“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven’t found it yet, keep looking, and don’t settle. As with all matters of the heart, you’ll know when you find it”
– Steve Job
Recently, I discovered something in my life which could very well be applied to investing. I was looking to make a pair of spectacles and visited a few optical shops – some are managed by founders while some are managed by employees. During my visit, I enjoyed a greater level of professional advice and service from optical shops that were managed by founders themselves – whether it was by chance or intent.
As I asked myself, would my motivations be different whether I am an employee, shareholder or founder of a business? Ultimately, the level of commitment and passion is found to be highest within the founder category.
It is not too hard to understand. As a founder, you would’ve built this business from the start and your business is your life. You think about it more often than anyone else. Your business is a representative of your hard work, time, sacrifice, and emotions. Your business is an extension of your personality, and it may even bear your name and entire wealth. There is no one more interested in your business’ future apart from you.
In this article, we will explore some characteristics of founder-led businesses and why we think it is more superior than hired management, ceteris paribus. It is also better if employees own a good amount of shares in the company.
- [Net worth] Most founders have huge part of their net worth tied to their business. In contrary, hired management may not own a percentage of shares in the company. This represents different levels of motivations. Very likely, a founder receives his or her wealth from the value of the business whereas a hired management obtains wealth from remuneration.
- [Capital Allocation] A management job is to run day-to-day business and make careful decisions on capital allocations. With profits, there are five ways to allocate it. (1) Re-invest in the business (2) Acquire another company (3) Pay down debt (4) Pay out a dividend (5) Buy back your own stock. Depending on how they are being remunerated, hired management may think of quick ways to boost their short-term profits to receive their bonuses while founders have a long-term view on the business. This could have different set of considerations about any merger and acquisition decisions.
- [Healthy Paranoia] What is healthy paranoia? It is understanding your business’ strengths, yet you do not downplay the possibility of being disrupted by other competitors within your industry. You are constantly on the hunt to know more about your industry, grow your business and seek for competitive advantages to form your own niches. There is no time to rest on your laurels.
- [Frugality] The founders tend to spend business expenses in the very same frugal way that they would have spent their money even after the business is profitable. In the early days of any business, the business expenses and equity are actually contributed by the founders themselves. They understand the value of each dollar spent and each dollar earned more intimately.
In short, founder-led companies have the element of an owner’s mindset as shared by Chris Zook in his article “Founder-led Companies Outperform the Rest – Here’s Why“. Horizon Kinetics also wrote a piece on “What is an Owner-operator?”
(credit: Horizon Kinetics LLC)
What are some companies which are founder-led on SGX?
Raffles Medical Group, Best World International, 800 Super Holdings, Jumbo Group, ISOTeam, T T J Holdings, ARA Asset Management, Cogent Holdings, Sheng Siong Group, Challenger Technologies, Breadtalk Group, The Hour Glass, Noel Gifts International and others.
All in all, the act of investing in founder-led business is not be a silver bullet to generate good returns. The above list is not a recommendation. There are many other considerations such as business models, industry, margins, competitive products / services, and valuations. Yet, an investor should not downplay the advantages of a founder-led business with high ownership because you can be certain of a more aligned management.
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Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author(s) involved in the writing of this piece does not have any current vested interest of the company. If you require expert financial or other assistance or legal advice, a competent professional should be consulted.