Which sectors are founder-led companies most common in?
The wrong question. Capital efficiency, not sector, is what identifies quality founder-led companies, and it works even in industries as dull as drinks.
First published in Livewire Markets, 6 October 2021.
Historical context
A generation ago, it took longer for founders to grow a company into a global powerhouse; to do so required significant capital expenditure and very few founders were able to hold on to their equity as they grew. A handful of exceptional founders managed to do it – think about Europe’s largest fashion houses, America’s old guard stalwarts such as Walmart, Nike, Marriott. In Australia we had Westfield, Aristocrat and Visy. These exceptional founder-led companies achieved the near impossible. It took them decades to build. The degree of difficulty was very high.
Development of advanced tools makes this era unique
Fast forward to today, in this investment era, it’s a different ball game. The playing field has changed – it is now very possible to achieve huge growth in a very short timespan. Tools that didn’t previously exist are now available for founders to leverage. Instead of having to hire large marketing teams, they can now reach customers efficiently through social media and digital advertising platforms. Instead of having to open bricks-and-mortar shopfronts, they can spin up online shopfronts and accept payments from customers all over the world. Companies can reach global audiences and founders possess even greater potential in this era with the ability to go viral so quickly.
With this evolving landscape in mind, the opportunity for investors is therefore in capital-light businesses. This is where founders can truly excel and can change the game. Companies like Zillow, HelloFresh, Spotify and DocCheck have shown they can fundamentally change an entire industry. It has been made possible because founders are utilising a new generation of tools to reach customers efficiently without the need for heavy expenditure on human resources or hard assets. It also means their operational leverage is incredible.
If I look at the trend, the timeframe to grow multi-billion dollar companies will continue to shorten. Credit Suisse research showed a founder’s kids (the second generation) drove most of the growth. But expect this to change in future. First generation founders will be the engine of growth going forward.
How to find these founders
The right question isn’t which sectors founder-led companies are most common in, but rather how to identify quality founder-led companies within each sector. The answer is to look for capital-light businesses. Take today’s fastest growing companies for instance. Many of them offer a technology product. That’s the obvious industry that is capital-light. But there’s more to the world than just tech.
It would be prudent to diversify beyond tech, especially given many lesser-known industries present equally compelling opportunities for investors. For a well-rounded founder-led portfolio, investors should evaluate companies based on capital efficiency.
Astute founders like to run lean operations for the reasons I outlined above. They prefer to spend less on capital intensive hard assets, but instead allocate resources to hyper-scalable moats such as sales funnels and brand reputation.
There’s more to founders than just technology
I’ll illustrate this with an example. Take for instance the drinks market, this is traditionally a very capital-intensive industry. Manufacturing and bottling require large factory capacity and high capex. The traditional way to build such a business would be to seek external capital and build a factory before working on the sales and distribution network. This is valid, but not one a hungry and resourceful founder would take. They would keep the company capital-light. They would outsource the bottling and manufacturing, and instead redirect expenditure towards building global distribution networks, digital sales channels and marketing for the brand. They would focus on building these hyper-scalable assets, and avoid committing to capital-intensive infrastructure. Even for a boring industry such as drinks, investors can identify these capital-light founder-led companies and ride alongside these founders.
There are a plethora of founders attacking traditional industries with capital-light strategies. All this is made possible with the tools available today that weren’t available a generation ago.
