, long time to figure out how to make this practical for folks that they could actually do it. And I ne I mean, I really never dreamed that it would have the kind of impact that it did. It's um Quite a moving thing, actually. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture.

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29:42 And just tell them. That Ben and David sent you. I want to tell this story in medious rest a little bit. So the natural next question would be, you know, how did this lead to starting LTSE? But I think to to set the stage for listeners, Eric, can you give us a high level overview of what on earth are you doing? And then let's get to how did you get here and why Oh, so what am I doing now? Yeah. What is the LTC so One of the privileges

30:07 of getting to work with so many companies. I mean I have you name an order of magnitude of company. From like two founders in a garage up to the biggest multinationals and governments in the world. And I've had the privilege over the last 10 years of working with all of them. Because once the lean startup hits and becomes a thing, it's not just startups that want to talk to you, right? No, I mean huge companies and nonprofits and NGOs. Like we can talk about there's a whole community of people that study um lean startup for national defense. within the five eyes uh intelligence alliance across nations. I mean it's crazy how many places this thing has gone. And in particular

30:42 Many of the early startups. who were just two people in a garage when they first heard about Lee startup, they grew. and got the product market fit. So I I mean I was really a a privilege to get to work with some of these companies as they scaled up and then yet to be called into these much bigger companies. And it's like there's some things that are different at ten people, a hundred, a thousand, ten thousand, a hundred thousand, three hundred thousand, you know, a million or more. But there's some things that are very consistent. And So I had had this experience and I to me it felt like

31:08 being issued a backstage pass. to capitalism. I I get to see how business I've lived in California my practically my whole life. And now here I am traveling the world and getting to see all these problems. And it you no matter where you go. No matter who you talk to.

31:23 If you say like what are the problems that afflict your organization? Be everyone's like short termism. We're living quarter to quarter, you know, we ne can't make the right investments. We're not really focused on the long term. We have bad ownership. They all have constancy of purpose. Like it's just a

31:38 epidemic problem. Or wherever. I mean, it's just it's something it's like one of the very few things that pretty much everyone in business agrees on. And yet if you ask people, what are we gonna do about it? It's like asking what are we gonna do about gravity? You're not gonna do anything about it. It's just a fact of life. It's like you don't it's like who do I complain to?

31:59 About gravity. Nobody. You just fall down when you fall down. Like that's just how it goes. And so like we've attributed, especially in Silicon Valley We treat the facts of our capital markets and the infrastructure of our financial reality as facts of nature, when they are in fact human creations and they're changeable. And for whatever reason, this always struck me as wrong. So LTSC is our attempt to fix that problem.

32:25 by aligning ourselves with the next generation of Mm. who have a very different value system than what's come before and their employees are activists. They care a lot about sustainability, diversity, and equality. They genuinely believe, deluded or not, you know, like they genuinely believe that uh companies can be a force to change the world for the better.

32:46 And they want financial infrastructure that supports that vision. And there isn't any. Yeah, and so this is uh. I I know that the LTSC as a a regulated body is very flexible in the type of guidelines. They they defer to the entrepreneur. You me you let the the company sort of pick a lot of the mechanics that they want to bring in, but what are some example ideas that you've had of mechanics that can change these things for the better, that companies who list on the LTSE versus the Nasdaq or in conjunction with the Nasdaq or New York Stock Exchange, what mechanics

33:19 Could fix this stuff. Yeah, so this is a very careful balance. Yeah, I've learned this over many years now of testing and testing and testing and refining this. Really, you. Yeah. Of all people. Without which we would definitely be dead. 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, that I'm gonna treat all of my stakeholders as first class members of my decision making process, my employees, my community.

33:51 My vendors and suppliers. My customers. You know the acid test. Of certain companies. In recent years. is when you discover that there's scientific research that shows that your product is unhealthy and addictive for your customers.

34:07 Are you gonna do anything about it? Are you gonna bury the research? And like Think how different our world would be if certain companies had made certain choices. that are different than they did make. Versus like think about an older generation of leaders, like when, you know, Thailand all famously had to recall all the pills off every shelf in America and how like

34:23 the short term pain of doing the right. They did it because they might have been necessary. Yeah. Because they understood that earning the public's trust over the long run is far more important than the short term. Exactly right. You can just pledge those principles, like And be like rah put it in your values. Whatever, put it in your S one and be like, we're gonna be so great and all the stuff. Which and every S one believable, right? We work to Right. And that's the that's the problem. Investors take those uh aspirations and things and they just put it in the shredder. Yeah. So like this isn't even worth the paper you print it on, because how do I know that you're serious about it? So the idea of LTSC is companies should commit to these principles by making a binding pledge.

35:06 To operationalize each one. And the flexibility that we have created is so that it doesn't have to be one size fits all. Every company does exactly the same thing, but every company has to do something real, and we act as the certifying body to say, yeah, that's real or it's not. So you make it by sort of registering the implementation of such a pledge with you. it then becomes like a securities violation to break it. You got it exactly right. So there's real enforcement penalties if you don't do it. And therefore only the good companies would do it. The bad companies would be crazy to do this. So you have like the perfect self-selection. That's what you want. So for example. One of my favorites is public companies today.

