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The pros and cons of “Stealth mode” February 22, 2007

Posted by jeremyliew in start-up, startups, VC, Venture Capital.

I recently heard about a company that has been in “Stealth mode” for four years. That is certainly on the extreme range, but I’ve noticed an increasing number of companies in stealth mode, as can be seen by seaching on Craig’s list job ads. Indeed, one of my portfolio companies, Tippit, is in (partial) stealth.

This got me to thinking about the pros and cons of stealth mode. Typically, companies want to be in stealth so that they can emerge “fully formed” into a new category with a big enough head start over potential competitors that they can’t be easily caught.

However, there are a lot of drawbacks to being in stealth mode as well.

    Hiring can be very difficult. This can be mitigated if the founding team can hire enough people that they know directly to fully staff out the initial organization. Otherwise, without the personal trust in an existing founder/employee/investor, it can be hard to pique the interest of a highly qualified candidate with many other easily understood options. Getting them to sign an NDA before you tell them what the company does is hard given the plethora of options that good people have right now.

    Business development can be difficult.
    As I’ve posted about in the past, in the early stages of a new consumer technology category, distribution is critical to success. Getting these distribution deals lined up can be difficult while in stealth mode. Again, this can be mitigated if the founding team already has existing relationships into potential distribution partners. Personal trust can overcome uncertainty about the benefits of a deal, at least enough to take an initial meeting.

    Less serendipity. It’s been said that it is better to be lucky than smart. Startups often benefit from serendipity; when people who know the company introduce them to potential employees, partners, customers, or tip them off on competitive threats, opportunities or new markets. The less people who know the company, the less opportunity there is for serendipity.

Given these drawbacks, when does it makes sense to be in stealth? I think some of the following criteria need to be met for the tradeoffs to be worthwhile:

    The idea is truly novel. If the idea is an extension of existing platforms, you’re likely to see a lot of competitors regardless of what you do. “High concept” movies are movies that can be summarized in one sentence, often referencing another well known movie or book e.g. “Superfriends in 19th Century London“, “Schindler’s list in Rwanda“, “Jaws in space“, or “Heart of Darkness during the Vietnam War“. If you have a “High Concept” startup (e.g. “Facebook for China“, “Digg for Games“, “Flickr for Video” or “Myspace for Baby Boomers“) then you’ll likely have a lot of other people trying to do the same thing, and being in stealth mode doesn’t help you much. (NB none of these companies are in stealth mode.)

    Technology development is lengthy but not difficult. If the technology problems are difficult, then that alone should be enough to be a barrier to entry. Execution is always a lot harder than just ‘having a great idea’. If the technology development isn’t lengthy, then being in stealth mode won’t give you much of an advantage once the product gets launched anyway. Hillcrest Labs took this approach while developing their next generation of TV remote controls.

    Sources of proprietary advantage are undervalued. Some companies depend on taking information that is publically available but hard to get and making it searchable and available online. Others might be buying undervalued assets and monetizing them better. In both cases there is real advantage to keeping your strategy secret until you have locked in your advantages and to keep other potential bidders for the asset in the dark.

    Your entry into this space will cause people to follow you by virtue of who you are.
    Apple certainly felt this way about their iPhone. Some Venture Capital firms also prefer to keep their investments in stealth because they feel that their investment in an industry is enough to cause a flood of competitors to enter that industry. Sometimes this is true, sometimes the time is right for an idea to happen. Entrepreneurs will need to decide if their Venture Firm’s relationships will be sufficient to counter the increased difficulty in increased hiring and business development.

    I’d love to see comments from readers who are or have been in Stealth


1. stealthy - February 22, 2007

all very good points. From a startjup in semi-stealth, my motivation is because the extremely short attention span in this web world. You only have one chance to make a first impression. I’d like to make sure that first impression (for my customer; could care less about the VC’s) is a good one. Exposing a site/business that is not ready can be a loss opportunity when a user makes the decision, “yeah, I’ve seen it already and it’s crap”… when they really haven’t ‘seen’ anything yet.

2. John D - February 22, 2007

I would think stealth mode also makes sense for start-ups whose products or services aren’t necessarily innovative but whose business models are and could be disruptive to the market leaders… priceline, netflix, salesforce.com, etc.

