Startup reality check: When the IPO comes, innovation goes

Rivers of wealth flowing from tech IPOs don't lead to more innovation but instead slow it

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Do IPOs bring on brain drains?

You don't need a doctorate in finance to know that tech companies are hungry both to buy patents and to buy creative talent. The most egregious -- in my mind, at least -- example of the former was Google's $6 billion purchase of Motorola Mobility, which translated into a cost of about $400,000 per patent.

Then there's the phenomena known as "acqui-hire," in which large companies buy small ones as a means to "hire" talent they've had their eye on, such as Facebook wanted to do when it went after

However they go about it, companies want to keep as much talent as possible. But Bernstein's study indicates that going public works against the goal.

He divided inventors into three categories: stayers, leavers, and newcomers. Inventors were about 18 percent more likely to become leavers at companies that went public. Even worse, it appears that the people who stayed became less creative: The quality of their patents plummeted by nearly 50 percent.

One of the reasons inventors leave is pretty obvious: Once they got rich, it was time to move on. Although Bernstein doesn't speak to this point, some of those wealthy leavers are likely to have started their own companies. In that case, there's still plenty of innovation happening, which is a benefit to the industry as a whole, if not to the companies they abandoned.

Then there's the pressure that Wall Street exerts on management. It's well known that too many investors and analysts get very impatient when a public company doesn't produce quick results. That impatience may lead managers to embrace strategies that are safer or more understandable to Wall Street, says Bernstein. As a result, there's less innovation and less incentive for creative people to stick around.

No one is suggesting that tech IPOs are a bad thing. Obviously the industry needs capital and incentives for people to work their best and their hardest. But Bernstein's work is a reality check that those who sing the praises of Silicon Valley should note -- as well as those who rely on startups to feed into the innovation paths in their own businesses.

This article, "Startup reality check: When the IPO comes, innovation goes," was originally published by Read more of Bill Snyder's Tech's Bottom Line blog and follow the latest technology business developments at For the latest business technology news, follow on Twitter.

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