35:45 generally speaking, don't know who their owners are. Which You can't run a private company this way, right? We obsessed about getting the smart money on the cap table and the idea that when you go public and just give it up like, well, whoever happens to buy it, I guess it's fine. And I've met so many companies who like, they literally pay for a service. I love this. This is my favorite like euphemism of service. Surveillance. Stock surveillance. Like you're hiring the CIA to go suss out who owns your cause like no, you need to know who your investors are. Therefore, know what they want. Make sure that you're actually aligned. So uh we believe that every company has the right to know who its long term investors are, but in exchange for that transparency should reward them, should give them additional voting rights, should give them additional economics, uh additional superior capital raising opportunities, that that kind of thing. So that's like that's a principle that's like very high level, but we drive it down into the market microstructure and make it

36:31 Make it real. And so let's dive into those. What what could superior economics mean? So if I hold the stock longer, my stock could become more valuable? Yeah, you could have a progressive dividend that's paid out preferentially to those who have held longer. Well, as far as I know, all of history of uh equity securities. There's this concept of preferred equity and common equity. There could be other classes of equity. That's correct. And those different classes can have different economic terms. It's actually a very old idea. And when you talk to like old timers and securities law and and um you know corporate structure, they're like, Yeah, sure. This isn't that big like This isn't like impossible to do. It's just practically speaking, we don't do it because there's so many forces that pressure people into conformity. And yet how ironic that we as the industry of innovation are hyperconformist and conservative about how we

37:21 structure companies and how we make them bring them to the public. And then now we've kind of stopped doing it. So now we're we're so unhappy about the public markets, we're taking our ball and going home and we're not taking place public until very, very late in their life. Yeah. And how anti social is that? I mean, these companies don't go public for fifteen years. You know, when you were saying a minute ago about I I I hadn't put two and two together either, which is funny'cause with we bring up the financial crisis so many times on this show, you know, whether it's It really shapes everything in our era. Everything of this era.

37:52 I think it it's so right to say That shaped the desire for the lean startup movement. There also are like a bunch of trends similar, huge trends in the financial world that have Kind of led. I I think to LTSE. So I I'll throw out there and feel free to agree. I'd love to hear your thoughts.

38:10 One so first you have the rise of algorithmic trading in the public markets. So you went from whether you were a value investor, a growth investor, or like whatever, it was like people were hitting buttons to make trades. Yeah, no longer. Not that long ago. And now most most trading and most ownership in the public markets are not people hitting buttons. It's machines hitting buttons and they hit them a lot faster and they care a lot less about the long term. Two, you have the rise of index funds, right? So now you have a whole nother class, which is a huge portion of the public equity market. Which isn't even anybody making a decision. It's just a passive, you know, this fund is going to track the market. Oh, now we have the rise of passive funds. We have competing index providers who have different index formulas for what tracking the market is. So the active decision making has just been moved from the fund manager to the algorithm of the index provider. Yeah. Abstraction on abstraction. It's it's getting wild. So now you have a situation I 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.

39:13 the number of active human voices has been reduced hugely. So a lot less information flowing into the map. And so you can be if you're a loud activist shareholder dissenting voice or whatever, you can now be heard in a lot. And if you move the stock all these passive index and algorithmic trading is gonna move with you. Uh you can have a huge impact on a stock. And importantly, right now governance is tied one to one with ownership. And so, you know, you could have these very short term investors who just arrived who can vote and change control of the company, which makes sense. They own it. But Eric, LTSE allows for a different view on that. So can you talk a little bit about separating economics from the market. Well, there was actually one one thing real quick before that. So then you have Snapchat go public, right? Or you have all these companies going public now with these dual class, multi class share structures. Snap was like the most egregious of like no, you guys get no votes. And I understand it as a founder, you're like, Screw this. Like But yeah, what okay, so what's the other path? Well yeah, I mean like I I get the view

40:11 that if you can be emperor for life, why not? Pretty good gig. But I think it first of all, I think it's really important that people should see the fact that founders are taking these extreme measures. is a reflection of an extreme problem.

40:25 Like these are extreme reactions to an extreme problem. And I would I would point to two of them. First of all, in the old days When I first got into this business. Founders were in the biggest rush to go public. 'Cause they're billion dollars about to become fully liquid and make a ton of money. The idea that you would put off Becoming a liquid billionaire.

40:42 For ten екстра єс. Like that's not an act of greed. Yeah. There's something else is going on here, right? People are putting off their own mega payday. Now, you know, of course there are secondary transactions that be it's like they're not starving or anything, but like Generally speaking, highly capitalistic and competitive people would rather have one billion dollars than like fifty million dollars, and they're choosing not to do that. Now.

41:04 Uh you know, the founders are one thing, right? But like the venture investors, right? Like you're a mentor like Ben and I run funds, you know, man, we would really like to distribute returns to RLPs so that we can raise new funds, but like And that would actually be better for the ecosystem as a whole. Like one of the problems I'm having is all these early returns are frozen. They're not being recirculated like they should be. And so um there's not as much Even though we have a lot of seed sage activity right now, we could have exponentially more if we would unfreeze all these uh all these transactions. And similarly, like very few founders can actually justify perpetual dual class control of a company. Right, even if you're like, I'm the greatest CEO that could ever happen. And it's but it's like, Well, even if you like develop dementia.

41:45 Or not yeah. Even if your children aren't as good a CEO as you, they should inherit The company from you. Like that's called feudalism. Like we have we have a lot of political experience with these systems, and we know they're does not go well, and most founders, you know, if you really press them in private, they'll say, I don't think this makes that much sense. But that's how bad standard governance is. So Eric, what's an example mechanic then where uh David, I like the way you painted it, that for a long time.

42:12 economics and governance were really tightly coupled, except for companies like media companies where you know there was a r a reasonable argument of why uh a dual class structure should exist. Exactly. Yeah. And so then the last five, eight years we see this incredible rise in massive, massively separated classes where the founders own everything, there's no way to ever change that. Sometimes the common gets no votes. It's crazy. And what's a way that you could sort of have a a middle ground here? I think the the compromise that I personally think is best is if you're gonna be dual class organized. So I think that's okay. But then you have to have a way for the long term investors to join you in that privilege class. They have to be able to earn their way into the better class so they can join you in co-determination of the company. That's really in the company's long term interest because Except for the very few of these founders that are investing in immortality. Everyone else is planning to die. So there will be another CEO of this company one day and your dual class protections will not protect them.

