• By
  • Next & Co.

  • 1 years 3 months ago
  • 16th Aug 2019

The advantage of staying private: An edge in tech innovation

In the swirling storm of tech innovation, companies are watching for the right time to venture into solutions that involve artificial intelligence (AI), process automation, and other new technologies.

The success or failure of those solutions will depend on myriad factors—and private companies have some unique characteristics that give them an advantage in the tempest of emerging technology. “Private companies are becoming the preferred vehicle for unfettered growth. Freed from the burden of quarterly earnings reports and Wall Street’s what-have-you-done-for-me-lately attitude, the Private Titansare able to steer a steadier course,” says Bill Saporito, Inc. Magazine

What are the advantages driving the power of private companies, and how can these companies apply their advantages to accelerate tech innovation?

The private advantage: Nimble leadership

Public companies are always accountable to the next quarterly report—and that can make leaders more hesitant to take risks on new opportunities. Of course, that reduced flexibility is part of the trade-off when a company goes public

“Companies may be willing to sacrifice control and privacy to access large amounts of capital,” as Michael Schmidt says in Investopedia.

But increasingly, companies must take the lead on bringing innovations to market. They can’t afford to wait, adopting technology in response to their competitors. Most private company leaders have more freedom to make nimble moves in technology.

As JT Kostman, Grant Thornton’s managing director, Applied Artificial Intelligence explains, “By not making that first move, not taking advantage of these technologies, and not being an early adopter, you’re missing out on the biggest advantage you have as a privately held company.”

Kostman adds that “ownership structure doesn’t negate bureaucracy,” but even large private companies can be more nimble than their publicly held competitors as opportunities present themselves in artificial intelligence, cryptocurrency, and other emerging capabilities.

How to use this advantage:

Before a company can successfully implement a solution built around new technology, the company needs to experiment. This developmental investment can be difficult for public companies that are subject to shareholder input. Private companies have more freedom to pursue a new tech vision—but they might have to do so with a smaller budget. So, quick-value projects and partner solutions can help them get started.

The private advantage: Steady vision

Companies need to have a long-term perspective as they innovate evolving technologies into differentiating solutions.

New technologies can take time to pay off, and it makes sense for companies to be anxious. “It is hard to reach a leading edge that’s always advancing. It is also disappointing when AI efforts run into real-world barriers, which can lessen the appetite for further investment or encourage a wait-and-see attitude, while others charge ahead,” says a recent article in McKinsey Quarterly.

“When it comes to new technology, the greatest advantage that privately held companies have is perspective,” Kostman says. “Since publicly held companies are subject to shareholder expectations about quarterly profits and dividends, they can be subject to short-term thinking. Privately held companies can focus on longer, and more realistic, investment horizons. They can think in terms of decades, not days. They can form legacies, rather than endlessly chasing short-term profits.”

He added, “By definition, investments in technology are for tomorrow, not for today. That gives private companies a considerable advantage in weighing those investments.”

How to use this advantage:

“Since the shareholder primacy movement in the 1980s, it is becoming the privately held companies that are built to last,” Kostman says. Private companies can stay focused on long-term expectations and goals for their innovative efforts. They can establish a steady vision that helps turn new technologies into real, differentiating, and sustainable advantages over time.

The private advantage: Innovation culture

Public companies are owned by external parties. That fact, and the large size of many public companies, can diffuse some of the responsibility for the company’s success. The company’s board may abrogate responsibility to the executive leadership team, with the leadership deferring down the chain.

In private companies, “the buck stops with the leadership,” Kostman says. “But likewise, the buck stops with them for failing to adapt and adopt new technologies and capabilities,” he adds, saying this can drive a higher obligation to ownership, insight and understanding—from the leaders and on down.

How to use this advantage:

The risk of failing to innovate can be a little easier to see and communicate at private companies. Executive leaders may be more receptive and proactive when presented with innovation opportunities. When teams align their initiatives with timely opportunities and stated goals at private companies, they can secure the kind of executive support that will help see their projects through.

A look to the future

Private companies are growing more popular, while the number of public companies has declined by almost half since 1996—and technology is at the root of the change. “In sum, digital strategies and rapid technological obsolescence increases the mortality rates among existing public firms, but does not correspondingly increase the demand for IPOs. This trend is the single largest cause for decline in listed firms,” says a recent study in the Harvard Business Review.

The rush of new technology has become the new normal, and wait-and-see companies will ultimately lose out. Fortunately for private companies, there are some key advantages that can help them harness the storm.

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