We finally hit our stride. We were constantly breaking new records, and we celebrated all of the successes. When we reached 100 million shares, we rented out a bar and hosted a party. When we hit 120 million shares, we rented out a bar and had a party. It didn’t matter that it was only two days later. At some point we could have had a party every other day because we were constantly hitting new records. Everything was great.

Going into 2008 we started preparing for our initial public offering (IPO) at a $4 billion valuation. We didn’t need to raise money, but going public had been an implied promise to our shareholders and investors. This included our employees as we gave everyone who worked at Liquidnet equity in the company. The plan was always that we were going to monetize this and share the company’s success with the people who built it.

Liquidnet was a super-hot company, and all of the investment banks wanted our business. We hired people to implement all the regulatory and reporting processes required by public companies. We also hired Lise Buyer, who had advised Google on its IPO, to advise us on ours. I don’t generally like to hire consultants, but this was an area that required specific expertise. I knew that in many respects the IPO process was deeply flawed and rife with Wall Street conflicts of interest. The bankers would have been through this process hundreds of times, but most of our management team had not done it once. We were woefully outgunned, and we needed help to even the odds to decide who to hire, what questions to ask, and what to ask for; help negotiate the fees; and when to call out the investment bankers if they tried to sell us a bunch of crap.

After an exhaustive process, we selected Goldman Sachs and Credit Suisse to co-lead the IPO, and JP Morgan, Lehman Brothers, and Sandler O’Neill were also involved to help sell the offering. For the first time I was very popular at our rivals, the large investment banks. This became very clear when I got a phone call inviting me to a prestigious conference hosted by JP Morgan in Deer Valley, Utah, in early March 2008. It was super-exclusive—there were maybe 100 people who attended, including the top JP Morgan executives, the heads of the major private equity firms, and industry luminaries like media mogul Rupert Murdoch, oil tycoon and financier T. Boone Pickens, and real estate baron Sam Zell. I was quite surprised to be included in that list and delighted when JP Morgan offered to fly my wife and me out on their corporate jet.

We spent the flight hanging out with the direct reports of JP Morgan’s chief Jamie Dimon, including COO Frank Bisignano and Mary Erdoes, head of their global asset management group. Much of the flight was spent discussing the youth village in Rwanda that my wife, Anne, was building to house the orphans of the Rwandan genocide of 1994. It was something completely different, not work related and something that everyone on the plane seemed to be interested in. JP Morgan has a corporate social responsibility (CSR) group that gives millions of dollars to charities every year, and they were very motivated to put their CSR head in touch with Anne. It was a great beginning to an incredible experience.

The conference itself was amazing. It was a beautiful setting, and there was epic skiing and epicurean lunches and dinners, with fireside chats with the biggest captains of industry. JP Morgan was courting me hard. At dinner, Anne and I were assigned to the main table and I was seated right next to Jamie Dimon. That’s how important this IPO was to them.

But while it was great fun, there was a heavy weight in the air. As peaceful as Deer Valley was, there was unrest in the world at large. There was talk of credit drying up globally. The head of one of the largest private equity firms had to fly home early because his mortgage securities company was filing for bankruptcy.

I was very concerned. I saw huge red flags portending major issues. I knew a credit crunch of this magnitude could lead not to a recession but to a depression. But I seemed to be in the minority. At the dinner table no one thought much of it. The sentiment was that this was not going to be a recession but just sort of a “blip.” I remember Rupert Murdoch said, “This is just temporary.”

We all hoped he was right. After a great few days, we left Deer Valley energized and went back to New York—and back to reality.

Call in Connections

About one week after the conference, the economy took a drastic hit when something unimaginable happened. Bear Stearns, the fifth-largest investment bank in the United States, collapsed. It was a warning signal of the financial meltdown that was soon to come. If we were at first unclear as to how we would be affected by the coming financial crisis, it would become clear to us almost immediately.

