Why Scottish Mortgage favours founder-led companies
Tom Slater – Manager, Scottish Mortgage
Key points
- Nearly 90 per cent of Scottish Mortgage portfolio companies are founder-led
- Company creators often have more capacity than non founders to push through radical change in rapidly shifting markets
- Founder leadership isn’t a cure-all or a must-have, but it often indicates a company aligned with our long-term goals
Most of us think of the Amazon Prime subscription service as a wonderful retention tool, bringing the best customers back again and again. That wasn’t always obvious. When Prime launched in 2005, Amazon was barely profitable. Yet here was a programme offering two-day delivery on unlimited items that suddenly turned the firm’s most profitable customers into its biggest loss-makers.
Along with many other lessons since we first invested that year, Amazon taught Scottish Mortgage a lot about the importance of founder-leaders. Jeff Bezos’s ability to focus on whatever created the most long-term value allowed him to use his authority as founder to make counterintuitive decisions.
Over nearly three decades, this allowed him to push through change despite the opposition of many around him. His successor, Andy Jassy, is matching that power, thanks to having led its Amazon Web Services cloud computing division since its inception.
Looking for the long-term thinkers
For us, the critical point is to find leaders running businesses for the long term who can escape the market’s focus on earnings over the next one or two quarters. Doing so lets them make decisions in investors’ best long-term interests.
Without our intending it – or even initially tracking it – the founder-leader factor has grown in importance within the portfolio. Today, nearly nine in 10 of our companies are founder-led: from Peter Carlsson at battery maker Northvolt to Marcos Galperin at ecommerce and payment giant MercadoLibre to the Collison brothers at payment processor Stripe.
Is there such a thing as an archetypical founder? Not exactly. There are different nuances in different parts of the world. But whether it’s in the US, Europe or China, we see the same sense of personal ownership and responsibility for what happens in the business, an urgency to get things done and an unwillingness to let bureaucracy get in the way of the company’s mission.
It’s hard for professional managers to match that sense of priority and to make transformative decisions that push the whole organisation to change. Not least because their incentives are often a performance bonus tied to earnings.
You can do all sorts of things to a business to boost short-term performance, including cutting your spending on research and development and marketing. But that can be very damaging to long-run outcomes. We like management teams that invest in the brand and optimise performance over a 10-year time horizon.
Getting it done
A strong founder-leader can take radical decisions to make sure change happens. This is important in a market environment that’s constantly shifting, both in terms of technology and consumer tastes. Against that background, stasis can be very damaging. Ambition and adaptability become vital.
Take Shopify: the ecommerce software provider flourished during the Covid pandemic by helping small businesses compete against larger retailers. The firm then moved into delivery and logistics, a lower-margin business that the founder-leader Tobi Lütke described as a ‘side quest’ to its main mission.
Shopify has been loss-making for most of its history, but rising interest rates meant the cost of building and connecting logistics infrastructure increased. Adapting to this changing business environment, Lütke abruptly switched course in May 2023, selling Shopify Logistics and cutting the size of the business by 20 per cent.
The company moved towards generating more cash when borrowing costs were rising. It’s an example of a founder taking tough decisions to give the company flexibility to compete in a very different environment.
Continuity counts
In the past 20 years, it’s become more common for founders to lead their firms for longer. Part of the reason is that financial backers have become less likely to push them out to bring in the ‘grownups’, but it’s also because companies have grown more quickly under their creators’ tenure.
We like that they have skin in the game financially. This forces them to think about long-term value appreciation as a key barometer of success, aligning their goals with ours.
Founders make an impact at every stage of the company’s development, and often a business’s very existence comes down to its creator matching the strength of his or her idea with the will and ability to make it happen.
Typically, the founder factor becomes less important as the business approaches maturity, when you’re less likely to see such radical shifts in the product portfolio or the pace of change.
The prime example here is Apple. Since Steve Jobs died and Tim Cook took over, we arguably haven’t seen products that have had the impact of the iPhone. But in terms of dollars of value created, it’s been much larger under Cook than Jobs. So it’s not that businesses can’t continue to be successful after the founder goes, it’s just that they sometimes become less radical.
Alphabet is in the same category. Compared with co-founder Larry Page, Sundar Pichai hasn’t done anything particularly revolutionary, but the company continues to grow and is one of the biggest, most profitable businesses on earth.
No magic bullet
I should stress that having a founder-leader is no guarantee of success. There are plenty who haven’t worked out. The interplay between a business and its founders can often be problematic. Some founders are pushed out, and some businesses simply outgrow them.
You see that particularly in enterprise software – cloud-based applications that help businesses become more efficient. The founder might have built a useful tool or product, but the challenge in scaling that kind of business is going out and selling it to big organisations.
That involves a very different skillset around managing a sales force, managing relationships and all sorts of the more boring things that enterprises are interested in. So it may make perfect sense to bring in a different chief executive.
Scottish Mortgage looks for companies that are changing their industries, providing goods and services in new ways and answering unmet needs. These are not normal companies. When you have a mission like this, having talented individuals at the helm has been utterly crucial.
We’re not in thrall to the ‘cult of the founder’. After all, the Trust’s largest holding is the Dutch firm ASML, which makes the machines that manufacture semiconductor chips. It’s not founder-led.
Nor do we see the continued presence of a business’s original leader as a panacea to the many problems that growth businesses face. It’s simply that we see businesses that are founder-led playing an outsized part in creating the great companies of the future.
Risk factors
Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.
About the author - Tom Slater
Manager, Scottish Mortgage
Tom Slater is manager of Scottish Mortgage. He joined Baillie Gifford in 2000 and became a partner of the firm in 2012. Tom joined the Scottish Mortgage team as deputy manager in 2009, before assuming the role of Manager in 2015. Beyond that, he is the head of the US Equities team and a member of another long-term growth equity strategy. During his time at Baillie Gifford, Tom has also worked in the Developed Asia and UK Equity teams. Tom’s investment interest is focused on high-growth companies both in listed equity markets and as an investor in private companies. He graduated BSc in Computer Science with Mathematics from the University of Edinburgh in 2000.
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