Silicon Valley Stock Exchange and the Saints of Wall Street

A week ago, the news of the Long Term Stock Exchange (LTSE) backed by some of the biggest names in Silicon Valley emerged. The Elites in the valley, including
Marc Andreessen, Reid Hoffman and Peter Thiel have joined hands to set up a stock exchange where firms do not have to worry about “Short Termism”. It is seen as the tech world’s open war against Wall Street’s modus operandi.

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Some hail the move as a masterstroke. The features of the LTSE make it more attractive for investors who stick around longer with a firm. Voting rights are directly proportional to how long an investor held a firm’s stocks. But this is also a double edged sword as it makes founding teams too powerful. It could make bubbles bigger, and wave riders could get a smoother ride to exit.

Many questions come to mind when I think about where this could take us. Let us explore each one of them.

  1. Recent disasters of Uber and Lyfts – is Wall street better at identifying good business models?
  2. How long can patient capital be, errrr, patient?
  3. Does Wall Street need to be more tolerant of Visionary Founders?
  4. Growth vs Profitability conundrum – Won’t LTSE make profitability and a good business model rarer?
  5. Creation of monopoly – Good way to make money for businesses and investors? But what about the consumer?

Uber’s IPO earlier this month is arguably the worst opening ever as investors lost $650 Million on the first day. This also happened with Lyft and the stock hasn’t recovered yet. Analysts claim that the ride hailing business model is broken. Softbank’s stocks has taken a beating since then. Would LTSE have minimised the losses that Softbank made since the Uber IPO?

However, with investments (of ~25 Billion) in Ola in India, and Grab in South East Asia, SoftBank’s fund controls 90% of the ride hailing market in the world. One of them (Wall street or Softbank) is definitely wrong about the market and the business models in this space. Is LTSE needed to bridge this gap in perception of business models?

The question that immediately followed was, how long can Patient capital be patient? Early stage investors go largely with gut instincts, where as later stage and public market investors are generally more data driven. If all data points to continued losses (Uber’s Q4 2018 EBITDA loss was at $842 Million), should analysts still give the firm a thumbs up based on the market potential of the firm?

LTSE in this scenario could make Wall Street look good, if the intention was to stay long despite continued losses.

The other side of the argument is also valid. Markets have misjudged visionary founders. Michael Dell took his firm private at ~$25 Billion in 2013 and led the transformation of his firm. The firm has re-positioned itself, and it’s estimated valuation today is ~$70 Billion. When Tesla had pressure from the markets, Elon Musk, took to twitter and spoke about taking the firm private – and of course got into trouble with the regulators for doing so.

If LTSE went live, founders like Dell and Musk could operate in the public market more comfortably.

If LTSE went live, firms like UBER could keep growing and take more of the market, without having to demonstrate a sound business model underneath.

One of the approaches that private investors like to see is “Going for Growth”

If your growth plan doesn’t scare me, I do not want to invest in you” – That’s another famous VC one liner.

This approach has given rise to centralised tech monopoly over the years. Google, Facebook, Amazon, Uber are all leaders in their market segment. If LTSE backed them with public money, they have to worry less about profitability, if at all. They can continue with growth and their market conquest.

As an investor who is just looking for an exit, I would love this approach. But as a consumer, who cares about accountability and healthy competition, this is definitely not the way forward. The “Winner takes all” approach has made tech look like the new banking.

LTSE can be a boon to some visionary founders. If it had been announced during times of low liquidity in the market, it would have come across as a genuine attempt by proven Silicon Valley elites. It is coming at a time when market is rich with cash, and it feels like LTSE will make the bubble bigger, and the fall harder.

Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on “Sustainable Deeptech Investments” and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

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