Bear Stearns was our clearing firm and the largest clearing firm on the street. Liquidnet crossed the stock between our customers, but Bear Stearns did everything else—all of the “plumbing” to get the trades into the correct accounts at the correct banks, and all the funds wired to where they needed to go.

When there were first rumblings that Bear Stearns was going to go out of business, members began calling, concerned that trades done on our platform would not get processed, and some informed us that they had to cease trading on our platform. The volume of calls and number of members discontinuing trading with us increased day by day.

Then, on March 14, the news broke that JP Morgan Chase would acquire Bear Stearns. This was good news, as JP Morgan would continue with Bear’s operations and we assumed the news would comfort our skittish members. But it wasn’t business as usual.

The world was really going crazy and our members were increasingly jittery about the market. They were particularly unsure about the transition between JP Morgan and Bear Stearns. Those who had stopped trading with us did not come back, and other members were ceasing trading as well. We lost significant volume and revenue. If it continued, we would be out of business due to no fault of our own. We had to figure out a way to remedy the situation—fast.

The JP Morgan conference had afforded me the opportunity to meet—and hang out with—many of the company’s top lieutenants. I had a massive long-shot idea, and I picked up the phone and called JP Morgan COO Frank Bisignano. He picked up immediately.

“Frank, I need a huge favor.”

“Anything. What can I do?” I explained what was happening. Even though he had inherited the Bear Stearns problem only days before, I said, “I need you to get Jamie (Dimon) to write a letter saying that JP Morgan is going to stand behind Bear Stearns and back up every trade that we do. And we need it today.”

I was completely shocked when Frank replied, “I’m on it. I’ll get it done.”

Sure enough, by the end of the day we got a letter signed by Jamie Dimon from JP Morgan to our members telling them that they would back up all our trades. We sent it to all of our members. The crisis was averted, and those members who had stopped trading with us came back on.

The Thing About Market Forces

After filing the IPO at a $4 billion valuation, Forbes put me on their list of the 400 richest Americans. I eked in right at the end, number 377, and if the magazine had come out a few days later, I probably wouldn’t have made it at all. The issue hit newsstands on September 17, 2008. Two days before the publication date—and two weeks before we were to start our IPO Road Show marketing our company to institutional investors—the world began to unravel and the economic crisis became very real.

On September 15, 2008, Lehman Brothers, the fourth largest investment bank in the United States, and one of our underwriters, filed for bankruptcy protection, the largest bankruptcy filing in U.S. history. The global financial crisis was undeniably here. Every major bank had enormous exposures to each other and so it seemed that every one of the major banks around the world were either in danger of going bankrupt or about to fail. The markets became paralyzed and just about all activity except trading stopped.

Needless to say, it doomed our IPO. We weren’t alone; IPO activity in the United States in 2008 dropped to a mere 31 IPOs, down from 213 the year before.¹ They say timing is everything. In this case, it was everything wrong.

Everyone in the company understood that shelving the IPO was due to the market and that it was beyond our control. But everyone was incredibly disappointed. Employees and investors had been counting on a very rewarding liquidity event. The board members who put in their initial capital would have made close to 150 times their money in eight years without the dividends. Our other investors would have made between 20 and 40 times their money in seven years. The folks we brought in in 2005 would have more than doubled their money in two and a half years. Many lives would have changed, and if the past was any indicator of the future, many more babies would have been born.

It was a crazy time, with most of the financial markets at a standstill, banks failing, and the federal government seemingly bailing out another huge institution every week. Many of our members were getting massive redemptions and many others were looking to profit from the panic in the markets and buying stocks of companies that they felt were suddenly very cheap. So while pulling our IPO was disappointing, our trading volumes were going through the roof and we were making more money than ever. Amazingly, 2008—the year of the major market meltdown—was the best year Liquidnet ever had.

