Companies managed by those who set them up tend to outperform. Dr Mike Tubbs explains why, and surveys the world’s equity markets to gauge which ones currently look the most appealing
Companies managed by their founders are often better investments than those managed by newcomers for three reasons. Firstly, the founder usually has a substantial stake so their personal wealth rises with the firm’s success. Secondly, the founder is an entrepreneur and likely to be good at spotting business opportunities. Thirdly, as far science and technology-based firms are concerned, the founder will hold the key patents and will defend them strongly, thus enabling the company to expand without larger competitors grabbing market share. The following examples illustrate these points.
Putting Polaroid in the picture
The first example is Edwin Land of Polaroid. Before the Second World War, Land invented a low-cost method of making optical polarisers (these let certain light waves through but block others) from plastic film. They found wide application in sunglasses and were used in military equipment during the war. After the war, Land invented the Polaroid instant camera, which produced refined black and white pictures in 15 seconds.
This was followed by instant colour photography in the 1960s, the compact SX-70 camera in 1972 and instant-colour movie film in 1977. In 1976 Kodak introduced an instant-colour camera based on Polaroid’s SX-70 principles, but these were protected by patents. Polaroid sued for patent infringement and won a $925m settlement. The court ordered Kodak to withdraw all its instant cameras and films from the market.
Land was a great innovator who protected his inventions with patents (his 500th patent was filed in 1977) and these enabled him to prevent Kodak, the world’s top photographic company, from marketing a copy of his key product. Polaroid’s revenue rose from under $100m in the mid-1950s to $500m in 1970 and around $1.5bn by 1980. Polaroid’s shares were one of America’s top growth stocks in the 1960s and, with Xerox, one of the best of that era’s “nifty fifty” US growth companies.
The second example of a founder-led firm is James Dyson and his range of household appliances. His range of dual-cyclone vacuum cleaners are the best-known products. Dyson’s company was founded in 1991 and the early DC01 model became the UK’s biggest-selling upright vacuum cleaner in just
