Startups are renowned for their creativity and innovation, but this can often dry up once the unique pressures of going public are imposed on a firm. Research from Duke University explores why some companies have managed to remain innovative after going public while others have struggled.

The researchers explain that many firms argue that they need to go public in order to gain access to the kind of resources they need to truly innovate. The move can coincide with a decline in risk-taking, as firms are pressured into meeting quarterly targets by investors.

Free from pressure

Indeed, notable entrepreneurs like Michael Dell and Elon Musk have bemoaned the pressure Wall Street can impose on firms to meet short-term targets as this distracts from being able to innovate for customers.

This pressure can result in funding moving towards more incremental innovation rather than the more breakthrough kind. The researchers found that this shift in strategy affected around 70% of firms after their IPO.

The researchers examined over 200 firms from the consumer-packaged goods sector that floated on the stock market over a thirty-year period. The analysis reveals that firms that were innovative before going public typically remained innovative after floating.

“Innovation imprinting occurs when firms establish product priorities and build market capabilities associated with breakthrough innovation in the years before they go public,” the researchers explain. “This imprinting establishes aspirations and routines within the company that support its ability to resist potential stock market pressure to shift priorities and capabilities away from breakthrough innovation after going public.”

Maintaining momentum

This ability to imprint innovation goes beyond an ability to maintain innovation momentum, however, and also signals to investors who are more comfortable with a higher degree of risk that they are a worthwhile investment.

Indeed, if firms are able to maintain their innovative output after flotation, they’re generally more likely to survive longer and experience stronger financial results.

The researchers hope that their findings challenge the notion that going public will inevitably result in a decline in innovation and highlight ways in which firms can counter this possibility.

“By studying the exceptions to the generally pessimistic view about public firms’ innovation—not the averages—we offer insights to help managers prevent their firms from falling prey to this effect,” the authors conclude. “Our research reminds managers to consider how segmentation also applies to investors. Investors, much like consumers, are not a homogenous group. Instead, there are segments among investors who have different preferences and propensities to purchase company stocks with varying types and levels of risk.”