Welcome!

Wearables Authors: Elizabeth White, Carmen Gonzalez, Liz McMillan, Jnan Dash, Pat Romanski

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
You have great SaaS business app ideas. You want to turn your idea quickly into a functional and engaging proof of concept. You need to be able to modify it to meet customers' needs, and you need to deliver a complete and secure SaaS application. How could you achieve all the above and yet avoid unforeseen IT requirements that add unnecessary cost and complexity? You also want your app to be responsive in any device at any time. In his session at 19th Cloud Expo, Mark Allen, General Manager of...
Financial Technology has become a topic of intense interest throughout the cloud developer and enterprise IT communities. Accordingly, attendees at the upcoming 20th Cloud Expo at the Javits Center in New York, June 6-8, 2017, will find fresh new content in a new track called FinTech.
The 20th International Cloud Expo has announced that its Call for Papers is open. Cloud Expo, to be held June 6-8, 2017, at the Javits Center in New York City, brings together Cloud Computing, Big Data, Internet of Things, DevOps, Containers, Microservices and WebRTC to one location. With cloud computing driving a higher percentage of enterprise IT budgets every year, it becomes increasingly important to plant your flag in this fast-expanding business opportunity. Submit your speaking proposal ...
Amazon has gradually rolled out parts of its IoT offerings in the last year, but these are just the tip of the iceberg. In addition to optimizing their back-end AWS offerings, Amazon is laying the ground work to be a major force in IoT – especially in the connected home and office. Amazon is extending its reach by building on its dominant Cloud IoT platform, its Dash Button strategy, recently announced Replenishment Services, the Echo/Alexa voice recognition control platform, the 6-7 strategic...
Bert Loomis was a visionary. This general session will highlight how Bert Loomis and people like him inspire us to build great things with small inventions. In their general session at 19th Cloud Expo, Harold Hannon, Architect at IBM Bluemix, and Michael O'Neill, Strategic Business Development at Nvidia, discussed the accelerating pace of AI development and how IBM Cloud and NVIDIA are partnering to bring AI capabilities to "every day," on-demand. They also reviewed two "free infrastructure" pr...
Unsecured IoT devices were used to launch crippling DDOS attacks in October 2016, targeting services such as Twitter, Spotify, and GitHub. Subsequent testimony to Congress about potential attacks on office buildings, schools, and hospitals raised the possibility for the IoT to harm and even kill people. What should be done? Does the government need to intervene? This panel at @ThingExpo New York brings together leading IoT and security experts to discuss this very serious topic.
More and more brands have jumped on the IoT bandwagon. We have an excess of wearables – activity trackers, smartwatches, smart glasses and sneakers, and more that track seemingly endless datapoints. However, most consumers have no idea what “IoT” means. Creating more wearables that track data shouldn't be the aim of brands; delivering meaningful, tangible relevance to their users should be. We're in a period in which the IoT pendulum is still swinging. Initially, it swung toward "smart for smar...
"Dice has been around for the last 20 years. We have been helping tech professionals find new jobs and career opportunities," explained Manish Dixit, VP of Product and Engineering at Dice, in this SYS-CON.tv interview at 19th Cloud Expo, held November 1-3, 2016, at the Santa Clara Convention Center in Santa Clara, CA.
Complete Internet of Things (IoT) embedded device security is not just about the device but involves the entire product’s identity, data and control integrity, and services traversing the cloud. A device can no longer be looked at as an island; it is a part of a system. In fact, given the cross-domain interactions enabled by IoT it could be a part of many systems. Also, depending on where the device is deployed, for example, in the office building versus a factory floor or oil field, security ha...
"At ROHA we develop an app called Catcha. It was developed after we spent a year meeting with, talking to, interacting with senior citizens watching them use their smartphones and talking to them about how they use their smartphones so we could get to know their smartphone behavior," explained Dave Woods, Chief Innovation Officer at ROHA, in this SYS-CON.tv interview at 19th Cloud Expo, held November 1-3, 2016, at the Santa Clara Convention Center in Santa Clara, CA.
