Should investors ride tech founders to the moon?

Twitter co-founder Jack Dorsey’s resignation letter included some parting words of caution: Being “founder-led,” he wrote, can be “severely limiting and a single point of failure” for a business.

The advice probably fell on deaf ears. As Mr. Dorsey wrote: “There aren’t many founders who choose their company over their own ego.” And, in another sign that irony is dead, he remains chief executive of payments company Square Inc., soon to be known as Block, which he co-founded in 2009. But investors aren’t bound by the same hubris. Should they be cautious about buying into companies where a founder might have stayed too long at the party?

In tech, there is often a visionary premium and it is at least somewhat justified. Tracking public companies’ performance over 25 years, Bain & Co. found the companies that best maintained profitable growth over the long term were disproportionately those at which the founder was still running the business, was still involved or where the founders’ operational focus was still in place. Based on an analysis of S&P 500 companies done in 2014, Bain found that founder-led companies generated over three times the indexed total shareholder return of other companies in the preceding 15 years. One wonders how much the study is affected by survivorship bias, though—those who flopped early aren’t in the sample.

Founders certainly are bolder. A 2016 study out of the Krannert School of Management at Purdue University found that founder CEOs are more likely to take their companies in a new technological direction, providing evidence that innovations of founder CEO-managed firms create more financial value than the innovations of professional CEO-managed firms.

Apple, which languished as a computer company in the years after its co-founder Steve Jobs was ousted, offers a twist on this phenomenon. Mr. Jobs returned as a savior. Among other things, he changed the company’s name from Apple Computer Inc. to Apple Inc., signaling an expansion of focus to a legacy that now includes the likes of the iPod, iPhone, Apple TV and more.

Not every returning hero has as smooth a path. Rich Barton co-founded and led online real-estate giant Zillow until 2010, at which point he handed off the reins to another co-founder. He then returned in 2019 to lead once again with the intention of morphing what was primarily an agent advertising business into a leading iBuyer. Perhaps he should have quit while he was ahead, but it is worth noting that even despite hundreds of millions of dollars in write-downs, Zillow today is worth close to twice what it was in early 2019 before Mr. Barton came back in.

Mr. Dorsey’s major shortcoming at Twitter actually was a lack of such bold innovation. Activist investors who began calling for his departure years before it came have long pushed for faster product development and bigger revenue and user targets. They also took issue with the fact that Mr. Dorsey split his time as the chief of two publicly traded companies. When questioned at a shareholder meeting about his split time, Mr. Dorsey responded that it wasn’t a function of time, but of prioritization. During his second stint as chief executive over the course of more than six years, Twitter’s stock rose just one-fifth as much as the S&P 500.

Perhaps he prioritized his payments company, which is around 20 times as valuable today than it was in late 2015 when it went public. There are many current examples of tech companies still excelling with a founder or co-founder at the top. Nvidia and Shopify, which have returned more than 80,000% and nearly 6,000% to shareholders, respectively, since their public debuts, come to mind.

The key is to build a business with longevity. Companies outgrow their founders’ expertise or may have to change course based on evolving social and economic conditions. Founders grow tired, bored and eventually, as in the case of Apple’s Mr. Jobs, die.

Reputational risks can arise along the way. It is difficult to read Mr. Dorsey’s letter without thinking of Mark Zuckerberg, the lone founder of a top-five S&P 500 company who remains in charge. Mr. Zuckerberg co-founded Facebook (now Meta Platforms Inc.) more than 17 years ago and is now working to pivot amid regulatory scrutiny from a social-media company to a metaverse company—the same face, but a new name.

For all these reasons, leaders with long-term views often groom a potential successor or at least invite others to join them at the top. Andy JassysucceededJeff Bezos at Amazon.com earlier this year after leading the Amazon Web Services division. Last year, chief content officer Ted Sarandos was promoted to co-CEO at Netflix alongside founder Reed Hastings. And just last week, Salesforce.compromoted its president and chief operating officer, Bret Taylor, to co-CEO alongside co-founder Marc Benioff.

But it isn’t necessarily true that a business is limited simply because a founder remains highly involved. History shows fate is case-specific where some businesses simply risk becoming limited by their founder.

This story has been published from a wire agency feed without modifications to the text