The Promoter’s Edge: Unraveling How Technology Companies Flourish Under Visionary Founders

By Harini Dedhia

In contemporary pitches to investors for up-and-coming enterprises, a common characteristic often seen among the leadership team is the designation of being a “second-time entrepreneur.” Startup founders establish companies with the goal of drawing investment, achieving rapid growth, and ultimately exiting the market.

In times like this, ‘Tech companies endure better under promoters than professionals’ sounds like a misnomer. It in a way takes a contradictory position to the startup boom that we see where founders build for 5-7 years and then move on to their next venture leaving the current business built for institutional investors to govern and be professionally run.

When we talk of businesses enduring we are referring to resilience over decades. In all technology-dominated companies, be it heavy engineering (capital goods), pharmaceuticals, biotechnology, or software, the pace of disruption is faster and it is consistent. All the giants that have endured in these spaces- be it Siemens or the locally grown- Thermax in the case of capital goods, Divis Labs or Syngene in pharma/ biotech, Ferrari in automotive engineering, Dolby in sound engineering, or Microsoft and Google in software – all are promoter owned and/ or governed entities.

The one thing common in all of these businesses is that even if professionally managed, the board is governed by the promoters that have skin in the game. These promoter families can talk in terms of generational endurance and not get bogged down by maintaining near-term market share when faced with a challenger. They are almost always able to take a view to invest for the long term. A long term that we can only aspire to have a vision for. This is the agency problem that the promoter’s edge solves.

Professional management at the helm is almost always judged on near-term earnings performance or worse, stock price movement since the start of their management. Their incentives therefore are scarily short-term in nature resulting in decisions that take away from investing for the future and do more for current shareholder gratification.

A case in point would be the major capex of over $100bn being undertaken by the semiconductor giant, Taiwan Semiconductor (TSMC). Would that be the case if not driven by a promoter? Under a professional CEO and fragmented institutional ownership, the focus would have been far greater on buybacks and dividends and not a major capex.

This is something we have seen play out in another technology-dominated field- pharmaceuticals and biotech. Over two-thirds of the new drug filings in the US today are coming from small (1-2 molecule) biotech companies. The professionally run and governed big pharma have unfortunately been all too focused on getting asset-light, increasing share purchase programs, etc. Either the big pharma companies end up making expensive acquisitions in the future for growth, or simply see an erosion of market share and relevance with time.

Perhaps one can accuse me of cherry-picking examples as yet. Any discussion on tech in the colloquial sense of the word today would be incomplete without a discussion of Amazon, Apple, Google, and Microsoft. All these companies have been under the founder promoters’ direct execution for at least over two decades post which they went into having professional CXOs. All barring Apple, still have the founder as a part of the Company’s board and significant individual shareholder. Bezos was famous for calling out in his earlier shareholder letters his desire to get in a race to report profits but rather consistently innovate and build a superior product and therefore scale to all the competitors out there.

With this heuristic in mind, the business of the above-mentioned four tech giants, I am least likely to wager on or invest in is perhaps Apple (though they have done a stellar job of inculcating their culture in all their employees). Closer home, if I had to wager a guess on Indian tech enterprises- a multi-generational business house or the promoter-owned king of retail will trump the quick commerce/ grocery race in India. They differentiate between shticks and real unit economics. A third-generation auto company might come out ahead in the EV race vs. challengers. Not saying all startups will fail but those built with a mindset to give founders an exit- the likelihood of thriving is much lesser because incentives are misaligned to build an organization that endures.

(The author is Harini Dedhia, Head of Research at Tamohara Investments, and the views expressed in this article are her own)