Welcome!

.NET Authors: Pat Romanski, Bob Gourley, Michael Jannery, Yakov Fain, Srinivasan Sundara Rajan

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.

@ThingsExpo Stories
The Industrial Internet revolution is now underway, enabled by connected machines and billions of devices that communicate and collaborate. The massive amounts of Big Data requiring real-time analysis is flooding legacy IT systems and giving way to cloud environments that can handle the unpredictable workloads. Yet many barriers remain until we can fully realize the opportunities and benefits from the convergence of machines and devices with Big Data and the cloud, including interoperability, data security and privacy.
IoT is still a vague buzzword for many people. In his session at @ThingsExpo, Mike Kavis, Vice President & Principal Cloud Architect at Cloud Technology Partners, discussed the business value of IoT that goes far beyond the general public's perception that IoT is all about wearables and home consumer services. He also discussed how IoT is perceived by investors and how venture capitalist access this space. Other topics discussed were barriers to success, what is new, what is old, and what the future may hold. Mike Kavis is Vice President & Principal Cloud Architect at Cloud Technology Pa...
The Internet of Things (IoT) is rapidly in the process of breaking from its heretofore relatively obscure enterprise applications (such as plant floor control and supply chain management) and going mainstream into the consumer space. More and more creative folks are interconnecting everyday products such as household items, mobile devices, appliances and cars, and unleashing new and imaginative scenarios. We are seeing a lot of excitement around applications in home automation, personal fitness, and in-car entertainment and this excitement will bleed into other areas. On the commercial side, m...
SYS-CON Events announced today that CodeFutures, a leading supplier of database performance tools, has been named a “Sponsor” of SYS-CON's 16th International Cloud Expo®, which will take place on June 9–11, 2015, at the Javits Center in New York, NY. CodeFutures is an independent software vendor focused on providing tools that deliver database performance tools that increase productivity during database development and increase database performance and scalability during production.
Dale Kim is the Director of Industry Solutions at MapR. His background includes a variety of technical and management roles at information technology companies. While his experience includes work with relational databases, much of his career pertains to non-relational data in the areas of search, content management, and NoSQL, and includes senior roles in technical marketing, sales engineering, and support engineering. Dale holds an MBA from Santa Clara University, and a BA in Computer Science from the University of California, Berkeley.
The Internet of Things (IoT) promises to evolve the way the world does business; however, understanding how to apply it to your company can be a mystery. Most people struggle with understanding the potential business uses or tend to get caught up in the technology, resulting in solutions that fail to meet even minimum business goals. In his session at @ThingsExpo, Jesse Shiah, CEO / President / Co-Founder of AgilePoint Inc., showed what is needed to leverage the IoT to transform your business. He discussed opportunities and challenges ahead for the IoT from a market and technical point of vie...
The 3rd International Internet of @ThingsExpo, co-located with the 16th International Cloud Expo - to be held June 9-11, 2015, at the Javits Center in New York City, NY - announces that its Call for Papers is now open. The Internet of Things (IoT) is the biggest idea since the creation of the Worldwide Web more than 20 years ago.
Things are being built upon cloud foundations to transform organizations. This CEO Power Panel at 15th Cloud Expo, moderated by Roger Strukhoff, Cloud Expo and @ThingsExpo conference chair, addressed the big issues involving these technologies and, more important, the results they will achieve. Rodney Rogers, chairman and CEO of Virtustream; Brendan O'Brien, co-founder of Aria Systems, Bart Copeland, president and CEO of ActiveState Software; Jim Cowie, chief scientist at Dyn; Dave Wagstaff, VP and chief architect at BSQUARE Corporation; Seth Proctor, CTO of NuoDB, Inc.; and Andris Gailitis, C...
"People are a lot more knowledgeable about APIs now. There are two types of people who work with APIs - IT people who want to use APIs for something internal and the product managers who want to do something outside APIs for people to connect to them," explained Roberto Medrano, Executive Vice President at SOA Software, in this SYS-CON.tv interview at Cloud Expo, held Nov 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA.
Performance is the intersection of power, agility, control, and choice. If you value performance, and more specifically consistent performance, you need to look beyond simple virtualized compute. Many factors need to be considered to create a truly performant environment. In his General Session at 15th Cloud Expo, Harold Hannon, Sr. Software Architect at SoftLayer, discussed how to take advantage of a multitude of compute options and platform features to make cloud the cornerstone of your online presence.
