The success of a startup is often determined by how well it comes up with new ideas. That creativity can be stunted, however, depending on where a company goes in search of new funding, research finds.
When startups go public, their innovations tend to increase in number but decrease in how groundbreaking they are, according to a study published recently in the Journal of Marketing Research.
"While such firms enjoy improved access to financial capital, their strategic choices are constrained because they have to meet short-term stock-market expectations and disclosure requests," the study's authors, Duke University professor Christine Moorman and Goethe University Frankfurt assistant professor Simone Wies, wrote in their paper.
This tension translates into opposing impacts on innovation.
"After an initial public offering, firms tend to introduce a larger number of innovations and a larger variety of each innovation — think different flavors, or different package sizes," the study's authors wrote. "But at the same time, the innovations they do make are usually not the kind of breakthrough innovations that take the company in new directions and into new markets."
For the study, the researchers focused on product introductions, rather than patents and research and development spending, which many previous studies had concentrated on. The study's authors analyzed a sample of more than 40,000 new-product introductions by 207 consumer packaged-goods firms that went public between 1980 and 2011. [Innovation in the Workplace: How to Harness It ]
The researchers counted the total number of new products each company unveiled in a given year. Then, they counted which of those products could be considered breakthroughs. These were products that targeted a new market or offered a substantially new consumer benefit through product positioning, merchandising, packaging, formulation or technology. Then, they compared those numbers to a benchmark sample of firms that remained private.
The study's authors discovered that going public has a tendency to make companies more conservative about their products. The researchers said startups that go public often find that coming up with risky, and potentially revolutionary, new ideas becomes much more difficult when they have the added pressure of having to answer to stockholders, many of whom are more concerned about short-term gains.
"While going public allows firms access to more financial capital that can fuel innovation, it also exposes firms to a set of myopic incentives and disclosure requirements that constrain innovation," the study's authors wrote. "Our results suggest that the stock market not only absorbs information, but also generates an incentive structure that impacts managerial decision-making regarding innovation."