Aug 24, 2012 · 3 minutes

The public market’s impact on Facebook has been “terrible," and entrepreneurs should build their own alternative, Eric Ries said at a tech event in Washington DC last night.

Speaking to an audience of about 200 entrepreneurs, "The Lean Startup" author suggested that the dramatic drop in Facebook’s stock price has had little to do with any new information about its business, and that the net effect of everyone “freaking out about revenue” has been damaging to the company.

"All the noise around Facebook is counterproductive energy that's making it more difficult to succeed,” he said. He bemoaned the shortcomings of the public markets, which he said are hampered by short-term thinking, and said entrepreneurs are responsible for reforming them. The path to that, he said, is not through regulation but through disruption.

“What we have to do as entrepreneurs is build our own markets," he said.

I collared Ries after the event and interviewed him about the alternative market idea, as we strolled the darkened streets of Washington in a circumlocutious attempt to locate his hotel. He was in town for the announcement of the Presidential Innovation Fellows and attended the DC Lean Startup Circle on a last-minute invitation.

Ries told me he was working on an idea for an alternative market that would provide liquidities for companies that don’t want to go public but need an exit to satisfy their investors. He said the current public market structure is so heavily weighted towards short-term thinking that it’s ultimately bad for business. "If you truly want to create a long-term company that's going to survive through generations of ownership, the current system doesn't support that,” he said. “But it should – it's like a bug in the system."

Ries said even a company that’s planning for the long term – such as Amazon – has to pay attention to quarterly earnings reports. And even for companies with dual-class stock structures – such as Facebook and Google – compensate thousands of employees with short-term stock options, which affects perceptions of corporate health. “They pay attention to the stock price,” Ries said. “They want it to go up and they don't want it to go down, and that is a real hindrance to innovation. You've got to be able to make disruptive bets."

Companies also have to think through the psychology of how quarterly reports are perceived and factor that into their trading strategies. “If you eliminated all that high-frequency trading and emotional trading – if that was just not part of the system – then I think the stock price would be a lot less volatile, movements of the stock price would be a lot more meaningful, and we'd have a more nurturing and supportive environment for these companies, where they would have less pressure to do the kind of bad stuff that we don't like them doing, and more opportunity to invest for the long term."

It’s possible to resist those pressures, he said, but the energy expended in resisting them creates a problem. "I talk to a lot of Facebook people who have had a lot of not very nice things to say about the decisions that are being made – not even that are being made, but that might be made – because of this incredible pressure from the markets. The stock price was hyped up too high, and now it's coming back to earth and that's being perceived as a negative. People are like, 'Why isn't it a $100 billion company?’ instead of celebrating that it's a $50 billion company."

"All the corruption in the system is being exposed, because people are paying so much attention to Facebook. Each one of those things is an indictment of the way it works now. It doesn't have to be that way."

Once upon a time, the prevailing public market system made sense, Ries said. Today, that’s no longer the case. "I view it as a situation that is ripe for disruption. The symptoms of the status quo are really negative."

He said creating an alternative market would be a 10-year project at minimum, and that the really difficult aspect would be creating a minimum viable product. However, he said it is legally achievable, and it's mainly a question of getting enough entrepreneurs and investors on board.

If entrepreneurs had their own market that was not the NYSE, they could have their own rules that are “SEC-plus”, Ries said. If everyone believes in those rules and that they’re superior to the existing structures, then it’s possible to disrupt the status quo. “That's straight from Clay Christensen,” said Reis. “You don't compete with the current system, you compete with disuse."