It makes sense, of course. As the markets were crashing, many of our members were selling everything that was not nailed down. In our platform we could execute only if there was a buyer and a seller; many of our members were taking the contrarian view and buying during the panic. Those members who bought stocks during the panic ended up having enormous returns over the next couple of years. Another reason our volumes exploded during that period was that everyone was focused on the solvency of the big banks. Our members generally did the majority of their trading with the big banks, but now they were concerned about what would happen to their trades if one of them failed. Little Liquidnet was now viewed as a safer, more solvent company than the major banks in the United States. We did not trade for our own account, take positions, or risk our capital as the banks did, which is what got them into trouble. So our major competitors were sidelined, our members were either running for the hills or running to the fire—but for us, volumes soared and business boomed. To top the year off, I was honored with Ernst & Young’s Entrepreneur of the Year regional award.

We entered 2009 wildly optimistic. We went into the first board meeting of the year with strong growth projections. All we had ever experienced in our first seven years was exponential growth. We were confident it would continue, that our tree would grow to the sky. Our board thought otherwise.

Remember the Ripple Effect

In the end, we didn’t escape the wrath of the financial crisis—it just adversely affected us much later than it did the rest of the industry.

When the crisis began, investors started pulling their money out of mutual funds. There was a great urgency to sell, and the concern over the solvency of the banks directed a lot of trading our way, which spiked our volume. But, soon—sooner than we had anticipated—clients were done selling and the big banks got bailed out by the government. Our members were left with half the assets they had a few months before, and trading slowed considerably. It was as if the dust settled and everybody—including us—was trying to figure out the new world order and what they should be doing now. We thought the crisis would be limited to the big banks, but we now understood that there had been a delay but the financial crisis was going to hurt us as well.

As 2009 got under way, our volumes were declining and we needed to get a sense of what was going on. We went on a listening tour to gauge the health of our customers. They didn’t paint a rosy picture. Visit after visit we found the morale of our members to be abysmal. The stock prices of the asset managers were in the tank. They were engaged in layoffs and downsizings. There were concerns about whether or not they were going to make it out of this alive. The private equity guys saw many of their portfolio companies in crisis, with sales coming to a complete halt.

Up until 2008, all we had experienced—and all our members had experienced—was growth for a very long time. The dot-com crash of 2000–2001 was painful, but it was fairly contained to one sector in the United States. It wasn’t a prolonged systemic downturn like we were facing in 2009. The whole world was in a recession at the same time. Investors needed their money and withdrew it from our members. There was no good economic news on the horizon. Our members saw very few investment opportunities, so there was very little trading. The whole world was in a funk with no end in sight. This is what a global financial crisis feels like.

It was a long year. The body blows came fast and frequently. Right after Lehman filed the largest bankruptcy ever, AIG collapsed and required a $180 billion bailout from the government. Whole countries went bankrupt, including Iceland and Ireland, and required international bailouts. The U.S. budget deficit tripled from 2008 to 2009 to fund all the bailouts.² Investors began buying tremendous amounts of gold because they felt the government was printing so much money that our currency would become worthless. There were articles and books warning of financial Armageddon and of people building bunkers and stocking them with canned goods to prepare for life afterward. The world was completely in uncharted territory, so the pundits ranged from telling us “The world is coming to an end!” to “Don’t panic, all will be fine.” The truth is that no one knew, and the uncertainty created paralysis in the business and investment world and that helped fuel the recession.

If the financial crisis weren’t enough, the United States was entrenched in and financing two wars. Mother Nature, too, seemed angry. In January 2010 a 7.0 magnitude earthquake and subsequent tsunami hit Haiti, killing more than 200,000 people, and in April 2010 the Eyjafjallajökull volcano in Iceland erupted for the first time in almost 200 years and halted flights across the Atlantic and Europe for five days, creating the highest level of travel disruption since World War II.³

Everything was a mess and nobody knew whether we were going to go into a full-blown depression. In January 2009 Liquidnet held a very sobering board meeting. We came with growth projections for the year, and our board cautioned us to reduce our growth forecast and to expect our volumes to decline.

We took their advice, and for the first time we pared back our growth assumptions to flat. That turned out to be too optimistic. Up until then we could do no wrong. Everything we touched turned to gold. But now things were looking more like lead. Our volumes and revenue declined by about 30 percent in 2009.

