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

Adobe Lightroom 6.1.1 - Import, develop,...
Adobe Lightroom is available as part of Adobe Creative Cloud for as little as $9.99/month bundled with Photoshop CC as part of the photography package. Lightroom 6 is also available for purchase as a... Read more
File Juicer 4.41 - Extract images, video...
File Juicer is a drag-and-drop can opener and data archaeologist. Its specialty is to find and extract images, video, audio, or text from files which are hard to open in other ways. It finds and... Read more
A Better Finder Rename 9.52 - File, phot...
A Better Finder Rename is the most complete renaming solution available on the market today. That's why, since 1996, tens of thousands of hobbyists, professionals and businesses depend on A Better... Read more
OmniFocus 2.2.3 - GTD task manager with...
OmniFocus helps you manage your tasks the way that you want, freeing you to focus your attention on the things that matter to you most. Capturing tasks and ideas is always a keyboard shortcut away in... Read more
TinkerTool 5.4 - Expanded preference set...
TinkerTool is an application that gives you access to additional preference settings Apple has built into Mac OS X. This allows to activate hidden features in the operating system and in some of the... Read more
Tinderbox 6.3.1 - Store and organize you...
Tinderbox is a personal content management assistant. It stores your notes, ideas, and plans. It can help you organize and understand them. And Tinderbox helps you share ideas through Web journals... Read more
Parallels Desktop 10.2.2 - Run Windows a...
Parallels Desktop is simply the world's bestselling, top-rated, and most trusted solution for running Windows applications on your Mac. With Parallels Desktop for Mac, you can seamlessly run both... Read more
Adobe Premiere Pro CC 2015 9.0.1 - Digit...
Premiere Pro CC 2015 is available as part of Adobe Creative Cloud for as little as $19.99/month (or $9.99/month if you're a previous Premiere Pro customer). Premiere Pro CS6 is still available for... Read more
Adobe After Effects CC 2015 13.5.1 - Cre...
After Effects CC 2015 is available as part of Adobe Creative Cloud for as little as $19.99/month (or $9.99/month if you're a previous After Effects customer). After Effects CS6 is still available... Read more
Adobe Creative Cloud 2.2.0.129 - Access...
Adobe Creative Cloud costs $49.99/month (or less if you're a previous Creative Suite customer). Creative Suite 6 is still available for purchase (without a monthly plan) if you prefer. Introducing... Read more

Domino Drop (Games)
Domino Drop 1.0 Device: iOS Universal Category: Games Price: $1.99, Version: 1.0 (iTunes) Description: Domino Drop is a delightful new puzzle game with dominos and gravity!Learn how to play it in a minute, master it day by day.Your... | Read more »
OPERATION DRACULA (Games)
OPERATION DRACULA 1.0.1 Device: iOS Universal Category: Games Price: $5.99, Version: 1.0.1 (iTunes) Description: 25% off launch sale!!! 'Could prove to be one of the most accurate representations of the Japanese bullet hell shmup... | Read more »
Race The Sun (Games)
Race The Sun 1.01 Device: iOS iPhone Category: Games Price: $4.99, Version: 1.01 (iTunes) Description: You are a solar craft. The sun is your death timer. Hurtle towards the sunset at breakneck speed in a futile race against time.... | Read more »
Tap Delay (Music)
Tap Delay 1.0.0 Device: iOS Universal Category: Music Price: $4.99, Version: 1.0.0 (iTunes) Description: Back in the “old days”, producers and engineers created delay and echo effects using tape machines. Tap Delay combines the warm... | Read more »
This Week at 148Apps: July 20-24, 2015
July is Heating Up With 148Apps How do you know what apps are worth your time and money? Just look to the review team at 148Apps. We sort through the chaos and find the apps you're looking for. The ones we love become Editor’s Choice, standing out... | Read more »
Red Game Without A Great Name (Games)
Red Game Without A Great Name 1.0.3 Device: iOS Universal Category: Games Price: $2.99, Version: 1.0.3 (iTunes) Description: The mechanical bird is flying through an unfriendly, Steampunk world. Help it avoid obstacles and deadly... | Read more »
Warhammer: Arcane Magic (Games)
Warhammer: Arcane Magic 1.0.2 Device: iOS Universal Category: Games Price: $9.99, Version: 1.0.2 (iTunes) Description: Engage in epic battles and tactical gameplay that challenge both novice and veteran in Warhammer: Arcane Magic, a... | Read more »
Mazes of Karradash (Games)
Mazes of Karradash 1.0 Device: iOS Universal Category: Games Price: $1.99, Version: 1.0 (iTunes) Description: The city of Karradash is under attack: the monsters of the Shadow Realms are emerging from the depths.No adventurer is... | Read more »
Battle Golf is the Newest Game from the...
Wrassling was a pretty weird - and equally great - little wressling game. Now the developers, Folmer Kelly and Colin Lane, have turned their attention to a different sport: golfing. This is gonna be weird. [Read more] | Read more »
Qbert Rebooted has the App Store Going...
The weird little orange... whatever... is back, mostly thanks to that movie which shall remain nameless (you know the one). But anyway it's been "rebooted" and now you can play the fancy-looking Qbert Rebooted on iOS devices. [Read more] | Read more »

