Public offerings decrease innovation at technology companies
TweetFollow Us on Twitter

Public offerings decrease innovation at technology companies

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% more likely to become leavers at companies that went public. Much more startling, however, was that the stayers saw a 48% 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.

 

Community Search:
MacTech Search:

Software Updates via MacUpdate

RapidWeaver 6.0.8 - Create template-base...
RapidWeaver is a next-generation Web design application to help you easily create professional-looking Web sites in minutes. No knowledge of complex code is required, RapidWeaver will take care of... Read more
Artlantis Studio 5.1.2.7 - 3D rendering...
Artlantis Studio is a unique and ideal tool for performing very high resolution rendering easily and in real time. The new FastRadiosity engine now lets you compute images in radiosity-even in... Read more
MacUpdate Desktop 6.0.5 - Search and ins...
MacUpdate Desktop 6 brings seamless 1-click installs and version updates to your Mac. With a free MacUpdate account and MacUpdate Desktop 6, Mac users can now install almost any Mac app on macupdate.... Read more
BitTorrent Sync 2.0.82 - Sync files secu...
BitTorrent Sync allows you to sync unlimited files between your own devices, or share a folder with friends and family to automatically sync anything. File transfers are encrypted. Your information... Read more
Google Drive 1.20 - File backup and shar...
Google Drive is a place where you can create, share, collaborate, and keep all of your stuff. Whether you're working with a friend on a joint research project, planning a wedding with your fiancé, or... Read more
Simon 4.0.3 - Monitor changes and crashe...
Simon monitors websites and alerts you of crashes and changes. Select pages to monitor, choose your alert options, and customize your settings. Simon does the rest. Keep a watchful eye on your... Read more
Vitamin-R 2.23 - Personal productivity t...
Vitamin-R creates the optimal conditions for your brain to work at its best by structuring your work into short bursts of distraction-free, highly focused activity alternating with opportunities for... Read more
iDefrag 5.0.0 - Disk defragmentation and...
iDefrag helps defragment and optimize your disk for improved performance. Features include: Supports HFS and HFS+ (Mac OS Extended). Supports case sensitive and journaled filesystems. Supports... Read more
PCalc 4.2 - Full-featured scientific cal...
PCalc is a full-featured, scriptable scientific calculator with support for hexadecimal, octal, and binary calculations, as well as an RPN mode, programmable functions, and an extensive set of unit... Read more
FileZilla 3.10.2 - Fast and reliable FTP...
FileZilla (ported from Windows) is a fast and reliable FTP client and server with lots of useful features and an intuitive interface. Version 3.10.2: Note: Now requires a 64-bit Intel processor.... Read more

Warner Bros. Interactive Entertainment A...
Warner Bros. has some exciting games coming down the pipe! | Read more »
GDC 2015 – Star Trek Timelines will Prob...
GDC 2015 – Star Trek Timelines will Probably Make Your Inner Trekkie Squeal With Glee Posted by Rob Rich on March 4th, 2015 [ permalink ] Any popular fictional universe has its fair share of fan fiction – where belo | Read more »
Protect Yourself from an Onslaught of Ca...
Surprise Attack Games has announced a Cat-astrophic new physics puzzler called Fort Meow! In the game, a young girl named Nia finds her grandfather’s journal which triggers an all mighty feline attack! Why do the cats want the journal? Who knows,... | Read more »
GDC 2015 – Jelly Reef will be Game Oven’...
GDC 2015 – Jelly Reef will be Game Oven’s Last Hurrah, and it Seems like a Good Note to Go Out on Posted by Rob Rich on March 4th, 2015 [ permalink ] It’s sad knowing that Game Oven ( | Read more »
daWindci Deluxe Review
daWindci Deluxe Review By Campbell Bird on March 4th, 2015 Our Rating: :: BLUSTERY PUZZLESUniversal App - Designed for iPhone and iPad This updated puzzle game offers some creative gameplay and new mechanics, but still suffers from... | Read more »
Dungeon Hunter 5 Coming on March 12
Gameloft has excitedly announced that Dungeon Hunter 5 is on its way! Once again, you will adventure across the land of Valenthia exploring dungeons and fighting monsters. The game will have a new asynchronous multiplayer mode called Strongholds... | Read more »
GDC 2015 – The Sandbox 2 is Coming, and...
GDC 2015 – The Sandbox 2 is Coming, and Now it has Textures! | Read more »
Warner Bros. Interactive Announces Mort...
Mortal Kombat X, by Warner Bros. and NetherRealm Studios, will be a a free-to-play fighting/card-battle Mortal Kombat game. The game promises card collecting, multiplayer team combat, classic characters such as Scorpion, Sub-Zero and Raiden, and the... | Read more »
GDC 2015 – Piloteer is Whitaker Trebella...
GDC 2015 – Piloteer is Whitaker Trebella’s Latest Project, and it’s Definitely Something DIfferent Posted by Rob Rich on March 3rd, 2015 [ permalink ] You know | Read more »
PangoLand Review
PangoLand Review By Amy Solomon on March 3rd, 2015 Our Rating: :: COME VISIT PANGO AND FRIENDSUniversal App - Designed for iPhone and iPad PangoLand is an open-ended world full of familiar characters, bright colors and interactive... | Read more »

