Is "Stealth" the Best Way to Build Your Business?

I’m just returning from another really great year at SXSW. It’s always fun to meet up with so many new and old friends in just a few days in Austin. Beyond that, one of my favorite thing is bumping into so many entrepreneurs I’ve never met who are working on interesting problems. However, this year I met a concerning number of entrepreneurs who wouldn’t tell me anything about their business. They explained they were building it “stealth”. I fear this has become the default course of action for far too many startups and in many cases it’s not the best plan.

Interestingly, very active angel and COO at Square, Keith Rabois weighted in on Quora in response to the question: “What are some concrete reasons for *actively* stealthing a startup?” last year.

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His answer:

With respect to the consumer Internet world, there are almost no valid reasons.

The best legitimate rationale applies only to a very small set of previously successful entrepreneurs who are “famous” and are attacking a market that is not intuitively massive. They might want to avoid signaling that the market opportunity merits a closer inspection until they are ready to launch.

My friend Charlie O’Donnell (currently a principal at First Round Capital) coined the term “anti-stealth”. As I’ve thought about it, I think there are three big advantage to going anti-stealth and would encourage any entrepreneur to consider it:

• Leveraging product feedback earlier in development
• Building a reputation and community in your target market
• Building relationships with potential investors pre-fundraising

Leveraging Product Feedback Earlier

Over the last seven years, before joining ReadWriteWeb as COO, I started two companies (sold to Morgan Stanley and LinkedIn). They both required a tremendous amount of capital and time before we were able to get a product into the market. As has been widely covered, companies are far more capital-efficient today and you can release a product into the market extremely early.

Eric Reis has covered the implications around this extensively and described these new ventures as “lean startups.” One of the key principals of going lean is to get meaningful customer feedback as quickly as possible often by developing a minimally viable product.

In some cases you don’t even have to build a product but can create a landing page and run some ad-sense ads to promote the concept. Then you measure to see how many sign up and recruit their friends/colleagues. It allows you to see if there is demand for the product – and avoid the killer realization later you’ve built something no one wants.

Building Reputation and Community in Target Market

Related to testing product demand, you also can develop a reputation in a given market by talking about what you’re working on. We’ve talked in the past about different types of startup blogs on ReadWriteStart but the key point here is you can start blogging to build an early community.

Being active on social platforms as early as possible in your startup’s life will help you gather valuable feedback and early users. In an enterprise sales context, I’ve also seen this have the effect of what I call “proof by repeated assertion” where you seem more credible as a vendor to an enterprise client because you have been telling them you’ll solve their problem in many earlier interactions.

Building Relationships with Potential Investors Pre-Fundraising

Obviously there are different schools of thought on the best way to raise a venture round. However, I don’t know anyone would argue that investors don’t care about your ability to make progress efficiently. Therefore, to the extent it doesn’t slow you down, being up-front with what you are working on and its progress provides a clear history. More importantly, you make your startup much more discoverable. You also make it obvious why an investor should be interested when you’re referenced by a trusted colleague or simply a Google search that turns up your site.

This becomes more important as deal-flow gets more and more competitive and investors try to proactively discover these startups. I continue to be shocked how competitive this is becoming. Earlier this month, TechCrunch covered a new program by Google Ventures to basically turn all 25,000 Google employees into scouts for deal-flow. Specifically the story states:

If you’re a Google employee and you know about a stealth startup that wants funding, you can pocket a cool $10,000. The Google Ventures team announced the new program at Google’s weekly all-hands “TGIF” meeting, earlier this afternoon.

As firms continue to search for new deals from unusual sources, I think the best thing entrepreneurs can do is make sure they tell the story well when a prospective investor shows up. Saying you are a “stealth” company with no details certainly doesn’t leave much to go on.

Conclusion

To be clear, I realize there are companies that need to build their startup in stealth mode (such as for famous entrepreneurs like Keith points out above). However, I think it’s also important to recognize that often the benefits of running your company in anti-stealth mode far outweigh those benefits and should be thoroughly explored before just choosing stealth by default.

Not convinced yet? Check out this video from one of this year’s SxSW keynotes: Reid Hoffman sharing his thoughts on data as well as 10 tips for entreprenuership. The whole video is worth watching but if you are pressed for time check out tip number six on releasing your product so early you are embarassed by it. It starts at 29:11. There is a great annectdote about a feature his co-founders felt they couldn’t launch without including in LinkedIn that still isn’t included eight years and 100 million members later.

What do you think? Let us know in the comments where you come out on the stealth vs. anti-stealth continuum. And if I bump into you next year at SxSW or at another event (like our upcoming ReadWriteWeb 2Way Summit) please tell me a little about what you do!

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