Invest In Builders Over Optimizers

Founder led companies outperform others by a margin. It's a fact and you should exploit this.

I think it was two years ago, my wife asked me: “How often do you think about the Roman Empire?”

It was a moment of enlightenment for me because I realized that I was often thinking about the Roman Empire.

“What the fuck is wrong with you?”, I asked myself.

Then I noticed that I wasn’t alone. Women were asking this question to their partners and it appeared that most men at least occasionally think about the Roman Empire.

After that, I realized that Roman Empire wasn’t the only thing like that…

I observed myself and my friends and I realized that most of us do this one thing too: We watch Steve Jobs’ legendary original iPhone introduction at least once a year 👇

It is one of the defining moments in the history of entrepreneurship:

• He says Apple will announce three different products: Phone, touch-screen iPod, and an internet browser.

• He drops the bomb by announcing these are the same product.

• He publicly humiliates all the competitors’ so called “smart” phones.

I don’t know whether it applies to women too but I am pretty sure men will relate.

Let’s try to validate:

First I couldn’t see why but the next time I watched it with this phenomenon in mind, I saw it immediately: It was his passion.

He was so passionate about the product he was introducing that he had no doubts that it would stun everybody. You feel literally “0” skepticism in him. He is just so proud with the thing he is introducing.

This is what attracts us.

Once you watch it, you instantly feel more passionate about your dreams, about the thing you do, about your projects. We love the video, because Jobs’ passion revives our own passion.

This is why people watched it, bought it immediately because he had transferred his passion to the potential customers and when the product became available, they didn’t hesitate.

This is more relevant to investing than you think.

Just ask yourself, who would you invest in? Steve Jobs or the Samsung CEO who was in rush to take their iPhone competitors to the market?

We actually saw how this played out, and we saw it very publicly:

Amazon launched Fire Phone in 2014.

It was $199 while Apple was selling iPhone 5 for $699.

Yet, nobody bought Fire Phone.

It was an ugly product that Amazon had launched thinking that whatever market share they could get was a net positive.

Fire Phone was just something to sell to customer while iPhone carried all the passion of its creator with its ease of use, metal casing, elegant colors and simplicity. It wasn’t just created for customers to use, it was also created to please its users.

You can see it why or not, but it’s a fact that passion matters.

You can see this if you go back in the same story.

Same Jeff Bezos who failed with Fire Phone, succeeded beyond imagination with e-commerce because he was passionate with it, he was obsessed with customer experience to the degree that he sacrificed all the profits for more than a decade to perfect the customer experience.

Guess what? It paid off.

At the height of the dot-com mania, there were more than 2,000 e-commerce businesses funded either by VCs or angel investors. You only know Amazon today.

If you think this could just be an anecdote, think again…

Joon Mahn Lee from Purdue University Business School conducted a research and found that founder led companies return three times as much as the other S&P 500 Companies. It doesn’t change even when you exclude tech companies. Founder led non-tech companies return nearly twice as much as others.

This is not a supernatural phenomenon you should blindly bet on, it has perfectly plausible reasons.

So, why do founder led companies are more innovative, grow faster and deliver superior returns?

The key is the ‘founder mentality’.

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1. Founders Have A Calling

Some call this “insurgency” while others call “purpose”, I say it’s a calling.

It’s been known for long among venture capitalists that the best founders to invest in are those that are motivated by an overarching goal rather than just capturing the market opportunity.

If you want to see how to fail fast in raising investment, tell your potential investors that you want to do it just for money. I guarantee you they will pay nothing.

Think about Steve Jobs and Steve Wozniak.

They were hippies.

Money was of course a factor but they weren’t primarily motivated by it, they were motivated by their deeper calling to challenge the status-quo. They were immersed with the counter-culture of 1960s and they used every chance to upset the status-quo.

They had been creating things long before the Apple I and using them to challenge the status quo:

You see Jobs and Wozniak playing with device they created and called “Blue Box.” It was capable of mimicking the tones used by the phone system to route calls, allowing user to make phone calls for free.

They would do countless of phone calls with this device, even international calls, not because they had too many people to talk to but because they enjoyed outsmarting the phone companies and render their monopoly over individuals meaningless.

Jobs fell in love with personal computers because he saw it as a way to empower individuals against institutions. Up until Apple II, computers were thought to be something that could only be used by institutions, they challenged this notion.

You can see this calling all over the place.

While companies ran advertising campaigns praising the capabilities of their products, Apple’s famous 1984 campaign says nothing about the capabilities of upcoming Macintosh. It’s all about individual’s insurgence against the establishment.

Look at all other insanely successful founders and you will find a similar calling.

Jeff Bezos had already been making more money than he needed when he decided to found Amazon. He was a Vice President in D.E Shaw, one of the most successful hedge funds in Wall Street.

Mark Zuckerberg rejected Yahoo’s $1 billion acquisition offer in 2006. If he accepted he was gonna walk away with $250 million. He rejected.

He didn’t reject it because he thought $250 million wasn’t enough money, he rejected it because it was his calling. He figured out that he would try starting another social media company if he sold and decided not to. No corporate manager would have rejected such an offer for a company that wasn’t generating any revenue. Only a founder could.

Now Facebook is a $1.5 trillion company.

Only a founder with a deeper calling could have rejected that offer and this passion eventually reflects on the business performance thus on the shareholder return.

This is not the only thing though, this calling naturally forces them to be obsessed about the product and the front-lines of the business that actually create the product.

