Click here to close now.




















Welcome!

API Journal Authors: Elizabeth White, Carmen Gonzalez, Liz McMillan, AppDynamics Blog, Vormetric Blog

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
In his session at @ThingsExpo, Lee Williams, a producer of the first smartphones and tablets, will talk about how he is now applying his experience in mobile technology to the design and development of the next generation of Environmental and Sustainability Services at ETwater. He will explain how M2M controllers work through wirelessly connected remote controls; and specifically delve into a retrofit option that reverse-engineers control codes of existing conventional controller systems so they don't have to be replaced and are instantly converted to become smart, connected devices.
The 3rd International WebRTC Summit, to be held Nov. 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA, announces that its Call for Papers is now open. Topics include all aspects of improving IT delivery by eliminating waste through automated business models leveraging cloud technologies. WebRTC Summit is co-located with 15th International Cloud Expo, 6th International Big Data Expo, 3rd International DevOps Summit and 2nd Internet of @ThingsExpo. WebRTC (Web-based Real-Time Communication) is an open source project supported by Google, Mozilla and Opera that aims to enable bro...
SYS-CON Events announced today that Pythian, a global IT services company specializing in helping companies leverage disruptive technologies to optimize revenue-generating systems, has been named “Bronze Sponsor” of SYS-CON's 17th Cloud Expo, which will take place on November 3–5, 2015, at the Santa Clara Convention Center in Santa Clara, CA. Founded in 1997, Pythian is a global IT services company that helps companies compete by adopting disruptive technologies such as cloud, Big Data, advanced analytics, and DevOps to advance innovation and increase agility. Specializing in designing, imple...
Containers are not new, but renewed commitments to performance, flexibility, and agility have propelled them to the top of the agenda today. By working without the need for virtualization and its overhead, containers are seen as the perfect way to deploy apps and services across multiple clouds. Containers can handle anything from file types to operating systems and services, including microservices. What are microservices? Unlike what the name implies, microservices are not necessarily small, but are focused on specific tasks. The ability for developers to deploy multiple containers – thous...
SYS-CON Events announced today that IceWarp will exhibit at the 17th International Cloud Expo®, which will take place on November 3–5, 2015, at the Santa Clara Convention Center in Santa Clara, CA. IceWarp, the leader of cloud and on-premise messaging, delivers secured email, chat, documents, conferencing and collaboration to today's mobile workforce, all in one unified interface
All major researchers estimate there will be tens of billions devices - computers, smartphones, tablets, and sensors - connected to the Internet by 2020. This number will continue to grow at a rapid pace for the next several decades. With major technology companies and startups seriously embracing IoT strategies, now is the perfect time to attend @ThingsExpo, November 3-5, 2015, at the Santa Clara Convention Center in Santa Clara, CA. Learn what is going on, contribute to the discussions, and ensure that your enterprise is as "IoT-Ready" as it can be.
Too often with compelling new technologies market participants become overly enamored with that attractiveness of the technology and neglect underlying business drivers. This tendency, what some call the “newest shiny object syndrome,” is understandable given that virtually all of us are heavily engaged in technology. But it is also mistaken. Without concrete business cases driving its deployment, IoT, like many other technologies before it, will fade into obscurity.
As more and more data is generated from a variety of connected devices, the need to get insights from this data and predict future behavior and trends is increasingly essential for businesses. Real-time stream processing is needed in a variety of different industries such as Manufacturing, Oil and Gas, Automobile, Finance, Online Retail, Smart Grids, and Healthcare. Azure Stream Analytics is a fully managed distributed stream computation service that provides low latency, scalable processing of streaming data in the cloud with an enterprise grade SLA. It features built-in integration with Azur...
With the proliferation of connected devices underpinning new Internet of Things systems, Brandon Schulz, Director of Luxoft IoT – Retail, will be looking at the transformation of the retail customer experience in brick and mortar stores in his session at @ThingsExpo. Questions he will address include: Will beacons drop to the wayside like QR codes, or be a proximity-based profit driver? How will the customer experience change in stores of all types when everything can be instrumented and analyzed? As an area of investment, how might a retail company move towards an innovation methodolo...
