A Blog by Jonathan Low


Jan 18, 2013

Do IPOs Stifle Startup Companies' Innovation?

Monetizing innovation.

That's what entrepreneurs - and their investment bankers and venture capitalists - have always claimed initial public offerings make possible. Funding new ideas, encouraging experimentation, rewarding risk takers.

But a new study from Stanford Business School - and they oughta know, right? - says the opposite. That going public distracts, disengages and dis-incentivizes.

The research suggests that newly rich entrepreneurs, despite claims about their superior intelligence and motivation - react to their recently-acquired wealth the way lottery winners and athletes with upwardly revised contracts do: their performance declines.

All too often, they begin to focus on how they are going to make up for all the 'sacrifices' they were forced to endure on the way up - and they become too obsessed with what others, both inside and outside the company, are earning compared to them rather than focusing on developing the next set of products that will grow the business.

It's an old story. Envy, hubris, paranoia. Homer, Herodotus and Shakespeare would recognize it immediately. And there is a practical explanation for the disconnect: running a public company under the scrutiny of professional investors and regulators is much more difficult than working quietly with a few friends and some people who believe in you. There are reports to fill out, rules to be obeyed, other people's expectations to be met.

Our own research in the early 2000s on IPO success determined that despite the popular mythology about young guys in a garage somewhere in Palo Alto and environs, the majority of financially rewarding IPOs were older companies with more experience, more employees and bigger revenues than the public would have one believe.

The implication for investors and entrepreneurs is that managing the tension between continuing to create and providing a return on investment is difficult. Which is why selling out to a 'strategic buyer' who has the resources to take it to the next level is becoming a more common tactic. Success is sometimes harder to maintain than failure. JL

Addy Dugdale reports in Fast Company:
If your young, hip 'n' happening tech firm is Superman, then going public is its Kryptonite.

A study by a Stanford academic has concluded that a firm's IPO can put the lid on creativity and innovation. Shai Bernstein of the university's Graduate School of Business studied thousands of startups between 1985 and 2003 to write a paper (PDF file) on the subject, and these are some of his findings:

•Going public causes an exodus of ideas as well as key creative staff.
•Acquired patents after an IPO are almost always of a higher quality than those produced in-house.
•A firm with the same CEO and chairman of the board--think Apple during those amazing Steve Jobs years, Mark Zuckerberg's dual role at Facebook--was more innovative than one with two separate people at the helm.

There is, of course, a middle path--going "prublic," the phablet, if you like, of a firm's status. But what do you think? Does going public signify the beginning of the end, or does it herald the start of something bigger and greater for a firm?


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