For the first time we had to lay off people. It was tremendously painful.

This was distressing not only because we were letting people go, which is incredibly hard, but also because we had to admit that we had gotten fat. We had hired a bunch of people in anticipation of going public in order to handle the extra burdens of being a public company, but we had no idea we had gotten so bloated throughout the organization. We had been growing so fast and hiring so many people that when we started really evaluating every person in the company, we found there were a fairly large number of low performers that we probably should have gotten rid of a lot earlier. It didn’t make it any easier to lay people off, as we had engendered very much of a family culture, and that, too, was a reason we had let the mediocre players stay on for too long. Ultimately, reducing our staff turned out to be an excellent and very necessary streamlining of our company, reducing layers of management, allowing some of the high-potential younger people to blossom and take on more responsibility, and set us up to manage the company much more efficiently.

That, unfortunately, was just the first round of layoffs—a small percentage of the company—but trading volumes continued to decline, and soon we discovered that the cuts weren’t deep enough and we had to reduce staff further. That was excruciating. Laying off people who have lost the fire within, the passion for the company, or were just mediocre is hard but totally justifiable. Laying off great people who did everything they could to help you succeed is agonizing. We made sure that we did it with dignity and with a fair amount of severance. We also helped them with outplacement services, extended COBRA benefits, and provided job counseling. It cost us a lot of money, but we knew that what we did and how we did it in the tough times would be a true test of our culture and character. We knew that, for many, being laid off from the company was no fault of their own and we had to treat them as best as we could.

What to Do When Things Go South

Communicate, communicate, communicate. For the first time we had really bad news to share—and lots of it. Terrible things were happening all over the world. Our employees had tremendous concerns about the economy, our members, our industry, and about how we were going to be affected. Are we going to be taken down along with the big banks? How are we going to survive? What is our breakeven? How low can volumes go?

Hiding from these concerns wasn’t the answer. We wanted all questions to be addressed as quickly as possible. I knew in bad times we had to overcommunicate. We started holding town halls every month. In these meetings we shared the state of the economy and what was happening with us, with our customers, and with our competitors. I didn’t want to ignore the concerns. I wanted to address them, and I wanted all of our employees to hear whatever the news was directly from me.

We were very, very transparent about everything. As the state of the global economy was in a freefall, our outlook could change month to month, and we knew that in the absence of news, our people would probably assume the worst. We communicated much and often. Our people were concerned about layoffs, and many people counted on their bonuses to fund their lifestyles. Bonuses were historically paid out twice a year, so employees were very concerned whether they would continue.

In addition to the truths we wanted to shed light on—even when they were difficult—there were other untruths that spread like wildfire. It seemed that every week there was a new rumor about Liquidnet to contend with. Customers and employees began to come to me with all of the crazy things they heard from brokers, traders, and competitors. Members called me with “news” that Liquidnet is positioning itself for an imminent sale! The board of directors is going to fire Seth! Bonuses are being canceled! Liquidnet will declare bankruptcy! One time I was in London and a rumor came out that I had sold all my shares. Most of these rumors were just crazy things, but they all had to be addressed by me personally.

It was as if the sharks started circling. Sometimes rumors can kill a company, but that’s only when there’s a run on the bank. That wasn’t the case here, so all these rumors were simply a distraction. The spread of rumors happens like playing telephone. By the time it reaches back to the originators, it’s probably completely different from where it started or much more exaggerated. I don’t know who started these rumors or how they started, but there was a period of time where there were so many circulating that we added a “rumors section” to the town halls. I brought them up one by one, and one by one I said, “This is not true.”

We took the problems, questions, and rumors head-on. If anybody else heard a rumor, they brought it up right there and then. It was our way of controlling this issue. And that’s how we always dealt with the tough stuff—we took everything head-on. You can’t shy away from challenges.