SYS-CON Events announced today that HPM Networks will exhibit at the 17th International Cloud Expo®, which will take place on November 3–5, 2015, at the Santa Clara Convention Center in Santa Clara, CA. For 20 years, HPM Networks has been integrating technology solutions that solve complex business challenges. HPM Networks has designed solutions for both SMB and enterprise customers throughout the San Francisco Bay Area.
SYS-CON Events announced today the Containers & Microservices Bootcamp, being held November 3-4, 2015, in conjunction with 17th Cloud Expo, @ThingsExpo, and @DevOpsSummit at the Santa Clara Convention Center in Santa Clara, CA. This is your chance to get started with the latest technology in the industry. Combined with real-world scenarios and use cases, the Containers and Microservices Bootcamp, led by Janakiram MSV, a Microsoft Regional Director, will include presentations as well as hands-on demos and comprehensive walkthroughs.
Contrary to mainstream media attention, the multiple possibilities of how consumer IoT will transform our everyday lives aren’t the only angle of this headline-gaining trend. There’s a huge opportunity for “industrial IoT” and “Smart Cities” to impact the world in the same capacity – especially during critical situations. For example, a community water dam that needs to release water can leverage embedded critical communications logic to alert the appropriate individuals, on the right device, as soon as they are needed to take action.
WebRTC services have already permeated corporate communications in the form of videoconferencing solutions. However, WebRTC has the potential of going beyond and catalyzing a new class of services providing more than calls with capabilities such as mass-scale real-time media broadcasting, enriched and augmented video, person-to-machine and machine-to-machine communications. In his session at @ThingsExpo, Luis Lopez, CEO of Kurento, will introduce the technologies required for implementing these ideas and some early experiments performed in the Kurento open source software community in areas ...
Consumer IoT applications provide data about the user that just doesn’t exist in traditional PC or mobile web applications. This rich data, or “context,” enables the highly personalized consumer experiences that characterize many consumer IoT apps. This same data is also providing brands with unprecedented insight into how their connected products are being used, while, at the same time, powering highly targeted engagement and marketing opportunities. In his session at @ThingsExpo, Nathan Treloar, President and COO of Bebaio, will explore examples of brands transforming their businesses by t...
With the Apple Watch making its way onto wrists all over the world, it’s only a matter of time before it becomes a staple in the workplace. In fact, Forrester reported that 68 percent of technology and business decision-makers characterize wearables as a top priority for 2015. Recognizing their business value early on, FinancialForce.com was the first to bring ERP to wearables, helping streamline communication across front and back office functions. In his session at @ThingsExpo, Kevin Roberts, GM of Platform at FinancialForce.com, will discuss the value of business applications on wearable ...
SYS-CON Events announced today that Micron Technology, Inc., a global leader in advanced semiconductor systems, will exhibit at the 17th International Cloud Expo®, which will take place on November 3–5, 2015, at the Santa Clara Convention Center in Santa Clara, CA. Micron’s broad portfolio of high-performance memory technologies – including DRAM, NAND and NOR Flash – is the basis for solid state drives, modules, multichip packages and other system solutions. Backed by more than 35 years of technology leadership, Micron's memory solutions enable the world's most innovative computing, consumer,...
17th Cloud Expo, taking place Nov 3-5, 2015, at the Santa Clara Convention Center in Santa Clara, CA, 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. Meanwhile, 94% of enterprises are using some form of XaaS – software, platform, and infrastructure as a service.
As more intelligent IoT applications shift into gear, they’re merging into the ever-increasing traffic flow of the Internet. It won’t be long before we experience bottlenecks, as IoT traffic peaks during rush hours. Organizations that are unprepared will find themselves by the side of the road unable to cross back into the fast lane. As billions of new devices begin to communicate and exchange data – will your infrastructure be scalable enough to handle this new interconnected world?
While many app developers are comfortable building apps for the smartphone, there is a whole new world out there. In his session at @ThingsExpo, Narayan Sainaney, Co-founder and CTO of Mojio, will discuss how the business case for connected car apps is growing and, with open platform companies having already done the heavy lifting, there really is no barrier to entry.
SYS-CON Events announced today that the "Second Containers & Microservices Expo" will take place November 3-5, 2015, at the Santa Clara Convention Center in Santa Clara, CA. Containers and microservices have become topics of intense interest throughout the cloud developer and enterprise IT communities.