Private Versus Public Companies: Which One Produces More Innovation?
It’s no secret that today’s top private companies are driving disruption and innovation in their respective sectors. Uber, Slack, and Airbnb — which have recently announced their intent to go public — have all created products or services that have upended and streamlined how we go about our daily lives.
And even with each of those company’s impending IPOs, there are still several large private unicorns and decacorns that are delaying going public to improve their products and increase their valuations. In fact, the global market value of private tech unicorns has grown exponentially over the past six years to more than $850 billion today.
However, what happens when these companies become public? Can they continue to innovate and scale, or do they find that their innovation and growth are stifled under public market scrutiny?
Public Companies Innovate, But Not As Fast As Private Counterparts
Some of the largest, late-stage companies that are driving innovation today are staying private longer.
According to a McKinsey Study titled “Grow Fast or Die Slowly,” the average age of technology companies that went public in 2014 was 11 years, and private funding rounds generated several decacorns and unicorns.
Additionally, the U.S. had a meager number of listed [smaller] firms as of last year, according to a working paper published in 2018 from the National Bureau of Economics. Published reports found that in 1975 there were 22 public firms for every one million Americans, that number was just 11 in 2018.
The reasons for staying private vary, but among them are the facts that removing public market scrutiny can allow a company to raise a private financing round, or ensure the company is closer to profitability without having to meet Wall Street’s expectations.
What’s more, public market scrutiny can negatively impact a company’s ability to innovate quickly on a product suite. A report from Shai Bernstein from Standford University found that “going public causes a substantial decline of approximately 40 percent in innovation novelty as measured by patent citations.”
Public companies still produce innovative products and services, but the products are markedly less novel than innovations produced by private companies.
The report also stated that the number of patents filed by public companies indicated that there was no change in the scale of innovation. Instead, many of these public companies took fewer risks and reallocated their Research and Development (R&D) investments towards safer projects.
Bernstein also found that going public not only impacted the quality of innovation, but also the tenure of the inventors who helped launch many of these products. Once public, “the quality of innovations produced by inventors who remained at the firm declined and key inventors were likely to leave.”
He posits that inventors see more opportunities to create and iterate on products at early-stage, private companies. And that once those companies become public, they would prefer to “cash out” and move on to the next early-stage private company.
An IPO is Still Favorable, But Be Cautious
Even though private companies are more agile than their public companies when it comes to innovation, an IPO can still be viewed as the hallmark of success for a company.
Additionally, the public market space is populated by successful innovative companies, such as Apple, Amazon, and Google. And, having the capital on hand to expand the company and fund new and existing projects, as well as increase market share with potential new customers, can lead to a growth spurt for the firm.
However, more companies are being cautious and taking their time to go public to create better, innovative products that will spur growth before going public — before they have to answer to a new board and a broad swath of shareholders.
If a company stays private longer, it can alleviate liquidity pressures for their employees who may have sacrificed big paydays for equity.
The secondary market can let employees liquidate a portion of their shares to fund significant life events — such as buying a home or starting a family. Or, it can provide opportunities to investors who want to invest in pre-IPO companies.
Financial firms, such as Forge, can provide liquidity to companies and employees, and connect investors to investment opportunities in pre-IPO companies.
To learn how we do it, visit Forgeglobal.com.
Kelly Rodriques has more than 26 years of fintech experience and has been an investor in more than 25 venture-backed firms. He was a founding investor of mFoundry, the leading provider of mobile banking, which was acquired by Fidelity Information Systems in 2013. Most recently, he served as CEO of PENSCO, one of the nation’s leading alternative asset custodians, which was sold to Opus Bank in 2017. Prior, Rodriques was an Operating Partner of Ignition Capital and CEO and Chairman of Totality, acquired by Verizon in 2006. Rodriques has also been Managing Partner of Operative Capital, a Fintech venture firm based in San Francisco.