At MHV, we invest in the early period of a company’s life cycle. By this stage, the start-up has only been in operations for 1-2 years, and usually the entire team has less than 20 people.

Naturally the original founding members make up the key management team also, and 99% of the time, one of them wears the CEO hat.

But as a company grows, many other considerations come into play. Founders start companies because they are driven by building a product that solves a problem, and have innate passion for seeing their vision through. However, does this mean the founder is also capable of scaling operations, technology, and teams? This issue is more acutely felt if the company is fortunate enough to experience rapid growth (i.e. “growing pains”), which means the founders are not given much opportunity to figure it all out – except through making mistakes.  

On the other hand, professional CEOs have built up a career of managing people and growing companies. They’ve seen a lot of things, and if they’re good, they have managed to survive it in tact and led companies to greater heights. We were interested to examine the topic of whether founder CEOs perform better or worse than non-founder CEOs (“professional CEOs”), specifically in the context of tech companies.

To make the comparison, we will look at it from a purely financial perspective as it is more measurable than most other indicators. We took data [1] from publicly listed tech companies in the US and China (two key countries where tech has been super active in the past decade or so), and focused on the below metrics:

  • Rate of return
  • Growth of market value
  • Growth in net revenue
  • Price-earnings ratio

The above indicators are a good reflection of a company’s financial performance, and we took our data set from over a period of 10 years. [2]

[1] For US companies, we choose 40 samples from the NASDAQ by doing a stratified random sampling based on the market cap. For the Chinese companies, we chose all companies listed before 2006 on SSE, HKEX, and SZSE. Due to the lack of available data, we only did analysis on public companies using ten periods of data from 2006-2015.

[2] The data is gathered from Reuters Datastream and we only took companies marked as technology companies in software or hardware. To find out whether it is a founder or non-founder leadership, we used various media sources.

Based on our analysis, we tabulated who ranked higher on the below indicators –  

Table 1 - US Companies

Table 2 - Chinese Companies

We see that founder CEOs do rank higher on most financial indicators. Why might this be the case?

Ben Horowitz, co-founder of Andreessen Horowitz (top tier Silicon Valley VC) wrote a blog detailing some reasons on why he prefers founding CEOs. He notices that founder CEOs have a total commitment to the long term, and own the product and vision (and therefore are more innovative at finding new product cycles). These are not necessarily traits he sees in a professional CEO.

Mark Zuckerberg, who is a founding CEO and still maintains control of his public company, has also weighed in on the debate. Mark has said in an interview that he doesn’t think there’s anything that makes founders intrinsically better than non-founder CEOs. However, they do have some advantages – such as having “social capital and moral authority” which invokes more trust from employees and customers. People are more likely to give founders the benefit of the doubt when the founder has to make tough calls.

Why would a founder relinquish control over a company that he or she essentially breathed life into, and step down as CEO? That’s exactly what Vaughan Rowsell recently did, as a founder of Vend (a point of sales SaaS that he built over a period of 6 years, and has raised $49m in funding). Vaughan wrote a candid piece to share reasons why he is on the hunt for a professional CEO who is experienced and commercial, whilst he goes back to focusing purely on Vend’s product vision.

Even though our data set does show that founder CEOs perform better in most financial indicators, it is by no means predictive. But we hope this article has given you some food for thought on why public markets and investors may prefer founding CEOs over professional CEOs, and provide some hard financial data to support what may otherwise just be cognitive investor biases.

Written by Putri Amalina, a former investment analyst at Monk's Hill Ventures.


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