IPOs can stifle innovation, according to Stanford study

We’ve all seen it a dozen times. Ground-breaking creative company files an IPO, then stagnates. Pick your example: Pets.com, Zynga, Facebook, Groupon, Pandora, etc. Having a popular service or clever marketing gimmick doesn’t necessarily translate into stock-market success. But according to an article in BusinessWeek, an IPO can also have a chilling effect on innovation.

“Companies that succeed in going public tend to “’find that the quality of internal innovation declines’ post-IPO, according to a meticulous new study (PDF) by Shai Bernstein, assistant finance professor at the Stanford Graduate School of Business. Not only does the level of innovation fall at newly public companies, but top inventors there tend to bail, the study found. Those who remain to watch their options vest, meanwhile, suffer ‘a decline in productivity.’ ”

Bernstein analyzed the patent data of more than 1,500 public and private U.S. technology firms between 1983 and 2006, a data set including Microsoft and Google, among others. He noted how public companies, rather than innovate from within, then resort to buying expertise and innovation from other companies. (Even Apple, widely considered an innovative company, routinely buys smaller companies for their knowledge base.)

Even The Economist is sounding the alarm about public companies. Last year, the site wrote:

Public companies are in danger of becoming like a fading London club. Their membership is falling. They spend their time fussing over club rules. And, as they peer out of the window, they see the bright young things heading elsewhere.

– The Big Engine That Couldn’t

Something to consider going forward. Is a public offering a sign of success in the 21st century or a relic?