Startups, take note: An IPO is a surefire way to lose your innovative edge, says Stanford study

Companies lose their innovative edge when they go public, a new study (PDF) from a Stanford Business School professor has found.

Professor Shai Bernstein analyzed patent data from almost 2,000 companies to discover the trend.

“Using patent-based metrics, I find that the quality of internal innovation declines following the IPO and firms experience both an exodus of skilled inventors and a decline in productivity of remaining inventors,” he wrote in the paper’s abstract.

Bernstein noted that post-IPO firms tend to change strategies after their offerings by shifting to acquisitions as a way to bring innovation into the company. He found that almost one-third of public firms’ patent portfolios are comprised of acquired patents in the five years after going public. Those acquired patents are also of higher quality than those produced internally by the companies during the same period.

According to a release announcing the study, the research covered companies that went public or withdrew IPO plans between 1985 and 2003. Bernstein’s data included close to 40,000 patents, rating them for their relative importance and how often they were cited in other patent filings.

To compare companies fairly, he matched up firms in similar sectors or industries that had considered going public in the same year and then rated those that withdrew their applications against those that continued on with going public.

Bernstein estimated that the average quality of patents produced by public companies declined by 40 percent during the five years after an IPO.

Also worth noting, Bernstein found that companies where the CEO also served as chair of the board of directors managed to better keep up innovation and hold on to inventors after going public than companies with separate chairmen and CEOs.

It’s worth noting that his reliance on the patent system to measure innovation will be suspect to some. After all, some have even argued that patents stifle innovation.

Of course, Bernstein’s study doesn’t mean that all IPOs are bad, but it’s definitely some interesting food for thought for any startups thinking about taking the plunge. In the meantime, we’ve got a few years of waiting before we see how the recent batch of IPOs from companies like Facebook and LinkedIn pans out.

➤ Does Going Public Affect Innovation?

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