Price Scanner via MacPrices.net

iPad: A More Positive Outlook – The ‘Book Mys...
It’s good to hear someone saying positive things about the iPad. I’ve been trying to bend my mind around how Apple’s tablet could have gone from zero to bestselling personal computing device on the... Read more
Mac Pros on sale for up to $279 off MSRP
Amazon has Mac Pros in stock and on sale for up to $279 off MSRP. Shipping is free: - 4-Core Mac Pro: $2725.87, $273 off MSRP (9%) - 6-Core Mac Pro: $3719.99, $279 off MSRP (7%) Read more
Sale! 13-inch Retina MacBook Pros for up to $...
B&H Photo has 13″ Retina MacBook Pros on sale for up to $205 off MSRP. Shipping is free, and B&H charges NY sales tax only: - 13″ 2.6GHz/128GB Retina MacBook Pro: $1219.99 save $80 - 13″ 2.... Read more
Another Tranche Of IBM MobileFirst For iOS Ap...
IBM has announced the next expansion phase for  its IBM MobileFirst for iOS portfolio, with a troika of new apps to address key priorities for the Banking and Financial Services, Airline and Retail... Read more
Sale! 15-inch Retina MacBook Pros for up to $...
B&H Photo has the new 2014 15″ Retina MacBook Pros on sale for up to $250 off MSRP for a limited time. Shipping is free, and B&H charges NY sales tax only: - 15″ 2.2GHz Retina MacBook Pro: $... Read more
WaterField Designs Introduces the Minimalist...
With Apple Pay gaining popularity, Android Pay coming in May 2015, and loyalty cards and receipts that can be accessed from smartphones, San Francisco’s WaterField Designs observes that it may be... Read more
Sale! 15-inch 2.2GHz Retina MacBook Pro for $...
 Best Buy has the 15″ 2.2GHz Retina MacBook Pro on sale for $1774.99 $1799.99, or $225 off MSRP. Choose free home shipping or free local store pickup (if available). Price valid for online orders... Read more
13-inch 2.5GHz MacBook Pro (refurbished) avai...
The Apple Store has Apple Certified Refurbished 13″ 2.5GHz MacBook Pros available for $170 off the cost of new models. Apple’s one-year warranty is standard, and shipping is free: - 13″ 2.5GHz... Read more
13-inch 2.5GHz MacBook Pro on sale for $100 o...
B&H Photo has the 13″ 2.5GHz MacBook Pro on sale for $999.99 including free shipping plus NY sales tax only. Their price is $100 off MSRP. Read more
27-inch 3.5GHz 5K iMac in stock today and on...
 B&H Photo has the 27″ 3.5GHz 5K iMac in stock today and on sale for $2299 including free shipping plus NY sales tax only. Their price is $200 off MSRP, and it’s the lowest price available for... Read more

Jobs Board

*Apple* Retail - Multiple Positions (US) - A...
Sales Specialist - Retail Customer Service and Sales Transform Apple Store visitors into loyal Apple customers. When customers enter the store, you're also the Read more
*Apple* Solutions Consultant - Retail Sales...
**Job Summary** As an Apple Solutions Consultant (ASC) you are the link between our customers and our products. Your role is to drive the Apple business in a retail Read more
Position Opening at *Apple* - Apple (United...
…Summary** As a Specialist, you help create the energy and excitement around Apple products, providing the right solutions and getting products into customers' hands. You Read more
Position Opening at *Apple* - Apple (United...
**Job Summary** The Apple Store is a retail environment like no other - uniquely focused on delivering amazing customer experiences. As an Expert, you introduce people Read more
*Apple* Solutions Consultant - Retail Sales...
**Job Summary** As an Apple Solutions Consultant (ASC) you are the link between our customers and our products. Your role is to drive the Apple business in a retail Read more
All contents are Copyright 1984-2011 by Xplain Corporation. All rights reserved. Theme designed by Icreon.