Welcome!

News Feed Item

Public Offerings Decrease Innovation at Technology Companies, According to Stanford Business School Study

For many entrepreneurs, it is a dream on par with finding the Holy Grail: an initial public stock offering that can turn a startup into the next Google and a 20-something founder into the next mega-millionaire.

Yet, for all that money and drama, do initial public offerings — IPOs — speed up technological innovation?

Not necessarily. An eye-popping new study by Shai Bernstein, an assistant professor of finance at the Stanford Graduate School of Business, finds that innovation slowed down by about 40 percent at tech companies after they went public.

In a meticulous analysis of patent data from nearly 2,000 companies, Bernstein found that newly public companies became noticeably more incremental and less ambitious with their in-house research than comparable firms that stayed private.

And that’s not all. Top inventors were much more likely to leave if their companies went public, and the ones who stayed behind showed a steep decline in “innovation quality.” Indeed, the newly public tech companies became much more dependent on buying technology from outside — usually by making corporate acquisitions.

That’s almost the opposite of what one might expect. Young tech firms go public on the strength of their innovative promise, and going public provides them with cash to double down on their research and development.

From the vantage point of public policy, IPOs may still be a net positive for tech innovation. Many companies go public because they have just scored a major breakthrough and use their new resources to scale up the business. And even if newly public companies do become less daring, they can still propel innovation indirectly by paying top dollar for startups. Google has bought 100 companies since it went public in 2004. Facebook paid $1 billion for Instagram just as it was going public in May 2012.

But Bernstein’s findings raise an important, but largely unexplored, management issue: IPOs appear to spur the outsourcing of innovation. It is a complex tradeoff, and one that tech entrepreneurs and investors may want to examine in more depth.

Bernstein reached that conclusion after a detailed comparison of patent data between companies that went public and similar companies that decided to stay private. All told, the study covered thousands of tech companies that either went public or withdrew IPO plans between 1985 and 2003.

To gauge “innovation,” Bernstein collected data on nearly 40,000 patents awarded to companies both before and after they announced plans to go public. In addition to tracking the absolute number of patents, he estimated the innovative importance of each patent based on the number of times it had been cited in other patent applications.

The basic idea is straightforward: Patents that are cited more frequently are likely to represent more fundamental breakthroughs. But Bernstein also estimated the “originality” of patents, based on how many different technologies were cited. Last, but not least, he analyzed data about the inventors themselves.

Bernstein compared two categories of companies: those that completed public offerings and those that filed IPO registrations with the Securities and Exchange Commission but later withdrew them. To make apple-to-apple comparisons, he compared companies that were in the same technology sectors and that contemplated public offerings in the same year.

He found that the two groups of companies had broadly similar characteristics up to the point they decided to go public or stay private. Both groups had high-quality patents that were much more heavily cited than those of companies that didn’t try to go public. The two groups were also similar in size, age, and research spending. And there were no significant differences in the quality of the IPO underwriters, which is often a proxy for the quality of the companies.

Not surprisingly, the biggest distinction between the companies that went public and those that stayed private was the stock market’s appetite at the time. If the tech-heavy NASDAQ went into a swoon just after a company filed to go public, the company was much more likely to call off its plans. Almost one third of all the abandoned IPOs between 1985 and 2003 occurred in 2000 — the year the dot-com bubble collapsed.

The real difference in innovation came after companies completed public offerings. The average quality of those patents, as measured by how often they were cited, declined by about 40 percent in the five years after going public. By contrast, companies that remained private stayed on the same track as before.

Bernstein also confirmed what even blockbuster companies in Silicon Valley have worried about for years: IPOs can spark a brain drain.

He divided inventors into three categories: “stayers,” “leavers,” and “newcomers.” Inventors were about 18 percent more likely to become leavers at companies that went public. Much more startling, however, was that the stayers saw a 48 percent decline in the quality of their patents. Inevitably, IPO firms recruited large numbers of newcomers.

One explanation for the brain drain is that top inventors have little incentive to stay after an IPO, in part because they often become overnight millionaires. An IPO also dilutes an inventor’s stake in subsequent breakthroughs because those future profits will be spread among many more investors.

Bernstein suggests that yet another important reason for the brain drain is that IPOs lead to different management incentives. Executives at publicly held companies may become more cautious, for example, because they are subject to market pressures and worry more about career threats and takeovers, and feel pressure to tell investors a simple story.

To find out more, Bernstein compared companies with two different management structures. In the first group, chief executives were also chairmen of the board and had more autonomy to resist market pressures. The second group had separate chairmen and chief executives, which usually means the chief executive is less insulated from market pressure.

The result: Companies with separate board chairs and chief executives — those more likely to be sensitive to outside investors — saw a much bigger drop in innovation, and inventors were more likely to leave.

Bernstein cautions that initial public stock offerings still may be good for innovation in general. Public companies may not be as technologically ambitious or as willing to take risks as firms that stay private, but public companies have better access to capital for tapping innovation generated by smaller companies.

But going public clearly changes the mindset of companies, and that might be a reason for some companies to think twice about the Holy Grail.