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2. Front-Line Obsession

You may call it a “product obsession” or else, I call it front-line obsession because this is what passionate founders do, they go the front-lines.

This isn’t something new or special to founders, it’s been clear all along the history that leaders that operate on the front-lines command more respect.

Marcus Aurelious commanded an incredible respect from his army and people because he didn’t sit in Rome while army was campaigning on the borders, in the same way, Caesar succeeded with his coup d'état because he had a 5,000 men who were devoted to him.

Steve Jobs was no different.

He would visit Johny Ive’s design studio every morning before anything to see the progression they were taking and directly involve himself in the process to make sure that products would reflect his taste. He couldn’t let a product he didn’t like out of the design studio because he thought customers would think of it as his taste.

And he was right.

Most people don’t buy Apple products because they are technically superior, most people buy them because they are more beautiful than others. And they are beautiful because their creators didn’t let the product out until they were something they would proudly use in public. Jobs didn’t sit in his office and wait engineers to finalize the product, he went to that design studio every goddamn morning, not because he had to, but because he wanted to.

These are not just anecdotes, think about Elon…

Why is Elon so successful?

Everybody working in Elon’s companies complains of the frenetic pace of work, still, churn-out rate in his companies is very low? Why?

Because he sits with people on the front-lines to solve problems. He doesn’t tell his VP’s to fix the problem. He finds the engineers facing the problem, sits with them, reasons with them, brainstorm with them and wait there until the problem is solved.

Here, Marc Andreessen explains it:

It’s impossible for a founder that only communicates with the front-line employees through VPs and division leaders to command the same respect that founders working in front-line command.

Once those people who are putting their sweat and blood into the work see the founder going crazy about the product and can’t tolerate even a small defect in the product, the passion rubs off on them.

Look at this:

This is Elon looking sadly at the debris of Falcon 1 back in 2006.

Think of all the front line workers in that garage, picking still usable parts from the salvage. Whom they would work harder for? The guy sitting there in tears and swearing to rebuild it and rebuild it right, or for the guy that communicates orders from his ivory tower?

Front-line obsession of the founder rubs off on the front-line workers who actually create the products. And through them, it is transferred to the customers.

And customers can pick the products designed with them in mind from those designed with only their pockets in mind.

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3. Owner Mindset

Think about a company in a hardship: At the one hand you have an owner with a plan and on the other hand you have a manager with a different plan.

Who would you bet on?

I would bet on the founder every single day.

If the company goes down, owner has nothing.

• Livelihood of the owner depends on the company.

• If the company goes down, reputation of the owner takes a hit.

• If company goes down, years owner spent building it will be wasted.

It’s not the same for a professional manager.

It’s only natural that founders care more.

This chasm between a founder and a manager reflects itself strongly at the turning points: A manager plays it safe, a founder goes for all.

Because for a manager, it’s a double sided blade:

• You take the risk, it doesn’t go well, you are fired.

• You don’t take the risk, it doesn’t work well, you are fired.

Thus, a manager optimizes for stability which means slow death in corporate world because if you aren’t growing, you will eventually shrink.

Founder, on the other hand, optimizes for fulfillment of the mission.

Again, go back to 2004, when idea for Apple phone was first appeared.

For the context, iPod was the best selling consumer electronics product at the time.

Imagine that Apple was run by a professional manager. What would he say to the idea of making a phone that would render iPod meaningless?

“Are you guys stupid?”, he would probably say, or even worse…

He would reason as follows:

• If we don’t succeed, we will have shown our competitors the way to disrupt our best-selling product.

• If we succeed, we will disrupt our best selling product without knowing that if the new product will reach the same levels of dominance.

It was a very easy decision for a manager: No.

Only a founder who was driven by passion for products, a founder who would deem it a cardinal sin to withhold such a great idea from customers would accept it and he did.

Result? Apple did really disrupt its iPod by launching iPhone:

Only a founder who believed making better products and empowering customers with them would have effectively killed a product that was generating 40% of all revenue.

In Apple’s case, it worked; but you must be aware that it might not have worked and definitely there are companies for which it hasn’t worked. Yet, you must know that this is the only way. Everything else is just a slow death.

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Conclusion

Regardless of whether you invest in tech companies or others, mindset matters.

It’s not a coincidence that founder led companies outperform peers, it’s because founders have a radically different mindset than managers.

• A founder doesn’t think about a paycheck.

• A founder doesn’t think about the year-end bonus.

• A founder wouldn’t ignore the slow disruption of his company.

Founders aren’t motivated by career milestones anymore. Being a founder is like being a parent. At the moment you become a parent, your success is defined by your child’s success; at the moment you become a founder, your success is defined by your company’s success.

This is why small founder-led companies could beat industry giants, because they care more…

This is why Apple beat IBM in personal computers, this is why Amazon beat Walmart in e-commerce, this is why Tesla beat legacy car makers in EVs… You can find many more examples.

This is not to say that you should go find the founder led companies and invest exclusively in them, but you need to somehow factor this in.

Take Amazon and Hims competition in telemedicine for instance.

Amazon is only motivated by making money in this market. It entered this market because it thought its distribution positions it well in this market. Hims, on the other hand, has a founder motivated by disrupting the industry and making drugs more accessible to anybody. Of course he also wants to make money, but you shouldn’t think that Amazon’s division leader and Andrew Dudum shares the same vision. After all, Dudum could work anywhere or create any company but he created Hims.

If the things I have said has done no impact at all, just look at the two offices below, one Steve Jobs’, the other Tim Cook’s and tell me who would you like to invest in.

For those who could see, it tells a lot.

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