"ReadyTalk is an audio and web video conferencing provider. We've really come to embrace WebRTC as the platform for our future of technology," explained Dan Cunningham, CTO of ReadyTalk, in this SYS-CON.tv interview at WebRTC Summit at 19th Cloud Expo, held November 1-3, 2016, at the Santa Clara Convention Center in Santa Clara, CA.
WebRTC is the future of browser-to-browser communications, and continues to make inroads into the traditional, difficult, plug-in web communications world. The 6th WebRTC Summit continues our tradition of delivering the latest and greatest presentations within the world of WebRTC. Topics include voice calling, video chat, P2P file sharing, and use cases that have already leveraged the power and convenience of WebRTC.
The many IoT deployments around the world are busy integrating smart devices and sensors into their enterprise IT infrastructures. Yet all of this technology – and there are an amazing number of choices – is of no use without the software to gather, communicate, and analyze the new data flows. Without software, there is no IT. In this power panel at @ThingsExpo, moderated by Conference Chair Roger Strukhoff, Dave McCarthy, Director of Products at Bsquare Corporation; Alan Williamson, Principal...
20th Cloud Expo, taking place June 6-8, 2017, at the Javits Center in New York City, NY, will feature technical sessions from a rock star conference faculty and the leading industry players in the world. Cloud computing is now being embraced by a majority of enterprises of all sizes. Yesterday's debate about public vs. private has transformed into the reality of hybrid cloud: a recent survey shows that 74% of enterprises have a hybrid cloud strategy.
An IoT product’s log files speak volumes about what’s happening with your products in the field, pinpointing current and potential issues, and enabling you to predict failures and save millions of dollars in inventory. But until recently, no one knew how to listen. In his session at @ThingsExpo, Dan Gettens, Chief Research Officer at OnProcess, discussed recent research by Massachusetts Institute of Technology and OnProcess Technology, where MIT created a new, breakthrough analytics model for ...
In his keynote at 18th Cloud Expo, Andrew Keys, Co-Founder of ConsenSys Enterprise, provided an overview of the evolution of the Internet and the Database and the future of their combination – the Blockchain. Andrew Keys is Co-Founder of ConsenSys Enterprise. He comes to ConsenSys Enterprise with capital markets, technology and entrepreneurial experience. Previously, he worked for UBS investment bank in equities analysis. Later, he was responsible for the creation and distribution of life sett...
Successful digital transformation requires new organizational competencies and capabilities. Research tells us that the biggest impediment to successful transformation is human; consequently, the biggest enabler is a properly skilled and empowered workforce. In the digital age, new individual and collective competencies are required. In his session at 19th Cloud Expo, Bob Newhouse, CEO and founder of Agilitiv, drew together recent research and lessons learned from emerging and established compa...
20th Cloud Expo, taking place June 6-8, 2017, at the Javits Center in New York City, NY, will feature technical sessions from a rock star conference faculty and the leading industry players in the world. Cloud computing is now being embraced by a majority of enterprises of all sizes. Yesterday's debate about public vs. private has transformed into the reality of hybrid cloud: a recent survey shows that 74% of enterprises have a hybrid cloud strategy.
Whether your IoT service is connecting cars, homes, appliances, wearable, cameras or other devices, one question hangs in the balance – how do you actually make money from this service? The ability to turn your IoT service into profit requires the ability to create a monetization strategy that is flexible, scalable and working for you in real-time. It must be a transparent, smoothly implemented strategy that all stakeholders – from customers to the board – will be able to understand and comprehe...
DevOps is being widely accepted (if not fully adopted) as essential in enterprise IT. But as Enterprise DevOps gains maturity, expands scope, and increases velocity, the need for data-driven decisions across teams becomes more acute. DevOps teams in any modern business must wrangle the ‘digital exhaust’ from the delivery toolchain, "pervasive" and "cognitive" computing, APIs and services, mobile devices and applications, the Internet of Things, and now even blockchain. In this power panel at @...