The Advantage of Founder-led Businesses

Today, all the companies in my portfolio are founder-led.

Think about it, the people you see in the photo. Who are they? They are just CEOs, but they are founders of successful businesses.

Look at why they’ve started the business? Was it to make just profits or was it to make better products or services to change the world? Mark helped us connect better. Sam allowed us to buy cheaper. Apple gave us ease of smartphones. Amazon brought us convenience. It was precisely their fiery passion which inspired greatness and delivered great customer value. Profits followed along.

From my own experience, I discovered founders act very different from hired management.

They are mission-focused and purpose-led. Founders tend to have a greater portion of their wealth at risk in the business, they think like long-term and they make acquisitions that would help the business become better… and not bigger. Many listed company CEOs are just too concerned with their compensation package and they may not be aligned with shareholders. Founders favor high share ownership and high variable performance pay, which is great. They are doing a job, they are living out their wildest dream. They breathe the business day-in, day-out.

(credit to Horizon Kinetics)

Founder-led businesses tend to enjoy better culture which supports staff retention and higher productivity. You can check using Glassdoor to verify it. They are also less likely to defraud you and they tend to act with integrity.

Consider two very similar businesses, TransDigm Group (NYSE:TDG) and Triumph Group (NYSE:TGI). They are both in the same industry where both designs, manufactures systems and components. Both perform similar maintenance, repairs, overhaul (MRO) for military and aerospace clients as well.

A price comparison from 2006 until 2018 revealed shocking figures. If an investor held from 206, he would have lost 5.31%. As compared to TransDigm, he could have made over 13x of its original investment! What could have made the differences?

TransDigm’s founder, Nicholas Howley, is still in the business as executive chairman. He emphasized strongly on orderly transition, culture, values and proven processes. Over the past few years, Mr. Howley focussed on creating shareholder value through careful allocation of capital and performing strategic M&As.

Triumph Group was formed by Richard C. Ill in 1993. Between 2012 to 2015, Jeffry Frisby was the CEO. Within the past few decades, many acquisitions were made however they were not integrated carefully. No synergy was extracted. Today, it is run by Daniel Crowley who is fixing these issues.

As you can see, while both operate in the similar industry, the return on share price was different. To understand a founder much better, the best way is to read up interviews and read his shareholders’ letter.

Shareholder structure among co-founders

For companies with co-founders, I prefer them to own most of their shares under a joint investment vehicle between the co-founders.

What if this is not? Like a marriage, if there is nothing to tie both co-founders together, one of them can choose to resign and sell off their shares without any permission. It could happen because of a disagreement. After all, their shares are owned are under their respective individual accounts.

But by being in a joint investment vehicle, it prevents them from making rash decisions and it promotes long-term thinking because it signifies unity among co-founders as their shares are held together. They think like married couples instead of two separate individuals, which is conducive for business development. When one decides to sell shares, other party must be consulted.

(source: Best World annual report 2018, page 160)

D2 Investment Pte Ltd owns 35.05% of Best World (SGX:CGN), but who owns D2 Investments Pte Ltd?

Dora and Doreen, who are the company’s co-founder, own 50% of the company respectively. Such shareholder structure provides more stability for the company.

Other companies that incorporated such structure are Sheng Siong, 800 Super, and Health Management International.

Are there founders who misbehave and overpay themselves? Yes. Are there hired management that outperforms previous management? This article provides a small glimpse into founder-led businesses, there are many more aspects to be considered.

Summary

• Go for founder-led businesses because they are more likely to be motivated by the virtue of their shareholdings and it promotes long-term value creation.
• Go for founders who believe strongly in creating unique products and services that solve problems for the world or bring added convenience to humanity.
• Be careful if the founder has many other business interests elsewhere, he / she may not devote fully into growing the business.
• Look out for how the shareholdings are structured for founders and co-founders.

Hope you enjoy this another short article from me! Do share this content with your friends if you find this useful! 

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