Innovation Decreased by 40% at Technology Companies After They Went Public, Finds Stanford Graduate School of Business Study

Leslie Kwoh at the Wall Street Journal reports that while many tech entrepreneurs dream of taking their companies public, they may want to think twice.  While public offerings raise cash, new research suggests that IPOs can also result in stunted innovation at technology firms.   Here’s more:

In general, post-IPO companies create inventions that are less ambitious and valuable than do firms that remain private, found Shai Bernstein, an assistant finance professor at the Stanford Graduate School of Business. He analyzed patent data from 1,500 U.S. technology firms that either went public, or intended to go public but called off those plans, between 1985 and 2003. In all, he examined nearly 40,000 patents awarded to the companies both before and after their intended IPO date. The two groups were similar in size, age and research spending.

An IPO didn’t affect the rate at which a company obtained patents, but Bernstein found that public companies’ subsequent patents were far lower in quality, as measured by how often each patent was cited in other patent applications.   Post-IPO companies saw an average 40% decline in such citations per patent in the five years after going public relative to the firms that remained private, the study found.

Innovation may slow at public companies because IPOs trigger “brain drain” as employees cash in their holdings, the study suggests. By tracking about 13,000 of the inventors named in patent filings, Bernstein found that they were 18% more likely to leave after a company went public. Meanwhile, those who stayed behind produced inventions that were less valuable than before, receiving on average 48% fewer citations per patent.

Tech cos. ‘decrease innovation’ after IPO, study says

The Austin Business Journal weighed in this morning [1/15/2013] with its own report:  

Innovation decreases at technology companies after it completes an initial public offering, according to a Stanford Business School study.

“Innovation slowed down by about 40 percent at tech companies after they went public,” Stanford officials said in a release.

The study analyzed patent data from about 2,000 companies that went public or withdrew IPO plans between 1985 and 2003 and compared “in-house research” at those who went public and those who stayed private, according to the release.

 

 

 Innovation decreased by about 40 percent at tech companies after they went public, according to a Stanford Business School study.