At The Money: Should You Invest in Companies Led by Founders?

The Founders Fund by Peter Thiel has over $20 billion in assets and strong returns -- but you have no access to it. How can ordinary investors access funds of companies led by founders? Enter the Founders 100 ETF (FFF). Michael Monahan is a partner and portfolio manager of the Founders 100 ETF. He's been a Wall Street analyst, a private market investor, a tech startup CEO, and a public equity portfolio manager. Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 2:10Barry Ritholtz?

  Should you invest in companies led by founders? Peter Thiel's VC Founders Fund has over $20 billion and produced excellent returns. How can ordinary investors get access to funds of companies headed by founders? To help us unpack all of this and what it might mean for your portfolio, let's bring in Michael Monahan. He is a partner and portfolio manager of the Founders 100 ETF, stock symbol FFF. He's also been a Wall Street analyst, a private market investor, a tech startup CEO, and a public equity portfolio manager in his career.

• 2:52Barry Ritholtz?

  So, so, Michael, let's just start with the basics. What's the central thesis behind the Founders 100 ETF? Why should founder-led companies outperform even after they've become large public companies?

• 3:08Speaker 05

  Barry, thanks for having me. The data shows that founders outperform by about 3X. We looked at 11,000 stocks over 30 years, and on average, founder-led companies grow 4% greater than the S&P.

• 3:22Barry Ritholtz?

  Wow, so let's stay focused with that 3X. I believe that was Bain Research, that founder-led companies tend to outperform other companies. What is it that drives that three times outperformance? Is it that founder-led companies tend to be heavily represented in the technology sector? Is it a function of age or size, or is this just survivorship bias?

• 3:48Speaker 05

  We've got companies led by founders all across the economy, so it's not just a concentration in technology, although there is a lot of technology company that are led by founders. We don't think it's survivorship bias. We think that founders bring something really unique. They have the vision to see where to go. They have the execution to execute that plan they've envisioned. They have the charisma to build a big team around them, and they've got the grit to get through the hard times, combined with the fact that they think in decades where a board-hired CEO is just trying to make the next quarter and the next PowerPoint presentation for the board.

• 4:24Barry Ritholtz?

  How much of this is due to the fact that, hey, if you're going to start a new company from scratch, by definition, you're a risk taker? How much of the outperformance of founder-led companies is simply just embracing that higher tolerance for risk?

• 4:44Speaker 05

  I don't know if that's the factor that's that's showing it. I think if you dig in, a lot of these guys are successful because they de-risk all along the path, right? So if you listen to, say, Marc Andreessen, he talks about at the zero stage and the one stage and the two stage, it's all about de-risking the problem as you move along. So I would gently say that I think founders de-risk their business even more than non-founders.

• 5:12Barry Ritholtz?

  Really, really interesting. And you yourself is a founder. Your startup was Bare Tooth Radio. It didn't necessarily find an exit, but I'm curious, how did that experience of standing up a company from scratch affect your view of founder-led firms?

• 5:31Speaker 05

  I think it completely reframed how I think about building a company. You know, I had spent my first 15 years of my life working for great companies. I worked at Goldman Sachs, I worked at Sanford Bernstein. But there's a big difference between working at a world-class organization where you fit into their system and building your own system from zero to one. I was fortunate enough to get exposure to some of these really good technology founders and just saw how differently they thought, how passionate they were, how they brought vision that, you know, sort of corporate managers didn't have.

• 6:03Barry Ritholtz?

  So let's zoom in on that. How do you define a founder? Must the individual have actually started the original enterprise? Or do you include anyone who perhaps acquired or reinvented or merged with or effectively refounded an already existing company?

• 6:23Speaker 05

  So we define founder-led as the original founder. That's the person who started the company, still running it, most often as the chief executive officer. Occasionally, it'll be the chief technology officer, or in the case where a medical or scientific company, it could be the chief medical or chief scientific officer. So it's the chief officer running the company day to day. We looked at the data. Board member doesn't have the efficacy we want. Chairman doesn't have the efficacy. It's only if the founder's sitting in the seat every day, running the company.

