IP-uh-O: Going public kills the startup magic, decreasing innovation by 40%

Public companies are safer, more boring, less innovative, and take fewer risks than startups, right? That’s a pretty common perception, but now we have a better picture of precisely how much less innovative companies that go public truly are: 40 percent.

Stanford professor Shai Bernstein tracked almost 2,000 technology companies that went public. After the IPO, companies became more “incremental,” less ambitious … and lost their top inventors and innovators. Mediocre performers, however, stayed behind.

The result? Companies turned to acquisitions to bring in new technologies and get fresh talent.

Bernstein tracked the companies between 1985 and 2003, recording how many patents each earned both before and after the IPO. He paired the hard analysis with an estimate of how important each patent was by checking how often it was cited in other patent applications. And then he went one step deeper by looking at companies that almost went public — planned to go public but changed their mind — and compared them to the companies that actually did conclude their IPOs.

While companies that stayed private continued innovating at the same pace, the ones that went public saw the average value of their patents decline by about 40 percent over the next five years.

In an sense, it’s obvious: The key leaders of a company benefit most from an IPO, cash out, and go elsewhere to pursue another dream. And those who fit well into the ungreased cogs of a startup don’t mesh with the bureaucracy of a public company with public responsibilities. In fact, inventors were 18 percent more likely to leave than other employees after an IPO.

But something odd happens to the ones that stay, too. Inventors that stay seem to become less innovative, as the quality and value of their patents dropped almost 50 percent after the IPO.

The lesson might seem to be: Don’t go public.

But that’s not exactly the case. In situations where the CEO and chairman of the board are the same person, innovation stayed relatively high. Bernstein attributes this to how a small leadership group with closely held authority is more able to stand firm against the quarter-by-quarter pressures from the market.

photo credit: Tony Fischer Photography via photopin cc