43:11 So what's the plan for the next CEO? If you're really thinking about I want to create a l a lasting institution, what's the plan? Why would the next CEO care at all about your ethos of multi-stakeholder development? Well of your ethos of long termism. Like why? They they right, they could easily be as good as you do of vetting them. They could just be like, you know what, my incentives are to run quarter to quarter. Screw this. So we have to rely on all of the long term stakeholders in the company, including the long tenured employees, and hopefully this next CEO is himself a long tenured employee, but also the long term investors should all have uh superior voting. uh opportunity just like you do as a founder. So you can imagine like every quarter that you hold the stock, it adding some multiplier to the amount of votes you get, or something like that. Exactly. Like like the the LTSE software makes it possible for companies to design programs like this because they can track the long term ownership in real time. And if you trade out you can't do it. And if you know who the investors are, where you're give them the appropriate reward. Yeah. Okay. So like we don't mandate this specific voting system because, you know, it's controversial and there's some people who they think like one share, two votes. It's like there's a big Wall Street Journal article about this one called one share, two votes basically like how hedge funds

44:17 they borrow extra money like right at the last second before a proxy contest to get extra votes like that day and then get it. It's just like I think that's indefensible, but I but that's currently allowed under the rules. So there's kind of a a big debate about like what's the best system. And I kind of feel like because none of these systems is exactly right. We should just we should have more experimentation with different models till we find the right one. I happen to like this particular one, but it, you know, that would make sense for like a Google type company that really has control and, you know, if it's founder owned and I I could see that making sense. I could imagine different different scenarios for other companies and I could imagine a smaller cap company saying, you know what we don't want to mess around with vote. Voting control isn't even really our issue. The issue is just creating an incentive for people to be long term investors. And then so let's do something like a progressive dividend. So so I'm not ideological about it. I just think like neither side can really justify what it's advocating for. And we like this you I see this a lot in ideological battles where everyone's like drawn to more extreme positions.

45:12 Because No. They they don't they feel like if you give those people an inch, they'll take the whole thing. Right. And so now not to make any meta commentary here. allowing your long term shareholders to become citizens of the republic with you. And sort of let's get away from this sort of feudalism mentality and let's say, look, if you want to go on a twenty year journey with us where You continue buying up your position in the company, you know, you help us make good decisions, you own this thing for the long like, of course you should be more participatory in helping us figure out where it's going next. Yeah. I think it's actually very logical and really a genuine win win.

45:52 So It's even a win. For the quantitative guys. This was a surprise to me. A bunch of these quantitative traders, like they're They're not immoral.

46:02 They're amoral. the point of view of companies. Yeah. It's not that they're trying to do something harmful. They just don't care. Yeah. So I'll tell you a story. I was sitting with a quantite trader once and I was like trying to explain the system to him and he was just like I don't get it. Who cares? Why it just was like I don't why is this important. And I was like okay, imagine a hypothetical with me. Imagine one day in the future, you've engineered an artificial short against a company, and today the stock is down 10%. So you just made a lot of money. And he was like, Yeah, you can just like see on his face. I watch billions. I'm familiar with. He's like, This is all this is an awesome story. Tell me more. I'm like, okay, do you realize that the next day, like three thousand middle managers who work at that company

46:38 are running around'cause there's a crisis. Time to change the company strategy. Because the stock price. Because the stock price. They had their earnings call in August twenty fifteen and they were like, We're seeing disruption in the cable industry, cord cutting is happening, ESPN is down, and they had plans for Disney Plus. Stock drop ten percent, they were like, We are accelerating the plans for Disney Plus. Now in that case, it was the right decision. But like even a company like Disney Stock price makes a lot of impact. So so I and so the guy was like I he was lit as like why? He couldn't understand why anyone would care.

47:13 He's like It's just a short. It doesn't have anything to do with them. It's just, you know, your intrinsic value is identical to what it's like. It was just as valuable and the strategy was I'm like I and I was like, So so you are approving of your role in governance here in changing the company strategy? He was like, This makes no sense. When I short cattle futures, the cow don't care. I was like, right. This this guy is not someone who cares about governance. His average holding period in a security is ten minutes.

47:39 So he was describing to me when he his firm had this policy that he hated that if they get a proxy they must vote the proxy. A lot of lot of mutual funds. A lot of f firms have this view that you get a proxy, you have an obligation to vote. And it to him it was like I held it for ten minutes and I was so unlucky. I was fishing and I pulled up a boot, right? It's like oh man, now I have to vote this stupid proxy. I have no idea. So he's trying to get his book down to zero when proxy You know, he would love he would love it. So I was like would you prefer he's like your he's genuinely a tourist in the best sense of the word. He does not care. He's just passing through. He just wants to get the money in it, like he's doing a technical thing. And so he would love for governance to be somebody else's problem. He would love to have that be completely different. It actually makes sense to him. And then we talked to a lot of long term investors, especially the the big asset owners. We have built.

48:27 The world's most efficient trading system in history for trading hundred share lots. If you wanna trade a hundred shares of stock, it's awesome. Yeah. You wanna trade three million shares. Oh now you can't. And that's my stuff you gotta go yeah, you wanna do that. You gotta go to a big investment bank and you gotta engineer a block trade. That's really difficult. Yeah, it's really it's very expensive and and hard and and for a lot of technical reasons I don't know that would be of interest to your listeners. Most long term investors. Are chronically underweight.