• 6:55Barry Ritholtz?

  And some classifications really straightforward. Obviously, Michael Dell founded Dell Computers, Zuckerberg at at Facebook. What do you do with the more ambiguous cases? And I think probably the biggest one is Elon Musk, who was an investor, not an original founder of Tesla. There are debates about the merger with PayPal. We could talk about SpaceX. How do you draw the lines there? You're really more interested in the, less interested in the technical founding issue than the driving animus of the company? Is that a good way to distinguish it?

• 7:36Speaker 05

  I think that's fair, that we have a rigorous process to decide, and you and I can hit a couple of edge cases at the, but we look to see who the original founder is. Most of the time, it's clear cut. Sometimes it's not, and then so we have to dig in. We have to say, who does the company define as the founder? Or Elon's a great one to examine because there is, for some reason, there's controversy as to whether he's the actual founder. We dug in and did the hard work. The company defines him as the founder, and in fact, it was either 2012 or 2014, there was a court case where this was actually settled, and Elon Musk is one of the five original founders of the Tesla Motor Company.

• 8:18Barry Ritholtz?

  I would modify that to say Elon wasn't the original founder, but once he took over, he so totally revamped the company that it looks nothing like the prior enterprise. So like this, is there any reason to split hairs with that? Same sort of thing with PayPal or SpaceX. How do you think about those two?

• 8:42Speaker 05

  So I think SpaceX, he clearly was the founder. I don't think anyone else lays claim to it, right? PayPal was the merger of a couple entities. It was the entity that sort of the original X entity that Elon was building merged into Peter Thiel's company. But there are, you know, edge cases. Berkshire Hathaway is a great example. I don't think anyone would doubt that Mr. Buffett was the founder of Berkshire, but he bought a failing textile company as part of a massive acquisition. And that company that acquired that and many other things, he's the founder of. And Monster Beverage is kind of the same way. They acquired a juice company, but it was really the energy drink company and

• 9:26Speaker 05

  the other acquisitions they made that is the founding of the Monster Beverage Company.

• 9:31Barry Ritholtz?

  Yeah, that that makes a that makes a whole lot of sense. So amongst your current holdings, you have founders like Alex Karp of Palantir, Larry Fink at BlackRock, Mark Ruin at Apollo. Each of those companies had multiple co-founders. How relevant must the individual who remains be to the company, to its strategic vision, to really as its dominant force?

• 10:03Speaker 05

  You know, it's kind of our test is are were the original co-founder? And we often look to the company to define it. If you go, you know, most of the companies in their origin story, their history will list who the original co-founders are. As long as at least one remains as an executive, that meets our test.

• 10:22Barry Ritholtz?

  So now that we take the list of however many founder-led companies are, I think it was 11,000, you're going to break that down to a list of 100. What are the underlying criteria that determines which of those thousands and thousands of founder-led companies end up in the 100 that are in FFF?

• 10:46Speaker 05

  Really great question. So we looked at 11,000 stocks over 30 years. And during that 30-year time period, there's about 800 founder-led stocks at any one time. So in the current market, there's about 800 founder-led stocks. From there, we look at the 200 largest by market capitalization. And then, you know, my co-founder and I come from a fundamental background, especially her, she's a classically trained Columbia Business School value investor. We build a valuation model using some factors to pick what we then believe are the 100 best out of the 200 largest.

• 11:24Barry Ritholtz?

  Interesting. And I'm looking at your largest holdings, Meta, Nvidia, Oracle, Palantir, Dell, Arista, and CrowdStrike. A lot of this is a heavy overlap with technology, AI, high growth, big cap companies. Why go with a founders fund instead of just a simple NASDAQ 100?

