In the Spotlight Trend of the Month
History shows that founder-led companies are often excellent long-term investments.
Founders bring a potent combination of passion and vision to their businesses, driving innovation and fostering a deep-seated commitment to long-term success. And for investors, this can lead to strong returns over the long run. Here’s a look at this niche investment strategy in more detail.
Founder-led companies are those where the founder of the business is currently the CEO or in some other position of significant influence such as President or Executive Chairman. This is in contrast to non-founder-led companies, whose executives may have risen up through the ranks of the company or come from other organisations.
Because they are led by their creators, founder-led businesses often exhibit a unique blend of ambition, entrepreneurialism, and tenacity. This can help to drive innovation and growth and lead to strong returns for investors over time.
In fact, studies have shown that the stocks of founder-led companies often outperform the rest of the market by a wide margin over the long term.
For example, a 2016 study by Bain and Company found that an index of S&P 500 companies in which the founder was still involved in business operations, performed 3.1 times better than the rest of the index over the 15-year period to the end of 2014.
Looking at the stock market today, there are many examples of founder-led businesses that have generated prolific returns for investors over the last decade. Some examples include:
Nvidia (led by founder Jensen Huang), whose share price is up more than 25,000% over the last 10 years.
Tesla (led by founder Elon Musk), whose share price is up more than 2,500% over the last 10 years.
Meta Platforms (led by founder Mark Zuckerberg), whose share price is up around 800% over the last 10 years.
Salesforce (led by founder Marc Benioff), whose share price is up around 500% over the last 10 years.
It’s worth pointing out that many successful founder-led companies are in “new economy” sectors such as e-commerce, FinTech, and electric vehicles. And they are often led by relatively young CEOs, who originally set out to disrupt traditional business models and provide consumers with superior products and services.
Why do companies that are led by their founders often have a lot of success? There are several reasons.
One is that founder-led companies tend to exhibit a founder’s mentality. Typically, they have a sharp sense of purpose and are highly focused on achieving their goals. They also tend to be more agile and adaptable. This can help them to seize compelling business opportunities when they arise.
Another reason is that founders usually have a deep understanding of their industries. In many cases, they started their businesses from scratch and, therefore, have a unique perspective on the challenges and opportunities within their markets. Mark Zuckerberg is a good example here. He wrote the original code for Facebook in the mid-2000s and today he continues to navigate the social media landscape successfully.
Founders also usually have substantial ownership stakes in their own businesses. In other words, they have “skin in the game.” This can act as a source of motivation. If their businesses do well, founders can potentially become very wealthy.
Finally, founders tend to take a long-term view when running their companies and this often pays off. Non-founder managers are often highly focused on near-term results (e.g., beating earnings expectations) because their jobs depend on it. Founders, on the other hand, are less concerned about the short term and more focused on building something that lasts. This longer-term focus tends to lead to better business decisions and more success.
Those looking for portfolio exposure to founder-led companies may wish to check out eToro’s new Founder-Led Smart Portfolio. This provides one-click access to a range of companies whose founders are currently playing an active management role. Diversified across multiple sectors, this Smart Portfolio offers a unique strategy for long-term investors who are looking to gain an edge in the markets. Stocks in the portfolio at present include the likes of Tesla, Nvidia, Spotify, CrowdStrike, and XPeng.
