Why Founder-Led Companies Outperform The Market

A year of market turbulence later and there are now, more than ever, opportunities to take advantage of, while the market is in this correction period. This is when the stock market thrives, when companies have an adequate valuation and when stocks can prove their long term efficiency. Nevertheless, some investors fear they will miss out on the next best stock or ETF, therefore they make short term decisions that will impact their portfolios forever.

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It is a complicated task to allocate hard earned cash to the right investment, particularly when it involves our long term investment accounts. But, there is a common characteristic often overlooked by most investors regarding these stocks outperforming the S&P 500: their founders. Companies led by their founders have been the standout winners over the last few decades and beat other companies’ performance consistently. Profit growth from tech founder-led companies have outpaced other businesses with a 30% growth versus 6.7%.

There are only a few founder-led companies; around 7% of globally listed companies with market capitalizations above $500M are run by their founders. Over the past 7 years, founder-led companies outperformed their counterparts. Founder-led tech firms, in particular, have a history of higher returns and faster recovery. While there is no telling if what happened in the past will also happen in the future, many arguments lead to support that founder-led companies will continue to beat the S&P 500 in the future.

 

Founder’s Emotional Commitment

To find performing companies like the Amazon of 2020 (74% return) or the Microsoft of 1999 (67% return), an investor can’t overlook founder-led company stocks. Much more than a charismatic chairman or CEO, founders were the ones putting the first brick to a company that they built from the ground up. Like a business owner who treasures his firm, founders will try anything to help their company grow. From innovative ideas to multibillion empires, the American dream has been alive and well in the hands of popular founders such as Steve Jobs, Jeff Bezos, Mark Zuckerberg, or Bill Gates. Investors know the importance CEOs and managers have on profit growth, but what few recognize is the founder’s intense involvement that unites them with their company. Much more than just managing a firm, founders are emotionally attached to their business and are taking personal responsibility for their company’s prosperity, which strengthens a culture centered on long-term prospects.

Founder’s Financial Involvement

Founders also tend to have large equity stakes in their company, which can represent a substantial portion of their personal wealth. Based on a Bloomberg survey, founders are found to have an average of 10 times higher ownership in their business than other S&P 500 CEOs. This financial connection comes with greater responsibility and nourishes the exigency for success. Moreover, as owners, these CEOs prioritize the long term capital growth of their stake rather than their income. For instance, the average annual compensation for founders has been found to be 32% less thana typical S&P 500 CEOs. Founders understand that maximizing their wages will come at the expense of the long term growth opportunities, and thus hurt their equity value over the long term. 

Founder’s Focus on Innovation

You will notice that most successful founder-run companies are in the technology industry. A study from professors at Purdue University discovered that founder-run companies exhibit higher levels of innovation. First, these companies generate 31% more patents than the average company in the S&P 500, demonstrating a strong engagement to improving products and technologies. They also found that founder/CEOs can take new drastic technological decisions, representing a unique ability to effectively pivot their businesses, for the purpose of remaining on the cutting edge with their competition. The fact that innovation remains a key aspect of founder-run companies helps fuel these companies’ long-term growth and avoid falling behind new challenges.

How to Get Exposure & Last Thoughts

Cultivating a stock allocation to founder-led companies is a key strategic asset management measure to your portfolio as we start 2023. While some founders don’t run their company anymore, many companies are still run by their creators: META by Mark Zuckerberg, NVDA by Jensen Huang, BLK by Larry Fink (one of an original 8 partners), or BRK.B by Warren Buffett are a few examples.

For diversification purposes, there is also a founder’s ETF. The Global X Founder-Run Companies ETF (BOSS) seeks “to generate alpha over the broad market by offering exposure to primarily U.S. mid- and large-cap companies who are led by their founder(s).” [It's up almost 20% over the past 5 years.]

While an equity stake in founder-led companies will position your portfolio for a potential recovery, consider diversifying over multiple funds and stocks to smooth out the potential risks incurred. 
 


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Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

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