Do Founder-Led Companies Make Good Investments?

Some of the biggest success stories in the market have one thing in common: the person who started the business is still heavily involved.

Think Nvidia and Jensen Huang, Meta and Mark Zuckerberg or, closer to home, companies such as Pro Medicus, Goodman Group and Fortescue.

So does having the founder still calling the shots actually make a company a better investment?

At first glance, you might think so. After all, who understands a business better than the person who built it?

But that is only half the story.

The same qualities that make a founder valuable can also create some of the biggest risks for shareholders. Strong conviction can become stubbornness. Long-term vision can turn into empire building. And when too much of a company's success depends on one person, investors can suddenly find themselves exposed.

That is why we think founder involvement is worth looking at, but it should never be the only reason you invest.

Does having the founder in charge really matter?

Pedro's view is that it depends heavily on where the company is in its journey.

If you are looking at a young business trying to get off the ground, having a capable founder who understands the product, the market and what they are trying to achieve can be extremely valuable.

That founder often has the vision and drive needed to take an idea and turn it into a real business.

But take a large, established company such as Woodside Energy. At that point, the business should have systems, experienced management and a clear strategy already in place. Whether the original founder is still involved becomes far less important.

There is also another trap investors can fall into.

Just because someone built one successful company doesn't mean everything they touch in the future will turn to gold.

Pedro raised this point in the podcast when discussing how much timing and circumstance can contribute to a founder's success.

Someone can have a brilliant idea, meet the right people and enter a market at exactly the right time. That doesn't automatically mean they will recreate that success every time.

So past success matters, but it shouldn't give a founder a free pass.

What does founder-led actually mean?

One thing investors need to understand is that founder involvement can look very different from company to company.

The founder might still be CEO and running the business every day. They might move into the role of executive chair and focus more on strategy.

Others remain on the board, retain a large shareholding or step away from management almost entirely.

That matters because the level of influence changes the risk.

Pro Medicus founder Dr Sam Hupert remains closely involved as managing director and CEO.

Greg Goodman continues as group CEO of Goodman Group.

Andrew Forrest remains executive chairman and a major shareholder in Fortescue.

Then you have situations where the founder steps back but still retains significant ownership and influence.

There isn't one structure that automatically makes a company better.

What matters is whether the arrangement works for the company and whether the board can still make good decisions without everything revolving around one person.

There is some research behind the founder effect

Evidence supports the idea that founders can make a measurable difference.

Research by Rüdiger Fahlenbrach examined large US companies between 1993 and 2002. Around 11 per cent were being run by their founders.

The research found founder-CEO companies invested more heavily in research and development, had higher capital expenditure and made more focused acquisitions. An equal-weighted portfolio of founder-CEO companies generated a benchmark-adjusted annual return of approximately 8.3 per cent during the period studied.

Innovation research also provides an interesting angle.

A study of S&P 500 companies between 1993 and 2003 found founder-CEO companies produced around 23 per cent more citation-weighted patents after controlling for research and development spending. They also produced more patents and were more likely to move into new technological areas.

Another study by Renée Adams, Heitor Almeida and Daniel Ferreira attempted to separate founder influence from company performance. After accounting for the possibility that performance itself affects whether a founder remains CEO, the researchers still identified a positive founder effect on company performance.

The research gives investors a reason to examine founder involvement. It doesn't mean founder-led companies automatically make good investments.

Why founders can create an advantage

There are several reasons why founder leadership may work.

They have skin in the game

A professional CEO normally earns a salary, bonuses and performance incentives.

A founder can have a substantial proportion of their wealth tied to the company. That creates financial alignment because their decisions directly affect the value of their holding.

They have specialist knowledge

Founders often designed the original product or developed the business model. They understand why the company exists and have accumulated knowledge that can be difficult to replace.

That becomes particularly valuable in specialised businesses where technical knowledge sits at the heart of the company's competitive advantage.

They can think further ahead

Professional CEOs face pressure to meet quarterly expectations. Founders may be more willing to accept short-term costs if they believe an investment will strengthen the company over several years.

That could mean spending more on research, technology, acquisitions or infrastructure rather than directing additional capital towards short-term shareholder returns.

They can move quickly

A powerful founder can often make decisions without waiting for multiple layers of management and committees.

When markets and technology change quickly, that ability to act can create an advantage.

When the founder becomes the risk

The qualities that make founders valuable can also create problems.

A founder with a large shareholding and significant influence may become difficult for the board to challenge. They can also become emotionally attached to a product, strategy or acquisition long after the evidence suggests a change is needed.

This is where governance becomes important.

A founder may understand the company better than anyone, while an experienced board can bring knowledge about scaling businesses, allocating capital and challenging assumptions. Problems arise when neither side is prepared to listen.

Founders can also pursue ambitious projects that make the company larger without necessarily making it more valuable.

Andrew Forrest and Fortescue provide one example. Forrest's conviction and willingness to take risks helped build Fortescue into a major iron ore producer. Pedro believes the company's expansion into green energy also demonstrates why investors need to consider whether founder ambition always aligns with shareholder priorities.

The biggest issue may be key person risk

For Pedro, one of the most important questions is whether the business has become too dependent on one individual.

If customers, employees and investors associate the company almost entirely with its founder, their departure can create a significant problem.

The same question applies to succession.

Who replaces the founder? Does the management team have enough experience? Can the culture and strategy continue without the person who built them?

A strong company should eventually be capable of operating without its founder.

This becomes particularly relevant for long-term investors looking 10, 20 or even 30 years ahead. The company they buy today may be very different after its founder leaves.

Founder quality doesn't replace investment analysis

One point Filip makes strongly is that investors can become so convinced by the founder and the company story that they stop paying enough attention to price.

He has seen professional money managers continue holding investments that had fallen substantially because they still believed in the founder and the long-term story.

That can be dangerous.

An exceptional company can still become a poor investment if you pay too much for it. Founder involvement doesn't remove valuation risk, market risk or the need to consider what the share price is actually doing.

This is where we approach the market differently as traders. 

Fundamental information can help investors understand a company, while technical analysis helps identify what price is doing and when an opportunity may be developing.

For investors who want to develop this further, Wealth Within's trading courses cover how technical and fundamental analysis can be incorporated into a structured trading approach.

Five questions to ask about a founder-led company

Rather than buying a company simply because a successful founder remains involved, we think investors can ask five questions:

1. Does the founder own a meaningful number of shares?
2. Have they demonstrated an ability to allocate capital successfully?
3. Can the board challenge them when necessary?
4. Could the company continue successfully without them?
5. Would you still buy the company if the founder wasn't there?

That final question may be the most revealing.

Founder involvement can create specialist knowledge, conviction, long-term thinking and stronger alignment with shareholders. The research suggests those advantages can translate into better innovation and performance.

But founders also create concentrated power, succession problems and key-person risk.

So, when analysing a founder-led company, don't invest in the personality alone. Look at the company the founder has built, the decisions they continue to make and whether the business is strong enough to eventually stand without them.