Price Scanner via MacPrices.net

12-inch MacBooks in stock for $20 off, save o...
Adorama has 12″ Retina MacBooks in stock for $20 off MSRP including free shipping plus NY & NJ sales tax only. For a limited time, Adorama will include a free Apple USB-C to USB Adapter, free 4-... Read more
College Student Deals: Additional $100 off Ma...
Take an additional $100 off all MacBooks and iMacs at Best Buy Online with their College Students Deals Savings, valid through August 8, 2015. Anyone with a valid .EDU email address can take... Read more
2015 13-inch 2.7GHz Retina MacBook Pro on sal...
B&H Photo has the new 2015 13″ 2.7GHz/128GB Retina MacBook Pro on sale today for $1199 including free shipping plus NY sales tax only. Their price is $100 off MSRP. Read more
2.8GHz Mac mini available for $988, includes...
Adorama has the 2.8GHz Mac mini available for $988, $11 off MSRP, including a free copy of Apple’s 3-Year AppleCare Protection Plan. Shipping is free, and Adorama charges sales tax in NY & NJ... Read more
Updated Mac Price Trackers
We’ve updated our Mac Price Trackers with the latest information on prices, bundles, and availability on systems from Apple’s authorized internet/catalog resellers: - 15″ MacBook Pros - 13″ MacBook... Read more
High-Precision Battery Fuel Gauge IC Extends...
Renesas Electronics Corporation has announced its new lithium-ion (Li-ion) battery fuel gauge IC, the RAJ240500, designed to extend battery life for connected mobile devices such as tablets, notebook... Read more
27-inch 3.3GHz 5K iMac on sale for $1799, $20...
B&H Photo has the 27″ 3.3GHz 5K iMac on sale for $1799 including free shipping plus NY tax only. Their price is $200 off MSRP, and it’s the lowest price available for this model from any Apple... Read more
Twelve South Free Dual Screen Backgrounds Co...
Twelve South has posted a second collection of travel Desktop photos, noting: For the Twelve South team, a vacation is never just a vacation. It’s a time to try out new prototypes on the road, visit... Read more
Apple Refurbished iMacs available for up to $...
The Apple Store has Apple Certified Refurbished iMacs available for up to $380 off the cost of new models. Apple’s one-year warranty is standard, and shipping is free: - 27″ 3.5GHz 5K iMac – $1949 $... Read more
Tablets: Why Microsoft’s Surface Is Soaring W...
In contrast to Apple’s record fiscal third quarter reported this week, Microsoft had a miserable latest quarter with its revenues falling by 5.1 percent, hammered by ongoing weak PC demand, and... Read more

Jobs Board

*Apple* Retail - Multiple Positions (US) - A...
Job Description: Sales. Specialist - Retail Customer Service and Sales. Transform Apple Store visitors into loyal Apple customers. When customers enter the store, Read more
*Apple* Retail - Multiple Positions (US) - A...
Job Description: Sales Specialist - Retail Customer Service and Sales Transform Apple Store visitors into loyal Apple customers. When customers enter the store, Read more
*Apple* Retail - Multiple Positions (US) - A...
Job Description: Sales. Specialist - Retail Customer Service and Sales. Transform Apple Store visitors into loyal Apple customers. When customers enter the store, Read more
*Apple* Customer Experience (ACE) Leader - A...
…management to deliver on business objectives Training partner store staff on Apple products, services, and merchandising guidelines Coaching partner store staff on Read more
Project Manager - *Apple* Pay Security - Ap...
**Job Summary** The Apple Pay Security team is seeking a highly organized, results-driven Project Manager to drive the development of Apple Pay Security. If you are Read more
All contents are Copyright 1984-2011 by Xplain Corporation. All rights reserved. Theme designed by Icreon.