Going Public might kill INNOVATION

A new research suggests that IPOs can result in diminutive innovation, especially in technology firms.

In general, post-IPO companies create products and inventions that are less ambitious and valuable than do firms that remain private. Innovation may slow at public companies because IPOs trigger “brain drain” as employees’ cash in their holdings. Increased scrutiny and accountability to shareholders may also affect the kind of research and development a newly public firm chooses to pursue. After the IPO, companies become more “cautious,” less ambitious … and lose their top inventors and innovators.

The result? New public companies turned to acquisitions to bring in new technologies and get fresh talent.

According to the research, post – going public, there is a general change in business objective and customer approach. Shareholder value is kept as the prime domain of focus with minimal interest in innovation. Another alarming outcome is attrition. In technology firms where employees focus on delivering quality output, post-IPO, they generally tend to start losing interest due to the autocracy and eventually start finding opportunities with other start-ups.

On the other hand, the study also shows a flip-side to this trend: IPOs are crucial in generating innovation in the early stages of a company, before it goes public, because the promise of public-offering riches helps startups to attract capital from investors in the first place.

So, going public should be a planned approach as it might result in completely change in a firms strategy in pursuing innovation.

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