Does Going Public Harm Innovation?

A new study by Wharton management professor David Hsu and Insead Professor Vikas A. Aggarwal,  suggests that IPOs may be a damaging event for some startups.   Their work suggests that going public actually decreases the amount of innovation at firms.   According to Knowledge@Wharton,

The researchers find that the level of innovation is highest among privately held start-ups and lowest in businesses that go public, while acquired companies fall somewhere in between. Hsu and Aggarwal discovered that pivotal to this ordering of innovation outcomes is the level of public scrutiny the company gets rather than the degree to which key players are leaving the company.

The scholars find that investors and Wall Street analysts focus a great deal of attention on short term performance.  As a result, many startups sacrifice the types of long run investments required to drive innovation, so as to maximize short run performance.   Moreover, being a public company makes it more difficult to experiment.  The markets tend to not be kind to failed experiments.  Of course, experimentation is a key innovation tool for startups.  For more on this research, click here.