More Stories By Business Wire

Copyright © 2009 Business Wire. All rights reserved. Republication or redistribution of Business Wire content is expressly prohibited without the prior written consent of Business Wire. Business Wire shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

Latest Stories
Every successful software product evolves from an idea to an enterprise system. Notably, the same way is passed by the product owner's company. In his session at 20th Cloud Expo, Oleg Lola, CEO of MobiDev, will provide a generalized overview of the evolution of a software product, the product owner, the needs that arise at various stages of this process, and the value brought by a software development partner to the product owner as a response to these needs.
SYS-CON Events announced today that Tappest will exhibit MooseFS at SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. MooseFS is a breakthrough concept in the storage industry. It allows you to secure stored data with either duplication or erasure coding using any server. The newest – 4.0 version of the software enables users to maintain the redundancy level with even 50% less hard drive space required. The software func...
Most technology leaders, contemporary and from the hardware era, are reshaping their businesses to do software in the hope of capturing value in IoT. Although IoT is relatively new in the market, it has already gone through many promotional terms such as IoE, IoX, SDX, Edge/Fog, Mist Compute, etc. Ultimately, irrespective of the name, it is about deriving value from independent software assets participating in an ecosystem as one comprehensive solution.
SYS-CON Events announced today that EARP will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. "We are a software house, so we perfectly understand challenges that other software houses face in their projects. We can augment a team, that will work with the same standards and processes as our partners' internal teams. Our teams will deliver the same quality within the required time and budget just as our partn...
SYS-CON Events announced today that delaPlex will exhibit at SYS-CON's @ThingsExpo, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. delaPlex pioneered Software Development as a Service (SDaaS), which provides scalable resources to build, test, and deploy software. It’s a fast and more reliable way to develop a new product or expand your in-house team.
In his keynote at @ThingsExpo, Chris Matthieu, Director of IoT Engineering at Citrix and co-founder and CTO of Octoblu, focused on building an IoT platform and company. He provided a behind-the-scenes look at Octoblu’s platform, business, and pivots along the way (including the Citrix acquisition of Octoblu).
SYS-CON Events announced today that Systena America will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. Systena Group has been in business for various software development and verification in Japan, US, ASEAN, and China by utilizing the knowledge we gained from all types of device development for various industries including smartphones (Android/iOS), wireless communication, security technology and IoT serv...
SYS-CON Events announced today that Outscale will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. Outscale's technology makes an automated and adaptable Cloud available to businesses, supporting them in the most complex IT projects while controlling their operational aspects. You boost your IT infrastructure's reactivity, with request responses that only take a few seconds.
Regardless of what business you’re in, it’s increasingly a software-driven business. Consumers’ rising expectations for connected digital and physical experiences are driving what some are calling the "Customer Experience Challenge.” In his session at @DevOpsSummit at 20th Cloud Expo, Marco Morales, Director of Global Solutions at CollabNet, will discuss how organizations are increasingly adopting a discipline of Value Stream Mapping to ensure that the software they are producing is poised to o...
DevOps at Cloud Expo – being held October 31 - November 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA – announces that its Call for Papers is open. Born out of proven success in agile development, cloud computing, and process automation, DevOps is a macro trend you cannot afford to miss. From showcase success stories from early adopters and web-scale businesses, DevOps is expanding to organizations of all sizes, including the world's largest enterprises – and delivering real r...
Cloud applications are seeing a deluge of requests to support the exploding advanced analytics market. “Open analytics” is the emerging strategy to deliver that data through an open data access layer, in the cloud, to be directly consumed by external analytics tools and popular programming languages. An increasing number of data engineers and data scientists use a variety of platforms and advanced analytics languages such as SAS, R, Python and Java, as well as frameworks such as Hadoop and Spark...
Interested in leveling up on your Cloud Foundry skills? Join IBM for Cloud Foundry Days on June 7 at Cloud Expo New York at the Javits Center in New York City. Cloud Foundry Days is a free half day educational conference and networking event. Come find out why Cloud Foundry is the industry's fastest-growing and most adopted cloud application platform.
Cloud promises the agility required by today’s digital businesses. As organizations adopt cloud based infrastructures and services, their IT resources become increasingly dynamic and hybrid in nature. Managing these require modern IT operations and tools. In his session at 20th Cloud Expo, Raj Sundaram, Senior Principal Product Manager at CA Technologies, will discuss how to modernize your IT operations in order to proactively manage your hybrid cloud and IT environments. He will be sharing bes...
SYS-CON Events announced today that delaPlex will exhibit at SYS-CON's @CloudExpo, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. delaPlex pioneered Software Development as a Service (SDaaS), which provides scalable resources to build, test, and deploy software. It’s a fast and more reliable way to develop a new product or expand your in-house team.
DevOps is often described as a combination of technology and culture. Without both, DevOps isn't complete. However, applying the culture to outdated technology is a recipe for disaster; as response times grow and connections between teams are delayed by technology, the culture will die. A Nutanix Enterprise Cloud has many benefits that provide the needed base for a true DevOps paradigm. In his Day 3 Keynote at 20th Cloud Expo, Chris Brown, a Solutions Marketing Manager at Nutanix, will explore t...