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The Founder Advantage: Why Founder-Led Companies Can Outperform.

Updated: Apr 8

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Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.

 

What is a Founder-CEO?

Founder-CEOs are individuals who had the original idea for the company, established it, and continues to hold the top executive position (Chief Executive Officer).




Advantages of Investing in Founder-Led Companies for Long-Term Investors:


Alignment and Commitment

  • Passion and skin in the game: Founders have a deep emotional and financial stake in their company's success, leading to greater dedication and commitment over the long term.

  • Long-term vision: Founders often focus on building a sustainable business, not just short-term gains, aligning their interests with long-term investors.

Agility and Innovation

  • Innovation drive: Founders are often driven by a desire to disrupt and create new things, leading to groundbreaking ideas and technologies with high growth potential.

Execution and Leadership

  • Deep understanding of the business: Founders have intimate knowledge of their industry and market, allowing them to make informed strategic decisions.

Performance and Returns

  • Historical outperformance: Studies have shown that founder-led companies tend to outperform their non-founder counterparts in terms of revenue growth, profitability, and stock returns.



notes:

  1. Amazon and Netflix are excluded from the list above, because their founder-CEOs (Jeff Bezos & Reed Hastings respectively) just stepped down recently hence the period post their leadership is too short to be evaluated.

  2. Companies like Lululemon & Alibaba were also excluded from the list because their founder-CEOs (Chip Wilson & Jack Ma respectively) stepped down as CEO before their companies went public.


Caveats:

Not All founder-CEO led companies are successful

  • For example, investors were unhappy with Steve Ellis's leadership at Chipotle due to the company's food safety issues, declining sales, and lack of successful growth strategies.

    • Food safety issues: During Steve Ellis's tenure as CEO, Chipotle experienced several foodborne illness outbreaks, including E. coli, norovirus, and salmonella. These outbreaks damaged the company's reputation and customer trust, and investors became concerned about Chipotle's ability to ensure food safety and maintain its premium positioning.

    • Declining sales and profitability: The foodborne illness outbreaks led to a decline in customer traffic and revenue. Ellis's attempts to revive growth through loyalty programs and mobile ordering were unsuccessful, further eroding investor confidence.



  • So it is important to evaluate each company on its individual merits, including the founder's track record, business model, and market potential.


Not all Founder are CEO

It's important to note that being a founder doesn't automatically guarantee someone holds the CEO position forever. Sometimes, as a company grows and becomes more complex, founders might step aside as CEO and bring in someone with different skillsets and experiences to lead the organization through its next stage. However, they may remain involved in the company in other capacities, such as chairman of the board or advisor.


Exceptions can be made when the company is led by a Key-Person who is not necessarily an original founder, but they are the Visionaries, Builders, and Scalers who are commited to driving the commercial success of the business. These Key-Persons can be just as (if not, even more) valuable than the original founders themselves.


  • Tesla: While not the original founder, Elon Musk's leadership, vision, and investment transformed Tesla from a niche electric car venture into a global leader in electric vehicles and renewable energy. He could be considered a visionary leader rather than a pure founder.

  • McDonald's: Ray Kroc wasn't the founder, but his franchising genius and marketing prowess propelled McDonald's to international fame and fast-food dominance. He could be considered a growth architect who scaled the business exponentially.

  • Starbucks: While others started Starbucks, Howard Schultz's leadership during its crucial expansion phase cemented its global coffee empire. He could be seen as a strategic builder who shaped the brand and customer experience we know today.

  • LVMH: Bernard Arnault wasn't the founder of luxury conglomerate LVMH, but he took control in 1989 and led its aggressive expansion and brand acquisitions, solidifying its position as a leading force in the luxury goods market.

  • Berkshire Hathaway: Warren Buffett took over an struggling textile company and diversified it into a financial powerhouse. He could be categorized as a transformational leader who reshaped the company's core identity and mission.


Conclusion:

The allure of founder-led companies is undeniable, but it's crucial to remember that leadership isn't solely defined by the founder's title. Visionaries, builders, and scalers, regardless of their origin story, can propel a company to greatness.


Ultimately, the key lies in identifying passionate individuals with a clear vision, strong execution skills, and a vested interest in the company's success. Dive deep, do your research, and let the leaders, not just the labels, guide your investment decisions.



 

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