At The Money: Should You Invest in Companies Led by Founders?

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Barry Ritholtz (0:24)

Should you invest in companies led by founders? Peter Thiel's VC Founders Fund has over $20 billion and produced excellent returns. How can ordinary investors get access to funds of companies headed by founders? To help us unpack all of this and what it might mean for your portfolio, let's bring in Michael Monahan. He is a partner and portfolio manager of the Founders 100 ETF, stock symbol FFF.

He's also been a Wall Street analyst, a private market investor, a tech startup CEO, and a public equity portfolio manager in his career. So Michael, let's just start with the basics.

What's the central thesis behind the Founders 100 ETF? Why should founder led companies outperform even after they've become large public companies?

Michael Monahan (1:22)

Barry, thanks for having me. The data shows that founders outperform by about 3X. We looked at 11,000 stocks over 30 years, and on average, founder led companies grow 4% greater than the S&P.

Barry Ritholtz (1:36)

Wow. So let's stay focused with that 3X. I believe that was Bain Research, that founder led companies tend to outperform other companies.

What is it that drives that three times outperformance? Is it that founder led companies tend to be heavily represented in the technology sector? Is it a function of age or size, or is this just survivorship bias?

Michael Monahan (2:02)

We've got companies led by founders all across the economy. So it's not just a concentration in technology, although there is a lot of technology company that are led by founders. We don't think it's survivorship bias. We think that founders bring something really unique. They have the vision to see where to go.

They have the execution to execute that plan they've envisioned. They have the charisma to build a big team around them, and they've got the grit to get through the hard times, combined with the fact that they think in decades where a board hired CEO is just trying to make the next quarter and the next PowerPoint presentation for the board.

Barry Ritholtz (2:38)

How much of this is due to the fact that, hey, if you're going to start a new company from scratch, by definition, you're a risk taker. How much of the outperformance of founder led companies is simply just embracing that higher tolerance for risk?

Michael Monahan (2:58)

I don't know if that's the factor that's showing it. I think if you dig in, a lot of these guys are successful because they de-risk all along the path, right? So if you listen to, say, Mark Andreessen, he talks about at the zero stage and the one stage and the two stage, it's all about de-risking the problem as you move along. So I would gently say that I think founders de-risk their business even more than non-founders.

Barry Ritholtz (3:26)

Really, really interesting. And you yourself is a founder. Your startup was Beartooth Radio.

It didn't necessarily find an exit, but I'm curious, how did that experience of standing up a company from scratch from scratch affect your view of founder led firms?

Michael Monahan (3:45)

I think it completely reframed how I think about building a company. I spent my first 15 years of my life working for great companies. I worked at Goldman Sachs, I worked at Sanford Bernstein. But there's a big difference between working at a world-class organization where you fit into their system and building your own system from zero to one. I was fortunate enough to get exposure to some of these really good technology founders and just saw how differently they thought, how passionate they were, how they brought vision that corporate managers didn't have.

Barry Ritholtz (4:17)

So let's zoom in on that. How do you define a founder? Must the individual have actually started the original enterprise? Or do you include anyone who perhaps acquired or reinvented or merged with or effectively refounded an already existing company?

Michael Monahan (4:37)

So we define founder led as the original founder. That's the person who started the company, still running it, most often as the chief executive officer.

Occasionally, it will be the chief technology officer, or in the case where a medical or scientific company, it could be the chief medical or chief scientific officer. So it's the chief officer running the company day to day. We looked at the data. Board member doesn't have the efficacy we want. Chairman doesn't have the efficacy. It's only if the founder is sitting in the seat every day running the company.

Barry Ritholtz (5:10)

And some classifications are really straightforward. Obviously, Michael Dell founded Dell Computers, Zuckerberg at Facebook. What do you do with the more ambiguous cases? And I think probably the biggest one is Elon Musk, who was an investor, not an original founder of Tesla. There are debates about the merger with PayPal. We could talk about SpaceX. How do you draw the lines there?