Here’s why founder-led companies can be good investments, or the odd man out!

Some companies on stock exchanges are founder-led companies. For several reasons, a company being founder-led can be a sign of a good investment. Inevitably, the company’s founder will have led the business through long-term growth and will have significant ownership, thereby incentivising continued growth. However, this is not always the case and no two founder-led companies are the same.

Why founder-led companies can be good investments

Founder-led companies can be good investments, as they often have an intimate understanding of their product or service and the market it operates in. The CEO’s unique perspective and vision allows them to create an environment that encourages innovation, while also providing a steady foundation that allows the company to grow.

In addition to being able to make decisions based on personal experience and understanding, founders may also benefit from being able to drive change quickly and more effectively than non-founder CEOs since they are not beholden to external shareholders or boards of directors. This allows them more freedom when implementing strategies that could potentially increase profitability or market share.

Examples of founder-led companies

In our view, the best example of a founder-led company was tech giant Apple, which was founded and led by Steve Jobs until his death in 2011. During his tenure, he was able to steer the company from near-bankruptcy to a world-renowned business with one of the most valuable brand reputations in history. His ability to inspire others with innovative ideas helped propel Apple’s products ahead of competitors and allowed it to continually expand its customer base. Remember his annual presentations during the 2000s when the company unveiled one innovative product after another? We all watched and awed at him year after year, while competitors watched on in horror wondering what would hit them next. The 1980s and 1990s were a different era to then, when Apple was in stagnation.

There are other great examples of successful founder-led businesses including Facebook/Meta (Mark Zuckerberg), Amazon (Jeff Bezos), Microsoft (Bill Gates), Google (Larry Page and Sergey Brin) and Oracle (Larry Ellison). All of these companies began small but managed to become some of the most valuable companies in the world, largely due to their founders’ insight, guidance, and careful decision-making processes.

What about founder-led companies on the ASX?

In the ASX 200, there are around 30 stocks that are founder-led companies and have a founder owning over 5% of the company.Some of the most prominent examples include Dominos Pizza Enterprises (ASX:DMP), Pro Medicus (ASX:PME), WiseTech (ASX:WTC), Fortescue (ASX:FMG) and Flight Centre (ASX:FLT). All of these companies have been significant long-term success stories and there are plenty of other examples of founder-led companies on the ASX that are outside the ASX 200.

Alternatively, there are companies that are family-run – that is to say have stayed in the family beyond the original founder’s retirement and/or death. These include Beacon Lighting (ASX:BLX), Redox (ASX:RDX) and Reece (ASX:REH).

Disadvantages of founder-led companies

Of course, founder-led companies are not guaranteed to be successful and some have not turned out well for investors.

There are several reasons why this may occur. Some are true in respect of all companies, such as poor strategic decision making or failure to update the company’s products and services to meet changing customer demands. Others are true in respect of founder-led companies, such as a lack of ability to challenge the founders’ decisions. Whatever the reason a company is performing poorly, the issue might be compounded by the founder’s large ownership stake in the firm, making it more difficult for other investors to challenge him or her.

This would be particularly the case in respect of companies that have multiple classes of shares, with some permitting less voting rights in a move deliberately designed to prevent the founder being challenged. A good example of a founder-led company in this boat is Facebook (now known as Meta Platforms), although we note that the ASX does not permit companies to list with multiple classes of shares offering different degrees of voting rights.

Every founder needs a good team

It is also important to consider that it is a big step from being a private company to a public company. As a public company, a founder-led company is subject to increased scrutiny from regulators, investors and the public generally, along with a lower degree of tolerance for mishaps of any kind.

In our view, any founder-led company should have a good team beyond the founder – on the board, in executive management and among rank-and-file employees. They are the ones that help deliver a founders’ vision for their business.

At the end of the day, the longest-surviving founder-led companies have succeeded because they have kept up with consumer demand, or perhaps even influencing consumers by creating innovative products and services that are superior to the competition. In some instances, it has also helped that competing companies did literally nothing to respond…until it was too late. After all it is easier to create the future than predict it.

Founder-led businesses offer potential to be good investments, but offer no guarantees of success

Ultimately, when considering whether or not founder-led businesses are good investments, it is important for investors to thoroughly research each venture before committing any resources.

While founder-led businesses certainly carry potential rewards due to the leadership’s intimate understanding of their product/service and market landscape, there are also significant risks associated with such investments which must be taken into consideration before making any investment in that company.

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