48:57 the companies they really believe in'cause they cannot get the allocation they want. They can't get into the good venture funds. They can't get onto a road show. They don't trade enough. And then once a company is public, they can't do the large block transactions they want to do. The stock price starts to go up. Now they They've like missed their target. So they're under like normally in the old old days, you would buy a big position, it would go up, you would take the gains from that position to buy more. But if you miss the train, now your target is behind and so you can't do it. So so they're they actually can't get the ownership they want. And so companies Even in even in the some of these direct listings, we're seeing lots and lots of really good companies who just they have too few long term investors on the cap table. And it's not does it's not actually a good situation for anybody. And this is the craest part. Not to mention those guys aren't set in the price, because the price is set by the trades that are being executed. Sure. And if you're a long term holder, then you're not making trades. So you're not helping inform push the information into the market about what's exactly. That drives way more volatility, it way more confusion for employees. Your employees are generally your longest term shareholders.

49:55 And so they're watching the ticker every day, every day and they I mean it's just it I ask CEOs who've taken their company public, biggest change you noticed afterwards, they're always like everyone's on Yahoo Finance every day now. Is that still true that employees are the longest term holders? I always felt like when I was at Microsoft that like everyone was dumping their stock all the time, just like you were there. I could probably guess what years it was. You should have held that stock then. But but you you are by necessity because of your grant period. Like you get a grant, right? And then you invest into that over four years. So Yeah. Well, and if you think about the concept of career equity, which is like the really the th that the financial term that dominates most employees of most organizations compensation is their perception of future promotion opportunities. People that are trying to make a career at a place are very long that place's survival.

50:42 And so For them to I think it's actually like toxic for them to be on Yahoo Finance. So like if you use longer term compensation instruments, we we obviously we sell software to companies to provide the information to employees in a better way. But if you know, for example, If you know in real time. what the long term investors are doing as a class. then you can report to your own employees here's the here's the price as perceived by our long term investors, with all noise removed.

51:07 And you'll realize that like most days Nothing happened. The fundamental of the company. So my my dream one day is to have a big ticker somewhere where the same number just goes by. Down Joe's industrial average and just the same number going by because most days nothing happened. All this noise is just that. It's it's just noise. And when something does happen, it's news. The private markets have gotten so perverted now that like what I'm about to say is very much uh idealist versus reality, but it's kinda like the private markets and venture investing, right? Like

51:35 A valuation is assigned to a company. A Venture firm invests at that valuation. You go work for a while, twelve to eighteen months. Yeah. I mean, I know a lot of founders Th no one in D C and and a lot of people in New York can't believe this, but I know a lot of founders who don't think there should be continuous trading.

51:55 Right, like you think about like how Elon Musk runs SpaceX. There's a regularly scheduled company driven auction where people can buy in or sell. The company sets the price. It's extremely restrictive as a regime. And there's a reason like he's so unhappy in the public markets he also has this thing in the private market. He's in completely never go public. Well so that's the so this is the other trend I wanted to Get your thoughts on

52:19 Really, I think s probably since you've started L T S E This whole massive expansion of the private markets. Staying private m longer. You know, people we've talked about on the show before. I remember when when Dave Goldberg was CEO of SurveyMonkey and he said, I'm never taking this company public. We're going to be private for life. Uh and obviously now they're a public company, so that's different, but the Dave's sadly no longer with us. Yeah, that's very sad. How have you guys learned through all of this change that's happened uh as you've been building LTSE? I was talking to a V C five years ago. And he said to me, Eric, I just don't get it.

52:51 If private companies. can raise unlimited capital. On whatever terms they want. Whenever they want.

52:59 With no disclosure requirements. No accountability. No publicity. Why would they go public? And I was like, Great, let's let us interpret your sentence as a bit field.

53:12 And let's make each clause of those a bit. I agree, but when all the switches are set to true You're right. Why like really, like there's a thermostat equilibrium that exists at all times between the private and public markets. And if you make being private relatively more attractive or being public relatively less attractive, you will cause more gas to stay in one side of the chamber than the other. So companies will be private loan. It's like a very very very predictable consequence of policy choices that we've made as a society. I was like, do you honestly believe

53:38 That all those bits will be true forever. And he was like, I'm not sure. I was like, Well, why don't you call me back when the when the bleep hits the fan because this is coming. And the time to have invested in a solution to this problem is not the day that everything crumbles, but five years ahead of time, so you should really be investing in LTSE and it didn't work. But other but other far sighted investors do it that way. And now here we are. And all every one of those things is under under threat, right? We have seen all kinds of mismanagement. Not to name any names, but we have seen horrible mismanagement in the private markets. We've seen valuations that are totally out of control. And and I'm my personal pet peeve that I don't think enough attention is being spent to is we're seeing a large number of secondary transactions with relatively high volumes at high valuations with no disclosure and information asymmetry. And like my grandparents lived through the depression and they told me st I like these were like spooky stories for me growing up as a kid for my I was like did everyone else not have grandparents that lived through the depression and they not tell them these stories? I look around and I think I

54:39 I have heard these stories before. This isn't right. There's a reason that our grandparents worked out the system the hard way, that, you know, large block transactions should come with account with accountability and transparency, and that's how you prevent fraud. And I I think as more and more of these stories come out it's gonna be uh it's gonna be pretty bad. I think v for for L T S E What's really the most interesting piece of that we work, Saga, is The last gasp, you know, save that they tried. Yeah.

