Andrew Hoffman

Ending the Woes of Short-Termism: Eric Ries and the Long-Term Stock Exchange

Published by WDI Publishing, a division of the William Davidson Institute (WDI) at the University of Michigan.

©2017 Anna Norman, Olexandr Spasov, Nathan Brougher, and Caroline Lucas. This case was written by Anna Norman, Olexandr Spasov, Nathan Brougher, and Caroline Lucas under the supervision of Professor Andrew Hoffman at the University of Michigan’s Ross School of Business.This case was prepared exclusively as the basis for class discussion and is not intended to illustrate either effective or ineffective handling of a situation. The case should not be considered criticism or endorsement and should not be used as a source of primary data.

While awaiting the arrival of the guest for her next meeting, Gloria Silva, the CEO of TechnoGrid,i gazed out her office window, deep in thought about the next steps for her company. In the past ten years, TechnoGrid had grown from a vague idea to a Silicon Valley success story, producing over $200 million in annual revenue with a recent valuation at $800 million. This wild success was due in large part to Silva’s strong vision, willingness to experiment, and commitment to fostering innovation and long-term growth strategies. However, to continue growing and fulfill its strategic roadmap, the company needed to raise capital to invest in a series of new products. The board and most trusted investors were urging Silva to graduate from venture capital funding and take the next step in the company lifecycle: raising private or public capital.

Silva knew TechnoGrid was prime for either option; the company could accurately forecast a strong financial performance, had a solid executive team in place, and had a strong valuation. However, Silva needed to ensure the culture of innovation and customer-centricity, — the two tenets that had made TechnoGrid a roaring success — would remain strong. She had three options in place, none of them ideal. The first was to sell the company to a private equityii group, the second was an initial public offering (IPO)iii on the New York Stock Exchange (NYSE), and the last was to IPO on the Nasdaq stock exchange.iv With all of her available options, she worried that she would lose control of the vision and direction of the company because of the impatience of her investors or the stock market to produce consistent, short-term returns. Silva’s board and venture capital investors had been advocating for an IPO on Nasdaq, citing the high share prices of many similar technology companies. But Silva worried deeply about how the short-termism of Wall Street and the pressure of quarterly earnings would stifle the innovation and long-term vision that had driven TechnoGrid’s success.

i Gloria Silva is a fictional CEO and TechnoGrid is a fictional company created for the purposes of the case.ii Private equity is capital that is not noted on a public exchange, i.e. on a stock market. Private equity is composed of funds and

institutional or retail investors that directly invest in private companies (Investopedia definition).iii Initial Public Offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by

smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded (Investopedia definition).

iv Nasdaq: The Nasdaq stock exchange is an American stock exchange that is the second largest in the world by market capitalization. It was also the world’s first electronic stock exchange.

case 1-430-504April 21, 2017

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