it’s been a while, I’ve been in the trenches for the last 10 days doing some deep work with little room for context switches. Today, I’m breaking the radio silence to talk about these two related news snippets from last week in much detail:
- Carta announcing it’s first unicorn raise of $300m at a $1.7bn valuation, shortly after its $80m December raise at a $800m post-money.
- Eric Ries’ Long-Term Stock Exchange obtaining approval from the SEC to become the 14th regulated stock exchange in the US.
Notably, these two pieces of news relating to marketplace infrastructure come against the backdrop of the disappointing Uber IPO on Friday, one of the historically most-awaited tech IPO. Instead of an IPO pop above $100bn on the first day of trading, we saw the market cap slashed by almost $6bn. This is short-term capital markets at its best.
And this brings us to today’s question: how can we build a marketplace that allows capital to flow to innovators, without counting the chicken before they hatch? Or put differently, how can we save Silicon Valley from the bean counters and the pump-and-dumpers?
I want to start off with probably my favorite quote from Marc Andreessen, the great systems thinker of our time:
“The compliance and reporting requirements are extremely burdensome for a small company. It requires fleets of lawyers and accountants who come in and do years of work. It’s this idea that if you control everything down to the nth detail, nothing will go wrong. It’s this bizarre, bureaucratic, top-down mentality that if only we could make everything predictable, then everything would be magic, everything would be wonderful.
It has the opposite effect. It’s biased enormously toward companies that are big enough to hire fleets of lawyers and accountants, biased against companies that are very young and for whom there’s still a lot of variability.”
He’s talking about the IPO process and the Sarbanes Oxley act in particular, but his critique goes much deeper, touching on the nerve of what’s wrong with the public markets. Today’s public markets are dominated by mandatory quarterly disclosure obligations that make them so costly and unattractive for true innovators that they will avoid them as long as possible.
We’ve seen this in Uber, which was once an exciting tech startup and now at IPO, it’s already in many ways “post-peak” as the drop on the IPO day suggests. It’s 300 pages S-1 statement must has taken fleets of corporate lawyers and accountants months to prepare. The Risk factors section spanned 50 pages, while there was obviously no equivalent “Innovation section”.
The stage at which firms go public has not only been pushed out further and further, but once they are public, founders suffer tremendously from the scrutiny that comes with having to answer to bean counters on a quarterly basis.
We’ve all seen what Elon Musk has been going through over the last year. He’s a tech builder, not an administrator. His meltdown has been the greatest demonstration of what can happen when builders and visionaries of high-growth startups try to stay innovative in the public…At an analyst call last year in May, when a Sanford Bernstein stock analyst asked him about the capital requirements going forward, he famously answered with “Next. Boring bonehead questions are not cool. Next?” His frustration with the public markets obviously later culminated with the now-famous “Am considering taking Tesla private at $420. Funding secured” Tweet.
Don’t get me wrong, I’m absolutely no enemy of financial analysis, I love deep financial due diligence. Bean counting makes a lot of sense if you’re looking at stable cash flow assets, but when it comes to innovation and growth, bean counting simply misses the mark. Innovation is like a curveball that comes out of nowhere and hits you in the face. You can try to predict it, but not with traditional financial metrics. You could have analyzed Amazon’s quarterly filings to the n-th degree and still haven’t predicted that Amazon’s Web Services (AWS) would become the firm’s high margin cash cow.
The tl;dr of this is 1 + 1 > 2 when you’re dealing with the novel.
Financial analysts, lawyers and accountants are the cheerleaders when it comes to technological innovation, not the drivers of it. We need to realize this and as a society develop organizations around it.
So where does this leave us? Well, public markets currently are clearly not the place for the J-curve of innovation. Neither are ICOs, which have unfortunately been hijacked by the pumper-and-dumper coyotes.
Innovation requires time, calmness and what I call “soft capital”. Capital that doesn’t price every micro movement you make, but that lets you breath and build. Soft capital is capital that cuts out the noise and let’s builders be builders and not push them into becoming administrators.
We can theorize about it all day long, but some people are working on the solution already. This week has marked a major step in this direction, with two of Marc Andreessen’s projects taking the next step.
On the one hand, we had Carta raising their $300m Series E, lead by Marc Andreessen’s a16z, to build the “world’s largest marketplace for private companies”. I’ve been fascinated by the company for a while now. They have “wedged” their way from “simply” issuing $20 stock certificates as an entry point, to something potentially much bigger now. What they seem to be building now, is the largest institutional market place for tech secondaries. Thus, I feel they will be operating much in the same space as firms like EquityZen and Nasdaq Private Market (formerly SecondMarket). In other words, their solution is to let the companies stay private, but provide a liquid institutional marketplace for as long as they are private. This has been the de facto solution up till now, so the amount of capital deployed to making this market segment more liquid doesn’t surprise me.
Now the second solution has seemed a bit more out there for quite a while…it’s the brainchild of Eric Ries, author of the bootstrappers’ bible Lean Startupwhom I only call the “godfather of the MVP”. Together with a group of tech visionaries, incl. Marc Andreessen and Tim O’Reilly, he’s come up with this idea, that you should encourage innovation in the public markets by providing incentive mechanisms, in particular tenured voting and long-term executive compensation. The approval of the Long-Term Stock Exchange Inc. (LTSE) by the SEC this week, marks the first step in making this vision an reality.
To put this into perspective, the LTSE is “just” a Series A company at this stage. It’s 30 percent owned by the MVP godfather himself and co-founder John Bautista, a partner at Orrick. The firm has raised a total of $19m from VC firms like the Founders Fund (owning 14 percent), Collaborative Fund and Obvious Fund and angels like Marc Andreessen. It’s not a huge company yet, much smaller than Carta for sure. But I’m so excited about their mission, what they are building and what this could mean for founders.
That’s it for today,
Note: I do voice recordings of these posts while walking on Sand Hill Road (not really SHR, but some busy street). Check it out if you don’t like to read.