55:08 An IPO. Yeah. Uh when you're scraping the bottom of the barrel of options. Or many of those bits seem to have flipped the other way. And so now we need to, you know, jam it out the door. Yeah. Yeah, exactly. Yeah, no, that's not that's not the way to go. And and a big a big part of our mission at LTSE is to get companies to adopt good governance from a very early age. Yeah. So we run by far the largest uh corporate governance platform for startups. But we don't call it that. Right.'Cause you can't sell startups on corporate government and corporate governments now extremely like I cannot wait some corporate governance, but let me tell you like what is that the the largest Um so so we go to market under a variety of brand names for distinct problems that cat that founders face. So like RNA valuations and cap table management, runway planning. I can't tell you how many startups I meet with don't know how much runway they have. Like Cardinal Sin number one. Don't guess

55:56 Don't have some finance person. Especially before you have a board. You better you better know, but most founders don't. We do option planning and um hiring planning, which again, most founders don't don't And so these are all individual staff. Individual tools. So you can go to captable.io, fast for and a dot IO, hiring plan. IO, Startup Runway dot IO, um and uh Yeah, they're like we're very we're very very straightforward naming and very consistent. And that you know the tools are part of a common a common platform. And You know, we build them for founders to use themselves. So it's a high focus on usability and design. And you don't have to have a G C or a CFO to use them for you. It's just we're just trying to take as much cost out of the ecosystem as we can. But then while we have you there, it's like while you're def I'll give you an example, our hiring plan product.

56:39 uh has completely free compensation data for market data for startups. So you can figure out for every job your every job offer you're giving, we can tell you exactly what the twenty fifth, fifth, and seventy fifth percentile cash and equity grants are for your stage, your geography. Your industry. It's completely free.io, you can just sign up for it right now. All that data exists. So right now startups are paying money. And then While you're there. Wouldn't you like to know if your offer letters that you give

57:15 Sure you would. Well while you're checking that, would you also like to split it up by demographics? Wouldn't you like to know if you have bias? In your offer letters? Now most founders are like, Of course I don't have bias. I run a perfect meritocracy. It's like well then great. The analysis will show what a great meritocracy you are, and then you'll feel good about yourself.

57:31 But if it doesn't matter. Well wouldn't it be a lot cheaper to solve the problem now? Versus when you're reading about it in the Wall Street Journal five years from now. And think how expensive these problems get when they're allowed to fester. So we really try to help people find their way to ethics and good governance. Um

57:48 Because a lot of these mistakes are inadvertent. It's just it's just ignorance. It's not It's not malice. It's just people don't know better because a lot of times it's the first time they're doing it. Yep. Well, this is a really good time to talk about so where where is the company now? You've got this license Um with the SEC. You have I assume a revenue generating business with with all these SaaS tools that are gonna kinda help people prepare. No one has listed yet. What could it look like when people list? When could that happen? Is that allowed to happen right now? Not yet, not yet. So yeah, you should think your listeners should think of us as having acquired the world's most expensive taxi medallion. But we are not yet driving the car around. So we got approved by the SEC uh in May. The bigger deal actually is we got our principles based differentiated listing standards approved, I think, in August.

58:30 So we're just starting to work our way through the technical filings now to actually stand up the exchange. It's quite a involved process to do this in a regulated way. And this is a superset of the requirements to list on any other extra. So much so that you can even do a list. So if you still want to go ring the bell at Nicy, God bless you. Um, this can be we were happy to be the secondary uh listing venue. So people could trade, uh investors could choose which of the exchanges they'd like to do. And and when people do an IPO with LTSE, whether we're the primary or the secondary venue, you get the same level of liquidity and access to um liquid options for your um for your interesting. So there's no there's no liquidity penalty. So you could buy shares that were previously on the Nasdaq, if that company's listed on Nasdaq, and then own them through the long term stock exchange? The literal words you just said to describe how that works are not a hundred percent correct. But not not in any way that's not a way that but I functionally that's that's exactly the right idea. The protections that LTSE embodies are enacted through the company's charter and they follow the security wherever it trades.

59:29 So it's a pretty I I think the hardest thing the reason this company took me more than five years to figure out how to start is Just the technical and legal challenge of combining full liquidity with those protections was quite the um intellectual challenge. But We got there. So anyway, to m to make a long story short, we should begin operations in twenty twenty. And then this is we put long term right in the name of the company. So our employees and investors are like, you know, we we warned everybody. But once we start operations lean startup instead of fast startup as you've got to do it. That's right. That's exactly right. We've been trying to make this point for a long time, that that lean doesn't mean fast in an absolute sense, but just fast compared to the industry that you're in. So we are actually even though it took us almost three years to get this um uh exchange approved, we're actually the fastest form one approval in history.

1:00:16 So we're faster than it has ever been done before. It's just Really? Yes. Yeah. So anyway, used to travel to Washington by horse and buggy like it. Yeah. You you yeah, it's exactly right. So so you know, we're trying to move the industry in uh in a good direction, but the thing I wanted to say was So we will go live in twenty twenty. And then we will be legally authorized to begin the process of soliciting companies to list on L T S E. I see. Which is why captable.io is so important. So it'll be a it'll be a little while before you know lots of things.

1:00:50 four years, you know, two, three years from now. And listen, and and if someone in the class of twenty twenty IPOs wanted to list an LTSE, you know, we would be delighted and thrilled, and that would be wonderful if that should happen. We'll work very hard to support them, but you know, just for like as an expectation setting exercise. We don't really know how long this is gonna take. And that's okay. That's why we raise a lot of money. And even by modern standards. So this is a show where we sort of analyze in and grade businesses. So like I want to make sure we understand the business model here. Traditionally a stock exchange would be they make money every time a trade happens. So they're incentivized to have lots and lots of transactions, which in part is why we see the lots and lots of transactions that we have today. Your business model's different.

1:01:33 Uh tell us about that. We believe that one of the most powerful things you can say when you're selling to a customer, like when we sit down with a CEO. We wanna be able to say to them, look. We are the only stock exchange you will ever meet. Where you're the customer.

1:01:48 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. We have trading on our platform. But our goal is not to serve traders primarily. We're not anti traders. Don't think traders are bad, but we have enough financial institutions who primarily serve traders. We'd like there to be at least one whose main job is to serve its actual customers. So your marketplace without a take rate business model.

