Founder-led firms outpacing CEO-led ones in market recovery

Technology companies led by their founders have been the standout winners in share price performance and profit growth this year, beating companies led by other managers, according to a Reuters analysis.

Major founder-led tech firms have seen their share prices double so far this year, comfortably beating a 7.8% gain for the S&P 500 index.

They have also outperformed rival tech firms led by hired managers, enriching investors and adding billions of dollars to the wealth of the founders themselves, including Amazon's Jeff Bezos, Netflix's Reed Hastings and Tesla's Elon Musk.

Profit growth has outperformed too, with founder-led tech firms seeing growth of around 30% over the past five years versus 6.7% for companies led by other managers.

Founder-led tech firms have a history of higher returns and faster recovery in the aftermath of a financial crisis. For instance, in the last bull cycle Amazon's shares surged fifty-fold, while those of Netflix's rose by 100 times.

"Great entrepreneurs thrive in down periods when tectonic shifts are occurring in how business is done. Resetting periods allow visionaries to do more with less," said David Brown, co-founder of venture capital firm Impellent Ventures.

"We believe the next few years will create some absolutely amazing businesses. I would posit that investors will be well rewarded by backing a portfolio of entrepreneurial leaders in the coming years."

This year, the top 400 founder-led stocks from all sectors have registered an average share price gain of 58.4% versus a 10% return for the top 400 stocks led by others.

With many companies' operations hit by the COVID-19 pandemic, investors are scouring for firms likely to recover the quickest. Analysis of capital expenditure (capex) plans suggests why investors think founder-led companies might have an edge.

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In the first half of this year, founder-led companies have seen a 20% growth in capex, whereas spending on future growth at companies led by others has fallen 2%.

According to Refinitiv data, founder-led firms are expected to post average net income growth of 22.8% in the next three years, compared with 7.1% growth for non-founder led companies.

Ric Marshall, executive director of MSCI ESG Research, said most founder-led firms would outperform non-founder led companies in both price performance and profit growth this year.

But while they provide greater opportunities for investors, founder-led companies also come with higher risks, he said.

"In my experience the widely held CEO-led companies were the safer bet – less likely to outperform, but also much less likely to result in dramatic losses," he said.