• 11:50Speaker 05

  We have very different exposures than the NASDAQ 100. We've got about 80% active share versus NASDAQ 100. We've got much higher exposure to founders, 100% founders versus about 20% of the NASDAQ 100. And it's a different portfolio construction. NASDAQ 100 is limited to only NASDAQ stocks. And there's obviously incredible high growth in tech and out of tech stocks on the NYSE. And it also, we feel like we've got a little better spread across the economy. Right now, the NASDAQ 100 is 30% exposed to semiconductors, S and P at 20, and we're only at 10. So we do have exposure to technology, but we

• 12:32Speaker 05

  really are bent across the entire curve. We're not substantially overweight versus, say, the S and P. We are slightly overweight, but I don't think we're massively overweight versus the S and P.

• 12:43Barry Ritholtz?

  Yeah, I was looking through your holdings, and I saw a lot of industrials and energy and financials, which you don't necessarily see in the NASDAQ 100. But I'm glad you mentioned the 80% active share. So many ETFs I look at end up being closet indexers. This is really a very concentrated portfolio with the top 10 holdings really accounting for a big chunk of your exposure. How much of what drives the performance of this is really just a conviction strategy, a concentrated portfolio with a long tail of, you know,

• 13:25Barry Ritholtz?

  sub 1% holdings? Tell us about the concentration and also tell us, why do you have the rest of these small holdings? They're almost like placekeepers to keep an eye on.

• 13:37Speaker 05

  So we run a modified market cap weighting. That is, we take the market cap and we allow that to define how much position size we're going to take for each position. The reason we modify it is we put a hard cap of seven and a half percent. We won't re so we rebalance quarterly. So every quarter, we reset the portfolio. We don't take any single position more than seven and a half percent because we want to have some diversification in the portfolio. That's where we come up with the weightings. And the reason we end up with some of these smaller weights at the bottom is just defined by where they are on a free float market cap. What I would tell you, Barry, it's really interesting. There'll be days I wake up, I look at our portfolio, our top holdings are down, and the portfolio

• 14:20Speaker 05

  is actually up because those other, you know, 75 to 80 stocks that make up the balance 50%, they drive sometimes when the big guys aren't working. So it's sort of just, we allow the market capitalization to set our our position sizes.

• 14:36Barry Ritholtz?

  All right. So now we know the criteria for selection, the criteria for weighting. Let's talk about the most challenging aspect of managing a portfolio, the sell discipline. What leads you to taking a company out of the portfolio? Is it just something as simple as the founder leaving? Or do you also run through operating parameters and other fundamentals? And when suddenly you're starting to think, hey, this company doesn't have the growth prospects we were hoping for, is that a basis for ejecting them? Or is it a variety of things?

• 15:14Speaker 05

  The main reason we would sell a stock is if the founder leaves. So in the prospectus, we state that if a founder announces their resignation, we will sell within 90 days of that announcement. So we don't wait for them to actually leave. We would sell on the announcement. The second way a stock would get sold is if the fundamental overlay flags a condition that says to sell the stock. So one of the ways we like to describe the fundamental overlay, it was built by my partner, it's really looking for what she calls burnt pizza crust. We think all of our founders can make great pizza. We don't want to tell them whether to make pepperoni or margarita. The factor looks and it says, are one of these crusts

• 15:56Speaker 05

  getting burnt? And if so, we'll slide it out and bring in the next best company.

• 16:00Barry Ritholtz?

  Really, really interesting. So to wrap up, if you're interested in a venture fund like Peter Thiel's founders fund, but you don't have a quarter billion dollars to gain access to it, consider the founders 100 ETF, stock symbol FFF. Be aware of the fact that this is a concentrated portfolio with a high active share, and it may not perform as similarly to the S and P 500 or the NASDAQ, but it is concentrated and it focuses on companies being led by the original founders. I'm Barry Ritholtz. You're listening to Bloomberg's At the Money.

• 16:43Speaker 06

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