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Investing in the best long-term founders

Amazon, Berkshire Hathaway, Google, Starbucks and until recently Apple have been some of the best-performing shares in the market. They were also all led by their founders. We believe their long-term view is an advantage in a market that usually thinks short term. Most founders have a view that spans decades. This allows them to take advantage of opportunities that cost in the short term but pay off big in the long term.

It’s the opposite approach and mindset of professional managers that sign on for caretaker roles for a few years. Founders tend to be more willing to disrupt their businesses. A major example has been Apple and Steve Jobs. He returned and released the iPod, a product that soon dominated the music market. At the time, investors questioned what Apple could do next. We all know what happened then as they disrupted themselves. Steve Jobs introduced the iPhone and then the iPad, two products no analysts predicted. It’s a difficult decision to cannibalise your best-selling product but it’s an easier decision if you’re thinking out decades. Unfortunately, Apple has changed since his passing but there are other founder-led firms with a long-term view.

Jeff Bezos and Amazon

Amazon started out as on online bookstore. Now it’s the most feared retailer in the world. Many retailers are getting ‘amazoned’, which means to watch helplessly as Amazon vacuums up the customers and profits of your traditional ‘bricks and mortar’ business. Amazon does not care about short-term quarterly profitability. They also created AWS, the leading cloud computing service. It’s hard to imagine that an online bookstore would become the leading retailer in e-commerce and cloud computing, two of the largest growth opportunities in the world.

A major reason for Amazon’s success is Jeff Bezos’s long-term customer focus. For $99 a year, customers access 20 million items with free two-day shipping. This Amazon Prime service increased its membership by 51% last year. I’m still waiting for it to be available in Australia. Investors initially thought he was crazy to offer free shipping but now it’s a key competitive advantage. Bezos knows that technology changes quickly so he focuses on what won’t change in the longer term, knowing no matter what happens customers will always prefer cheaper prices, more choices and free shipping. While both Prime and shipping are short-term costs, it creates longer-term customer loyalty with these customers spending 140% more than non-members of Prime.

Amazon’s cloud computing business was started 10 years ago and is now a $10 billion revenue business at a 28% operating margin (they disclosed sales and profitability last year for the first time.) It would have been hard to establish this business without the backing of an entrepreneurial founder.

Amazon is also taking the long-term view by moving into homes. Their dash buttons have been a big success (see picture below). Prime members can purchase brand-specific buttons such as for Tide detergent, attach them to their washing machine and press the Tide button every time they run low on detergent. If that’s not easy enough they have introduced voice ordering with Amazon Echo. If you run out of toothpaste while brushing your teeth, you can tell Echo to reorder without bothering to open your smartphone. What’s better than a store that sells everything, open 24/7? A voice-activated store that buys you everything you need without you having to remember it.

Larry Page and Google (now Alphabet)

Google is another famous founder-led company. Not many companies I follow have a category for investing in moon shots. Google takes the long-term view investing in driverless cars instead of just incremental search improvements. Google’s founder Larry Page is an inventor but also a great businessman. Some of their investments have worked out extremely well. They paid around $50 million for Android and the $US1.65 billion acquisition of YouTube in 2006 has been one of the best acquisitions of all time. When investing they don’t look at the profitability but at the long-term usefulness of the product. Products must pass his toothbrush test. They invest only in products that are as useful and meaningful as a toothbrush that you use twice a day. This approach means Google now has seven products with over a billion users.

Google spent $3.6 billion in moon shots last year, an increase of 84% on the prior year. A non-founder is unlikely to make these longer term investments. Now that it is called Alphabet (Google is its largest division) it will be interesting to see what comes next. It might seem strange for Google, an internet company, to invest in health care (longevity is a focus) but it makes more sense for a conglomerate like Alphabet. What potential employee wouldn’t be inspired to join a company that is willing to take on long-term problems?

Howard Schultz and Starbucks

Technology founders get the lion’s share of people’s attention but I am constantly amazed by what Howard Schultz, the founder of Starbucks, has built. Coffee is an extremely competitive market with low barriers to entry but there is still only one global coffee chain. Starbucks serves 85 million customers around the world every week at an average sale of $5. Most people buy from Starbucks not because of the coffee but because of the brand and how they treat their employees and customers. Howard not only helped create the business but came back and turned it around when Starbucks overextended its growth in 2008. He shut stores to retrain baristas, stopped reporting monthly sales and introduced technology to make ordering easier.

Taking the long-term view, Starbucks invests in its employees. It recently offered full college tuition coverage with a goal to graduating 25,000 employees by 2025. The technology investments were also a major hit to the bottom line but Starbucks now processes the most mobile payment transactions in America (21% of transactions) and it has introduced mobile ordering. No more waiting in line. Starbucks is also trialling delivery e-commerce based on a coffee app.

We believe that some of the best growth investments are found in founder-led firms. They have the advantage of longer term views and the ability to take advantage of opportunities that most companies couldn’t or wouldn’t invest in. In a quarterly focused world, it’s a major advantage.

 

Jason Sedawie is a Portfolio Manager at Decisive Asset Management, a global growth-focused fund. Disclosure: Decisive holds Amazon, Google and Starbucks. This article is for general purposes only and does not consider the specific needs of any individual.

 

  •   18 March 2016
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