1:02:14 Yeah, that's right. Yeah, I mean well it's like a marketplace like um You know, you're subsidizing other supply or demand, right? Like and if you're an investment bank or you're an exchange The supply is companies. And equity securities. the demand of the investors. So who do you think they're serving? You know, you guys are flipping that on

1:02:32 Yeah, that's exactly right. In fact, they don't call them companies, they call them issuers. Yeah. The ATM machines that print out the certificate like the real customers trade, the issuers just issue. That's what their job is to do the issuing. So that's that's a big part of what of what we do. Now we do have a stock trading platform and we want to be the premier stock trading venue for infrequent trade. So we've built up um. A very valuable service you could offer is like You want to buy$500 million worth of stock. Right. We can facilitate you buying five hundred million dollars. So yes, we have a number of things that we offer to companies where they can do those kinds of capital raises um without, you know, and and still consummate the transaction after market close, where their investors can't be front run, but where the company can have a say. In the kinds of investors that can acquire the stock. So they can basically place the stock with their existing long term investors. And is that the sort of service that you would charge for? Yeah, exactly. Right.

1:03:24 Got it. We try to build services that are valuable for companies at every stage of their life to and through the IPO. So we're very strong in the seed series A B C stage with these kind of early stage tools we've been talking about. We have a separate product suite, which is not yet publicly announced, but where we have customers um that are in the late stage, you know, pre-IPO. stage and then you know we'll eventually take those companies public, we hope and and maintain you know, maintain a software relationship with them as well as a listings relationship. That's our that's our long term goal. Got it. Cool. All right listeners.

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1:05:41 We're gonna move to grading now. And obviously this is so speculative that it's difficult to grade. We have a mechanism for doing this, because lots of times we talk about things that just happened. So um let's talk about the A plus case. So what would it look like a decade from now if this has gone phenomenally well? And then let's talk about the F case, where, you know, hey, this was a a a great experiment. I'm glad we tried it, but why did it fail? Or why could it have failed? And I'll start with that A plus case by by throwing out the idea that This might enable a whole bunch of goodness in the world and new innovation, but actually be a way worse business than any of the other stock exchanges ever have been. It's interesting that that could be an A plus for the world, but apples to apples if you bought shares of LTSE today, or if you had bought shares of Nasdaq in nineteen seventy three, like buying Nasdaq in nineteen seventy three may have been a much better bet.

1:06:32 I mean that's totally possible. I've learned a lot about what it means to build a long term oriented mission oriented company. But you know, I had paid lip service to that stuff before, but like I worked in consumer internet, you know. It's not the same. It's just not the same. Every person who comes to work here and every investor we allow to invest in the company, we have to have a serious conversation with them about risks and downsides.

1:06:58 And in particular We say we are trying to fix a trillion dollar problem in capitalism itself. Tim O'Reilly has that famous adage about create more value than you capture. We're gonna create That order of magnitude of value or die trying.

1:07:12 That's what we know for sure. Whether we capture any of it for ourselves I don't know. probably gonna be fine. I'm pretty sure if you create trillion dollars of value, like you don't have to create you have to capture a very high percentage to make an awful lot of money. But

1:07:26 We don't know. And frankly, we don't care. Now our investors care. Because they want return. But like but we have a fair candidate like look, if you have an IRR target in your fund for like the next seven years, like please don't invest in this company. Well, I'm not going to be able to do that. You don't have to uh speculate or or you know say percentages or numbers or anything, but like if you just think about what the problems are with the current system. I think a lot of it does hinge around These

1:07:50 large dollar size transactions. Whether that's you know, a soft bank style round of a private n currently private company where you're raising a billion dollars at once. with no governance and no, you know, rights and preferences. Or you're in the public markets and you're a long term holder and you're trying in a publicly traded security to get a five hundred million dollar position.

1:08:12 You know, those are hard right now. And like if you could solve those and you you could probably like make some money on those transactions. You know, I just I that's of all the things to worry about with this, it's honestly the thing I worry about the least. Like Yeah,'cause people are always like, Well, what if the incumbent exchanges just copy your reforms? And put you out of business. And I'm like

1:08:28 You mean if we change the world? Well also there's like an innovator's dilemma there. Like I don't know. Yeah, right. I mean, wouldn't that be great? I tried really hard. I in the in the early years of this, I tried very hard to give this idea away for free to the incumbent exchanges. I begged them to build it so I wouldn't have to. Um and you know, here we are. So I'm not gonna cannibalize their revenue stream either. Like they're not gonna they're not gonna get revenue. That's always a problem trading. Listen, I wish I wish they would copy us. That would be great. So so it's but it is important for us, like sho we especially in recruiting, just to be really clear eyed about this. We don't exactly know what the rewards for us will be. But but we hire people who are gonna sleep really well at night knowing we solve this problem. Whether we get paid or not.

1:09:08 It's just that's not the most important thing. And that I think that's how you build truly great companies is you have people who are in it for the mission. You have an understanding that business model is important and economics are important in the same way, you know, that oxygen is important, but like you don't live for oxygen. It's the other way around. And I that's become kind of a cliche idea in our world today, but I think it's still it's even still underappreciated how powerful it is. Yeah. Okay, well real quick If it completely fails.

1:09:32 What are the most likely reasons? Oh, how can we count the ways? I mean, and listen, I we go through this with every employee, so so I'm I'm happy to be very open about it. The first and most obvious thing is we are dealing with a very conservative system where change is really hard and people resist change. And it's not just in in like a lot of enterprise software situations, you have the r the generalized resistance to change that like people are used to that all crappy enterprise software and they don't really want to get the new stuff and be trained on a new thing. Like all that usual stuff. But here we compound that with the fact that this is a reform that is actively opposed. by people who are making astronomical amounts of money from the status quo. And the government's involved.

1:10:09 You said it not me. So It ain't gonna be pretty. And like A lot of people think it's a suicide mission to go up against those entrenched forces and win.