3. Serial Stealth Mode Veteran - February 22, 2007

Most of succesful startups change business models/strategies during early stages of their lifespans… So, another advantage is that the stealth mode gives you more opportunities to change strategies at the seed stage…

For my current startup, we have been in stealth mode for 2.5 years – but cash flow positive for the past two years 🙂 During this period, our products have metamorphed into something completely different which we hope is tremedously more scalable than the original ideas that are continuing to generate cash for a 10+ person operation…

My last stealth mode software/ASP startup had raised $35MM+ in first round VC funding but it needed hardly a few months’ of runway due to the dot com boom…

I believe it is always good to start in a stealth mode – at least until you are going beyond the initial early adopter market or until you need vc/institutional funding…

4. Tony - February 23, 2007

My company Telebao (www.telebao.com) is in stealth mode for a very defensible reason: market conditions in China are fluid and we need to develop a realistic assessment of what will work and what won’t. I think that most startups are afraid to tell investors about corrections in their business plans, but I feel that this is essential.

My partner is a PRC native who sees a lot of highly publisized deal flow in China, but like me feels that stealthy planning and execution is key. In our case, recent regulations in China have forced us to re-think our plan and focus on strategic relationships and “exclusive deals” that we had not considered before. Creating the mythic billion dollar media company in China requires a little misinformation, stealth and virtuous tweaking.

5. jeremyliew - February 24, 2007

John D, I think that business model innovation is a good reason to be in stealth if you can build in some defensibility for when you emerge from stealth – e.g. locking up undervalued assets as Zillow and InternetREIT did.

Tony and Serial Stealth Mode Veteran, i think its critical for a startup to have the flexibility to change approach and strategy as they learn more about the market whether they are in stealth mode or not. Sticking to a flawed strategy just because thats what you announced would be awful for a company.


I think what you say is true for bloggers and the digerati. But if your main focus is on the mass market, most of them will not have any opinion of you before you’ve had a chance to get your product right, whether you’re stealth or not

6. David Armstrong - February 25, 2007

I think stealth mode is just a decision about priorities. We’ve put our product and our customers as our priority. We’ve turned away blogging requests, PR requests and have not spent any of our “precious” money to hype or market our product via advertising. We’ve put 100% of our effort (and money) into building a great product that is sound in design, usability and helps real people. For us, we just want to run a business and our priority is simple, making customers happy and that has little to do with “cool” or “barriers to entry”.

7. Richard Kligman - March 1, 2007

Qoof has been in stealth mode for about 18 months, but we are finally coming out of the closet at the Video On The Net Show (www.videoonthenetshow.com) March 19th in San Jose.

We are so stealthy that we haven’t allowed the show producers to put our company deatailed info on their site. Our Exec VP of Sales & Marketing will be giving a 20 minute presentation at the show, but we are not yet even telling the subject of our speech, again because of Stealthiness.

Our website? Stealth
Our Business Cards? Stealth
My wife asking me what I’m doing? More Stealth

Actually at the show we are only partly coming out of the closet launching our first product while tryind to hide our main product that we will be launching in June. We are driving our PR Agency batty 🙂

8. Mark Bolton - March 10, 2007

sometimes its good to keep quiet until you have something to really say and stealth mode allows you to build your voice, learn new songs, try out new backing singers until you have something to really shout about!!!!

The biggest fear of any company in stealth mode is that some else will come out with the same or similar product/idea which turns you into a copycat rather than an innovator.

As a stealth operator about to come out with some big boys backing me up…I have to say it paid off, however, there have been some scary times over the last 4 years!!!!!

9. Michael Vu - March 14, 2007

We have also been in stealth mode for about 1.5 years now and feel that it is the best strategy for us.

When you’re one of the little guys, you don’t get that many chances to swing. So when we swing, we want to make it hit hard.

Thanks for an insightful post.

10. Blogcosm - October 29, 2007

Anti-stealth: Path 101 blogs their startup

There’s an old argument among entrepreneurs and investors about whether (and how long) new startups should stay in "stealth mode", keeping secret the details (or even existence) of their ven

11. No Name - November 5, 2007

I would think stealth mode also makes sense for start-ups whose products or services aren’t necessarily innovative but whose business models are and could be disruptive to the market leaders… priceline, netflix,

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