“It’s time to build.”
So declared venture capitalist Marc Andreessen with elder-statesmanlike flourish in a widely circulated essay in April, just as the novel coronavirus began to overwhelm hospitals around the world. Housing, education, manufacturing, transportation—in all of these areas, he argued, we are suffering from “our widespread inability to build.” Andreessen’s solution was simple: “We need to want these things”; we need to find the “will” and the “desire” to build automated factories, internet-tutoring marketplaces, and supersonic aircraft. He did not mention software, the subject of his 2011 manifesto, “Why software is eating the world” (in which he augured that tech would disrupt the very same industries he now criticizes for their complacency).
On Twitter, techies swooned. “Hard to read this and not get amped,” one wrote.
Meanwhile, on the private exchanges where startup employees go to sell their equity stakes pre-IPO, it was not time to build, but time to sell. One of the largest, Forge Global, which trades shares in more than 110 private companies, saw a nearly 300% spike in sellers signing up in April, as the economy spiraled and employees looked to cash out of the visionary unicorns they had once believed in. “People got scared,” says Forge Global CEO Kelly Rodriques.
So much for “desire.”
It’s hard to argue with Andreessen’s observation that we need better schools and public transit. But like any venture capitalist trained to identify heroic entrepreneurs, he sees solutions through the lens of Elon Musk–like supermen. His essay portrays transformational innovation as strictly a matter of personal resolve. (Andreessen Horowitz did not respond to a request for comment.) The reality, of course, is far more complex. Of late, we have failed to “build” not for lack of will, but because our society—and particularly our public and private financial markets—do not value building.
Instead, they maintain a singular devotion to shareholder primacy and quick-fix financial tools such as stock buybacks—despite corporations’ putative embrace of “stakeholder capitalism,” embodied by the Business Roundtable’s 2019 statement of purpose. Now, as we look for ways to reconstruct an economy in which more than 1 million Americans filed for unemployment each week during the spring of 2020, the critics of unfettered markets and the financialization that underlie them, such as Senator Elizabeth Warren, are looking prescient.
If we build anything in the months and years ahead, markets that value what society values should be the cornerstone.
U.S. initial public offerings peaked in 1996, with more than 800 companies offering shares. Since then, the public markets have shrunk. Roughly 4,000 companies trade publicly today, half as many as in the late 1990s. The major exchanges, meanwhile, make the bulk of their money from trading volume, as opposed to listing fees and other services. In other words, NYSE and Nasdaq have no financial incentive to cultivate the types of long-term investors interested in buying and holding positions.
They aren’t the only ones. The public markets writ large include a host of actors who thrive on short-termism. There are the Wall Street quants who have transformed investing into an elaborate computational problem. There are the activist and private-equity investors who look for opportunities to quickly wring value out of corporate balance sheets through shareholder payouts or debt-funded restructurings before moving on to their next target. Finally, you have the “lol nothing matters” amateurs, who trade micro-shares for free through platforms like Robinhood and Square’s Cash App and have amassed the power to change the fate of companies such as Hertz and Nikola Motor overnight. Any public company CEO professing to put employees or the planet first must contend with these forces. Some, such as the CEOs of Apple and Uber, are turning to high-margin, high-growth banking services as a market reprieve.
No wonder startups are delaying IPOs—if they’re pursuing them at all. A decade ago, the aggregate value of private U.S. companies valued at more than $1 billion (unicorns) was $53 billion. Today, it’s more than $700 billion.
Board members and senior public company executives believe that longer-term strategic thinking improves corporate performance—and research bears them out. But they admit to consistently making decisions based on short time horizons. The result is that CEOs slash R&D while orchestrating stock buybacks, which boost earnings per share (and, not incidentally, executive pay). It’s a spellbinding example of late-stage-capitalist magic: The numbers go up, everyone is happy and high-fiving, and yet no lasting value has been created.
The idea that staying private for longer gives startups the necessary leeway to pursue a big, bold vision is now conventional wisdom in Silicon Valley. Safe from short selling and other volatility, companies such as Stripe, Airbnb, and SpaceX can develop products and scale unencumbered.
One downside to staying private, however, is that it’s hard to build when you’re personally broke. Startup employees typically receive stock as part of their compensation, but that wealth is hard to access pre-IPO. Their frustrations with this illiquidity have given rise to a new, largely unseen casino of private stock-market sales. Forge, EquityZen, and the pioneering Nasdaq Private Market all facilitate transactions between employees eager to cash out and buyers looking to get in pre-IPO.
Time to Build or Time to Finance?: In April, Andreessen Horowitz (A16Z) declared: “It’s time to build.” But in January, it asserted that “every company will be a fintech company.” Which philosophy reigns supreme?
These new platforms are, in theory, an improvement over the back-alley-style dealings that used to dominate the private secondary market—many involving high-interest loans, forward contracts with shaky legal standing, and special-purpose vehicles designed to shield employee sellers from corporate rules prohibiting secondary transactions. In practice, however, some charge high fees and encourage trades based on a unicorn’s brand name as opposed to material information (only Nasdaq requires that buyers have access to company financials).
It’s a laudable goal—giving employees a chance to buy a home, or offering retail investors a look at significant upside. But right now, these platforms still work best for large shareholders looking to sell and institutional investors with access to company financials willing to buy. One white-shoe secondary broker recalls a pre-IPO founder who had quietly cashed out enough of her stake to build a $15 million house, yet maintained a corporate policy denying secondary liquidity to her employees—a power imbalance that remains all too common.
“You want more price transparency, not less. You want more reporting, not less,” says Garry Tan, managing partner at venture firm Initialized Capital. “Yet we’re in a situation where the opposite has happened for more than 10 years. The only thing that can fight it is the ability for founders to go public earlier, and the way to solve that is through governance.”
In 2011, Eric Ries published The Lean Startup, a manifesto that called for continuous innovation through the use of minimally viable prototypes presented to real customers in the real world. When corporate America caught wind of Ries’s ideas, he began acting as consigliere to C-suite executives, and it was in those corner offices that he was, to his own surprise, radicalized. “You can’t find anyone to speak well of our current market construct who actually has the job of making anything in this world,” he says. During today’s COVID-19-induced recession, the topic only feels more relevant. “There’s been this outsourcing and hollowing out of our institutions, driven by short-term metrics,” he tells me, citing it as a blight on “our entire civic fabric.”
So Ries decided to do the impossible and challenge NYSE and Nasdaq, naming his venture, fittingly (if clunkily), the Long-Term Stock Exchange. He has been building—actually building—software tools for tasks such as cap-table management and head-count planning, governance systems in close coordination with SEC regulators, and relationships with a rising generation of startup founders. In order to list on LTSE, companies will have to agree to a set of principles-based standards, an evolution of the principles underpinning B Corp certification.
Until Ries’s first cohort of companies start publicly trading on LTSE, it’s impossible to say whether the exchange will achieve his ambitions. But it might be our best shot at incentivizing the type of enduring value creation that would serve society’s needs in our current moment. Last August, LTSE raised an additional $50 million from venture investors—including Andreessen Horowitz.