1:10:20 And it may yet be. Those people thought we'd be dead long before now, so at least we've gotten something right and like Is there any reason why the cum why it would you would fail to be able to get companies to list? Is is there something like We'll get to that next. Sure. So yeah, that's like the general, you know, like people didn't even think we could get this approved by the regulators. That was a huge accomplishment in itself that was very, very unlikely. And we were sabotaged multiple times and we almost died. Many that could tell you all kinds of crazy stories of what that looked like behind the scenes. But also Even if we get everything right and we survive our political problems and we f fight off the forces of darkness and and and and

1:10:53 Customers might still walk up to the precipice of this and say, You know what? Um, I'd like to go second. Maybe and maybe everybody would like to go second. How do you how do you lean start up your way to knowing if customers will buy? We have spent a lot of our time on that on that question. But and you know, I think I have you know we we do we use every trick in the book. So if your listeners have studied any lean startup, you'll know about how to build a concierge MVP. You'll know how to build the you know, non binding letters of intent as proxies for I mean, like you name it. You name it. We've tried everything. And you know, we we have uh significant companies who have who have signed up as much as they're allowed to sign up. So sign up so far. And we obviously have all this software and we've built all these relationships. So like I I have a lot of confidence in this, but like at the end of the day, Until customers do it. You don't know. Now,

1:11:37 the whoever goes first will reap unbelievable rewards, I think, of the kind of messaging and positioning that that will win for them as seen being seen as a leader who's changing capitalism itself. But maybe that's not enough to overcome What it means. And also demand from the long term investor community, right? Like

1:11:54 Very significant. And and they and they feed off each other. So like when we, you know, when companies want to know more about why they should do this, they often say, Well, well, how do I know what investors will think of this? And we're like, Well, would you like to talk to some of them? No that's like a radical idea. Like what? Target that it's like, well, yeah, would you like I can put you in touch with the CEO Of some of the world's largest asset owners.

1:12:17 And they'll take your call. And you guys could talk. And they're like, Really? And when I talk to asset owners, I'm like they're like, Well, how do I know it's really true that the next generation of companies wants XYZ? I'm like Would you like to talk to them?

1:12:28 Because we have become so intermediated. It's unbelievable. Even like I won't name any names, but you can imagine some of these next gen companies that have severe political problems all over the world with like unions and local governments and Right. I always ask him, so have you talked to any public pension funds?

1:12:49 about investing in your company or IPO. They're like, No, do you think I should? Oh, you will on your road show. Right. Well no you won't. Because those funds don't get invited to the right. Because they don't trade and only the allocators will be there. Only the allocators will be there. So so it's actually like this wild situation where two of the most logical partners like Being an being a good owner. is one of the most underrated skills in our world today.

1:13:11 Like you s in sports, you s in corporations, right, like like having good ownership, like really is a source of competitive advantage. And people who are investing for multi-generational timelines are excellent owners. So you would think That companies that have a long term perspective and excellent owners who have a long term requirement that they would naturally want to spend time together. And whenever we do get them together, it's amazing because they have such a bond. And yet it's so hard to do because there's so many intermediaries in the way and the intermediaries have no incentive.

1:13:42 to drive connection between investors and companies directly that That's how they get paid. So part of it is just having the willingness to to build those relationships. So if that if that's not enough Then it won't work. And then we haven't even gotten into all the technical ways it could fail. Like that's like a hundred of them. We will catch you with that one another time. I think this is a fantastic place to leave this. Eric, where can listeners find you and the LTSE? Sure, LTSE.com for everything uh exchange related. I am still using the leanstartup.com for my my personal uh domain if you want to learn about me. And obviously we're all on on Twitter and everywhere else. And for for the tools for earlier stage companies. Yeah, you can go to ltsc.com slash tools, or you can try any of our individual tools, captable.io

1:14:24 Io. If any of your listeners are in a venture capital firm and you'd like to extend the suite as a whole to your portfolio companies, we do all that kind of stuff too. So we do all and I 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. And Uh, we also are the only provider in the space who actually believes that you own your own data. Not we so we have export, yeah. That says uh you've said all you need to say. You got it. So anyway, so please uh anyone's interested, please do uh give us your feedback and try those out. Thank you.

1:14:57 Awesome. Well, listeners, that is all we have for today. If you like this or any other episode, please don't be shy about sharing it on social media or leaving us a review on iTunes. If you want to go deeper on company building topics, you should consider becoming an acquired limited partner, and you can click the link in the show notes or go to glow.fm slash acquired, and all new listeners get a seven day free trial. And starting right now, here's an excerpt of our latest episode with Vlad Magdalene, the founder and CEO of Webflow. With that. We will see you next time. Welcome, LPs.

1:15:38 Today we are doing an episode I have been excited about for a long time. with Vlad Magdalene, the co-founder and CEO of Webflow. Webflow is a company I am personally very passionate about since I grew up as a web developer, always fighting between building websites from scratch and PHP and hand coding HTML and CSS. PHP Facebook days the lamp stack, baby. Oh boy. Uh there were WYSIWYG editors out there. I know. Like Dreamweaver, uh, but they always required you to do all the hosting yourself. They I I don't know the state of the product today. This is like, you know, twelve year old data, but generated garbage code and uh webflow has been an amazing answer to provide the ease of use of a graphical user interface while still being an enormously powerful tool. And uh we personally use the site for acquired, uh, we use it for PSL and basically all of our portfolio companies use it as well.

1:16:31 Uh so Um It's it's so powerful that Even, you know, I can now update the website and add which is you know the last time I wrote a line of code, I think I was probably maybe twenty years old. So I have the designer credit. So one year ago David has an David has an editor login.