SYS-CON Media announced that Splunk, a provider of the leading software platform for real-time Operational Intelligence, has launched an ad campaign on Big Data Journal. Splunk software and cloud services enable organizations to search, monitor, analyze and visualize machine-generated big data coming from websites, applications, servers, networks, sensors and mobile devices. The ads focus on delivering ROI - how improved uptime delivered $6M in annual ROI, improving customer operations by mining large volumes of unstructured data, and how data tracking delivers uptime when it matters most.
In this Women in Technology Power Panel at 15th Cloud Expo, moderated by Anne Plese, Senior Consultant, Cloud Product Marketing at Verizon Enterprise, Esmeralda Swartz, CMO at MetraTech; Evelyn de Souza, Data Privacy and Compliance Strategy Leader at Cisco Systems; Seema Jethani, Director of Product Management at Basho Technologies; Victoria Livschitz, CEO of Qubell Inc.; Anne Hungate, Senior Director of Software Quality at DIRECTV, discussed what path they took to find their spot within the technology industry and how do they see opportunities for other women in their area of expertise.
DevOps Summit 2015 New York, co-located with the 16th International Cloud Expo - to be held June 9-11, 2015, at the Javits Center in New York City, NY - announces that it is now accepting Keynote Proposals. The widespread success of cloud computing is driving the DevOps revolution in enterprise IT. Now as never before, development teams must communicate and collaborate in a dynamic, 24/7/365 environment. There is no time to wait for long development cycles that produce software that is obsolete at launch. DevOps may be disruptive, but it is essential.
Almost everyone sees the potential of Internet of Things but how can businesses truly unlock that potential. The key will be in the ability to discover business insight in the midst of an ocean of Big Data generated from billions of embedded devices via Systems of Discover. Businesses will also need to ensure that they can sustain that insight by leveraging the cloud for global reach, scale and elasticity.
SYS-CON Media announced that Cisco, a worldwide leader in IT that helps companies seize the opportunities of tomorrow, has launched a new ad campaign in Cloud Computing Journal. The ad campaign, a webcast titled 'Is Your Data Center Ready for the Application Economy?', focuses on the latest data center networking technologies, including SDN or ACI, and how customers are using SDN and ACI in their organizations to achieve business agility. The Cisco webcast is available on-demand.
"BSQUARE is in the business of selling software solutions for smart connected devices. It's obvious that IoT has moved from being a technology to being a fundamental part of business, and in the last 18 months people have said let's figure out how to do it and let's put some focus on it, " explained Dave Wagstaff, VP & Chief Architect, at BSQUARE Corporation, in this SYS-CON.tv interview at @ThingsExpo, held Nov 4-6, 2014, at the Santa Clara Convention Center in Santa Clara, CA.
Advanced Persistent Threats (APTs) are increasing at an unprecedented rate. The threat landscape of today is drastically different than just a few years ago. Attacks are much more organized and sophisticated. They are harder to detect and even harder to anticipate. In the foreseeable future it's going to get a whole lot harder. Everything you know today will change. Keeping up with this changing landscape is already a daunting task. Your organization needs to use the latest tools, methods and expertise to guard against those threats. But will that be enough? In the foreseeable future attacks w...
As enterprises move to all-IP networks and cloud-based applications, communications service providers (CSPs) – facing increased competition from over-the-top providers delivering content via the Internet and independently of CSPs – must be able to offer seamless cloud-based communication and collaboration solutions that can scale for small, midsize, and large enterprises, as well as public sector organizations, in order to keep and grow market share. The latest version of Oracle Communications Unified Communications Suite gives CSPs the capability to do just that. In addition, its integration ...
Building low-cost wearable devices can enhance the quality of our lives. In his session at Internet of @ThingsExpo, Sai Yamanoor, Embedded Software Engineer at Altschool, provided an example of putting together a small keychain within a $50 budget that educates the user about the air quality in their surroundings. He also provided examples such as building a wearable device that provides transit or recreational information. He then reviewed the resources available to build wearable devices at home including open source hardware, the raw materials required and the options available to power s...
“The age of the Internet of Things is upon us,” stated Thomas Svensson, senior vice-president and general manager EMEA, ThingWorx, “and working with forward-thinking companies, such as Elisa, enables us to deploy our leading technology so that customers can profit from complete, end-to-end solutions.” ThingWorx, a PTC® (Nasdaq: PTC) business and Internet of Things (IoT) platform provider, announced on Monday that Elisa, Finnish provider of mobile and fixed broadband subscriptions, will deploy ThingWorx® platform technology to enable a new Elisa IoT service in Finland and Estonia.