Don’t Mortgage the Future for the Present

During this time—despite the difficulties—we continued to focus on two main things. One was not to give up our culture. We had always invested in our people’s education, which is generally the first thing that companies cut back on. We still expected all employees to give us their all, and during this time we needed their all more than ever, so we continued to emphasize that in every town hall. We also have a fully stocked snack bar and a fridge filled with soda, juice, and beer, and provide a catered lunch to all employees every Friday. We knew if we cut back on any of that, it would affect the culture and camaraderie, and it would send a clear message to the company that we were in severe distress. The other main thing we did was to continue to invest in the growth of the company. Many companies mistakenly cut this investment in bad times. We continued to invest in new products and in new markets.

But these investments weren’t always universally assumed to be right. We were in a constant and contentious debate with the board. We had cut a significant amount of our staff, an amount I believed was as much as was possible without affecting our future opportunities, but the board wanted us to cut more. They wanted us to cut to the bare bone, to stop all investments, and retrench back to our core money-making franchise, the crossing network in the United States and Europe. It might sound counterintuitive that we were able to make these staff cuts and continue to invest in the future. While it was very painful to lay off anyone, we recognized that we had too many layers in the organization. We took some of the savings from the cuts to continue investing in our future growth areas.

The board wanted us to pull back on every area of our business. We had opened operations in five Asia-Pacific countries a few years earlier, and we were losing a lot of money there; it was an enormous drain on our finances. The board said, “Just close down Asia-Pac.”

They wanted to maximize and preserve whatever cash flow we had, so that we would survive and preserve the remaining value and be able to sell the company if we had to.

I wouldn’t do it. Instead of retrenching, I thought there was a case to be made for waiting this out and continuing to build our presence for the long term. And in hindsight, we now know that this was the right call. Asia-Pacific is a profitable and fast-growing market for us now.

The board also wanted us to downsize all of our developments, including the algorithmic business we had entered after we acquired Miletus. No way. That would mean basically giving up all of our growth opportunities. It would have set us back five years. We continued to invest heavily in that business as well.

This was an excruciatingly painful but eye-opening time. I had expected the board to be incredibly helpful and supportive through these hard times. I was looking for the board to be strategic and constructive, to give input, advice, and some encouragement. Every business book I had ever read said if you continue to invest in the downturn, you will accelerate into the inevitable upturn. We were deep in unknown territory with the world economy in the worst recession since the Depression with no signs of light. The board understandably was concerned.

I, on the other hand, was determined to continue to invest in our future growth. We didn’t know how long this cycle was going to last. But I knew that I didn’t like how the rest of the industry did things. Brokerage firms overhired in good times and overfired in the bad times, so they were constantly getting in and out of businesses in all these cycles. I thought that was a stupid and short-sighted strategy. It was not how to build a good culture of excellent people or a sustainable company. I believed that investing in a downturn is how you leapfrog the competition once the downward cycle is over. The cultures at our larger competitors were solely mercenary. There was loyalty through the next paycheck or bonus and not beyond. It is difficult to sustain a company’s culture during tough times, but that is also when it is most important. I believe to this day that we could have gone out of business due to the recklessness of our big bank competitors, but we were able to survive and thrive again because of our strong culture.

The fact was, despite the doom-and-gloom predictions, and because of strategically downsizing operations, we remained profitable every year throughout the entire financial meltdown. The difference was, precrisis, our pretax margins were above 50 percent. We could have maintained those margins had we shut down every new business we were starting, but we made the very conscientious decision to sacrifice our margins to continue building this company for the future.

The Times They Are A-Changin’

When I saw that the recession was finally coming to an end, I decided to make changes to the board. I thanked them for everything that they had done for the company and the tremendous value they provided during the formative years. Then I asked three of the five original board members to retire. They served on the board for 10 years, were instrumental during our launch and formative years and had made a tremendous return on their investment. It was clear to me that they had provided great value during our start-up phase, but now we needed people who could help us through our next phase and growth into new areas. The hardest thing to do as a manager is to make these types of changes, but as the saying goes, those who got you here are not necessarily the ones who will get you to your future.