Founder-led companies can make for great businesses -- and investments. Chris Zook and James Allen, authors of The Founder's Mentality, write that such businesses are more innovative because they demonstrate "business insurgency" (the ability to go against the grain or to form new industries) and a "front-line obsession" with their business (think of someone like Mark Zuckerberg or Elon Musk).
Founders often think like long-term shareholders thanks to their significant ownership and investment (both in terms of time and money) in the company. They take risks and are often problem solvers familiar with the challenges in their industry as these pain points are often what motivated them to found their companies in the first place.
What's more, founders often toil away in obscurity for years before receiving significant attention or investment, so they have the grit to deal with challenges. Research from Purdue University's Krannert School of Management finds that founder-led companies are more innovative and generate more patents than other businesses.
Investors may be curious, above all, about performance. The authors of The Founder's Mentality find that founder-led companies in the S&P 500 significantly outperformed the rest of the index from 1990 to 2014 by roughly threefold. Here are three companies led by passionate and innovative founders that all offer significant, long-term potential for investors.
Figs (FIGS -2.81%) is the maker of colorful and fashionable scrubs and other garments that have taken the healthcare apparel industry by storm.
How did Figs' founders get the idea that there was a market for these types of products? Co-founder and now Executive Chairwoman Heather Hasson had a background in fashion. While meeting a friend who worked as a nurse practitioner for coffee, she was struck by the lack of options these types of professionals had beyond boxy, unfashionable (and even worse, uncomfortable) scrubs, which were essentially a commoditized product.
She and co-founder Trina Spear set out to create a branded product in an industry that was previously more of a commodity and sought to bring an innovative and technical approach to healthcare apparel in the same way that companies like Nike design high-performance apparel for athletes.
This focus on core customers seems to be working so far. Figs boasts that 70% of its revenue comes from repeat customers, and it has 50% first order retention, meaning that half of all customers that place an order come back for future purchases. The company also has an admirable net promoter score of 81, meaning that Figs customers are likely to recommend its products to their friends and family. The company's 71% gross margins show that consumers are willing to pay more for their products and view them as an aspirational purchase as opposed to just a commodity.
Lastly, Figs has plenty of room to keep expanding as more healthcare professionals give the brand a try, and it's also expanding into lifestyle apparel and entering international markets. Shares of Figs are down 75% from their 52-week high as growth stocks have plummeted during 2022, but the stock looks like a buy with significant potential for long-term investors.
Zoom Video Communications (ZM 0.47%) went public in 2019 and quickly became a household name by 2020 as the company's software connected the world during the COVID-19 pandemic, at a time when communicating with colleagues and customers remotely became mission critical for companies.
But Zoom wasn't an overnight success story. Founder and CEO Eric Yuan already had an extensive background working in video-conferencing technology by the time he started Zoom. Yuan got the idea for Zoom when he was taking 10-hour train rides to visit his girlfriend and realized how useful and convenient video conferencing technology like Zoom could be.
Yuan was an early employee of WebEx, which was later acquired by Cisco Systems (NASDAQ: CSCO), where he worked his way up to corporate vice president of engineering overseeing the company's collaboration software. He recognized the frustrations customers had with existing video conferencing software and wanted to start a completely new product from scratch. When his idea didn't gain traction at Cisco, he took a risk and left to start Zoom.
Yuan exhibited the "front-line obsession" mentioned above -- in the early days of Zoom, he would personally email customers who canceled the service to ask what Zoom could have done better.
Now a $25 billion company and a household name, Zoom is still led by Yuan, and the company is still innovating and working to deliver new solutions for workplace connectivity and collaboration like Zoom Phone, Zoom Contact Center, and Zoom IQ for Sales. Shares of Zoom are down 54% year to date as growth has understandably slowed since the early days of the pandemic when people and companies were scrambling to sign up for Zoom's services, but the company still has plenty of runway for growth ahead with its new services -- and the company is now profitable.
Furthermore, after the sell-off, shares of Zoom look attractively valued at just 20 times earnings. With an intensely dedicated founder, a suite of new offerings, and an attractive valuation for a profitable software stock, Zoom looks like another founder-led company that has significant, long-term potential.
Follow the founders
These are two businesses led by passionate and dynamic founders whose drive to solve an existing problem motivated them to create incredible companies. The CEOs have the long-term vision to continue to innovate and to think like owners.
With these leaders at the helm, Figs and Zoom both look like growth stocks with a bright future. Plus, the shares are well off their highs after the sell-off in growth stocks this year, making for an attractive entry point for long-term investors.