The Double-Edged Sword Of Going Public, In Two Charts

Whether and when to go public is something that founders and investors agonize over. It brings a huge influx of capital, and a lot of riches, but puts a great deal of pressure on everybody.

There’s also the prospect of losing some of your best people to newer, more exciting prospects.

A new paper from Shai Bernstein at Stanford finds that going public is a double-edged sword. Newly public firms see that some of their best talent leave, and that those who stay aren’t as effective. “I find that the quality of innovation produced by inventors who remained at the firm declines following the IPO,” Bernstein writes, “And key inventors are more likely to leave.”

Here’s his chart that shows the effect:

IPO innovation

[credit provider=”Shai Bernstein” url=””]

It’s not all negative. A lot of the influx of cash from going public goes towards hiring new innovators, and going and and buying new companies. Bernstein writes:

“I also find a stark increase in the likelihood that newly public firms acquire companies; in the years following an IPO. To better understand whether these acquisitions are used for purchasing new technologies, I collect information on targets’ patent portfolios. I find that public firms acquire a substantial number of patents through M&A: acquired patents constitute almost a third of firms’ total patent portfolio in the five years following the IPO. The acquired patents are of higher quality than the patents produced internally following the IPO.”

Here’s his chart of the likelihood of a firm acquiring another in the years after their IPO, versus those that don’t end up going public:


[credit provider=”Shai Bernstein” url=”″]

He finds that many of those acquisitions are for the purpose of acquiring new patents.

The lesson here is that going public turns you into a very different kind of company, and that it can be a difficult transition. You have resources that were never available before, and many more options, but that comes with significant challenges.

Acquiring companies is not just about getting ahold of new patents. It’s about successfully integrating them, which is much more difficult than most realise. There are more prospects for growth, but a lot that can go wrong.

What got you to the IPO in the first place isn’t likely to be the same thing that grows you as a public company.

Find the paper here.

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