1:16:55 Uh, so listeners, who is Vlad? Well, Webflow, you know, while most of you may know this company only from the last year or two. It is a at least decade old company that I believe Vlad you started as a side project in two thousand five. Yep. Uh it was actually something that started when I was still in college. Uh uh when I was working at an agency part time as an intern. And then turned into my senior project, then turned into uh a couple failed attempts at starting it as a business, then I joined into it, sort of worked there for a while, then had another failed attempt at turning into a business uh during sort of the web two point oh heyday And then finally started it, hopefully for the last time in two thousand twelve.

1:17:38 Wow. Attempts to start the same business. Same business, same name, different co founders every time. To those attempts just by myself, uh sort of looking for a co founder. The third attempt actually was with two Intuit buddies, uh, one of which Uh so that attempt didn't work out and can go into sort of like the history behind that, but sort of fizzled out and over time one of those co founders ended up

1:18:02 Starting his own company, got into Y C got acquired by Stripe, and then came back as a senior product manager here. So now you as one of our product leaders. The circle of life. Exactly. So I sort of worked on it in many different iter iterations with multiple people and uh finally Something worked. Well, Wow. Well we'll get into all of that. So it's the twenty twelve version. That was the the start of the company. That's the best vintage so far. We know it today. Exactly. Wow, and you I think it only raised maybe a a few million dollars between then and and now when you did the Yeah, so we started in twenty twelve, started that with my brother and then one of my buddies from Intuit joined uh a few months later, Bryant.

1:18:43 ended up being the third co founder. And then we about a year later we got into Y C and then did uh A seed round, which at the time seemed huge. It was one point four million dollars. Uh, even though other companies were, you know, closing their seed rounds. much faster or uh they were bigger and then we ended up doing a small well small relative to today extension of another one point five about a year later. And then got to profitability and sort of didn't worry about funding for a long time. But now was what, twenty fifteen you get to profitability?

1:19:15 Late twenty fifteen, yeah. Awesome. listeners, you should know the the company then uh for the last four years has raised no money as as Vlad said, and then this year raised a seventy two million dollar series A from Excel that is coinciding today with sort of this no code movement. So I think we'll we'll get in a little bit of that. So th this notion isn't brand new. WYSIWYG web editors had existed before. And it's kind of like the

1:19:43 right one to run anywhere, it'll finally be good this time. Like it's still not good this time. So why is it that Webflow has really found product market fit and created this nice product with a web based WYSIWY editor when it's failed so many times before? So two things. One, I think if we tried this the same exact thing in two thousand seven, it would have failed. Uh, and I'll tell you why. Like the reason direct manipulation works in webflow is that we can actually emul not emulate, we have the real thing. inside of the browser itself. So Webflow is built in a browser. You can sort of think of Webflow as DevTools or Web Inspector with a lot more visual tools on top. Right. A lot of other WYSIWYG tools what they try to do was like, hey, we're going to take a graphic design tool like Photoshop or or illustrator or sketch or whatever. And we're gonna try to randomly guess or or best guess what the generated code should be. It's the approach that doesn't respect the the core principles, the core foundations of what the web is. And the web is like, you know, you have these DOM nodes uh and they're essentially boxes On top of boxes, inside of boxes, et cetera. And everything is a box, right? You want to make a circle, you have to make a box with rounded corners, right? That's a circle. Uh or you have like a, you know, N SVG or something like that. I think Webflow is the very first application that that said, okay, here are the core primitives.

1:20:58 uh you know you have styles, you have classes, you have like CSS abstractions, and what we're gonna do is create a pretty shallow abstraction that that still forces you to understand those core principles, not necessarily the core syntax. Uh so for example, when you're doing layout in in Webflow, it's Flexbox or CSS grid. You just don't know it. The visual tools built on top of it are a representation of those same like constraints and limitations. They're not like draw anything and then we'll try to guess what the code is. It's literally like adjust the margin and the padding. Exactly. You're almost like one to one making code changes. You're just doing it through a different language. Uh it's almost like if you're using software to create music. Uh you have to understand the core principles of of music. You might not, you know, have a piano in front of you, right? But y you don't get to cheat by by saying, I'm gonna create like a a masterpiece by not understanding like good rhythm and et cetera. So that's the same thing with Wetflow. Like you it it does have a uh a more

1:21:57 you know, advanced learning curve because you have to understand the box model. Because you have to understand you don't just draw a box and then go like drag it anywhere. You have to think, okay, when the screen resizes, I have to think of this box as being fifty percent of the width of the current viewport, not Five hundred pixels, right. And then when I resize I'd change it to four hundred and ninety five pixels or whatever. I sort of had to think in a more like relative the way that a d front developer would think, but we're erasing like ninety five percent of the complexity and like knowing how to glue all these things together, uh, et cetera. And the other thing that made it possible was that when we first uh started building it in two thousand twelve was the first time that browsers were getting good enough. There was like Chrome one point oh days. Uh Safari and WebKit were kind of like on the same they were using the same engine. Firefox and Internet Explorer were sort of like the old guard in terms of like, hey, this is like a way to uh like view documents or whatever. But Google's really pushing Chrome as like a an application platform. Like they were like Google Maps at sort of the standard of like what's what's possible as an interactive type of thing in the browser. That wasn't possible in two thousand seven, two thousand eight, et cetera. So you in in in order to create that full abstraction of like I'm previewing exactly what's gonna ship, you have to actually show that in the browser in an iframe or something. And browsers just didn't support that until like

1:23:11 twenty eleven, twenty twelve, twenty thirteen to be to be really like that's when when browsers like were kind of kicked into gear of like, Holy crap, this is yeah, uh the next wave of an application platform. Exactly. Yeah, exactly. All right listeners. Now is a great time to talk about one of our favorite companies, StatSig. Yes, there is a reason why the best product teams rely on StatSig, whether they are iterating on their core product features or shipping AI powered experiences at scale. Yeah. In the

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