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What Are the Benefits of Stealth Mode for Startups, Really?

Lee Hower
June 11, 2015 · 3  min.

Startups and their founders who claim to be in “stealth mode” prior to launch are such a commonplace part of the startup ecosystem that it might seem odd to question its merits. But it’s important to address this head on and ask: What are the benefits of stealth mode for startups, really? 

At NextView, some of the companies we invest in at the seed stage already have a meaningful public presence, while others choose to remain in stealth mode. So what are the pros and cons of either approach? And specifically when completing a seed round of financing, what are the implications?

Stealthy startups obviously remain under the radar intentionally or are even actively secretive about their existence or what they’re doing. I’ve seen startups that name their corporate entity something random, for instance, while others decline to discuss their startup or wait to announce seed stage funding rounds as a result.

The two main benefits are:

1. Developing Your Product Behind Scenes

The most common reason to be stealthy is to develop v1 away from the prying eyes of competitors, press, and others. Founding teams can be flexible in the design and development timeline of their product with less immediate worry about being imitated (great ideas always spawn competitors in the longer run) and less pressure about release date.

If you have a longer time to get to market and/or can get private feedback from potential customers, being stealthy can help. The drawback is of course that it’s difficult to get larger-scale customer feedback, potentially making it harder to get to product-market fit quickly.

So while we’ve seen the stealth approach across sectors, including consumer software/internet, B2B software, and hardware companies, it tends to be more prevalent with the latter two. There’s a reason Facebook, Twitter, LinkedIn, et al., launched publicly and then iterated with real users rather than trying to remain stealth. (I shared the LinkedIn founding story in episode 2 of our podcast if you wanted more details of how we went about our launch.)

2. Create an Air of Mystique

Another reason startups sometimes remain stealthy is to actively cultivate a quiet buzz about what they’re doing. Investors, potential employees, and the press all love to hear whispers about the next great company — it’s the startup equivalent of the hip LA speakeasy.

For a startup, all momentum compounds, so being able to generate some early momentum without a product, large team, or customer traction could make things easier later on when you do have those things.

However, this approach tends to work only for high profile teams of entrepreneurs, as their reputation draws interest by itself. (In the NextView portfolio, we’d currently cite Driftt and their great team led by established entrepreneurs David Cancel and Elias Torres as the example.) For successful, respected entrepreneurs, the story of leaving one’s job to start something new or the splash of announcing a funding round can provide a short term lift, even if there’s relatively little other news.

However…

The best founders recognize that it’s hard to sustain the mystique longer term, absent real innovation or growth as a business.

On balance, I think it can make sense for some startups to remain somewhat stealthy during the pre-product phase. But in general, I’m in favor of being public about what you’re doing. My experience is that startups that are are quicker to achieve product-market fit and, on average, being public about your company makes hiring and other aspects of startup-building easier.

There’s also a false badge of honor around the idea of being “stealth,” particularly for those founders who like the idea of being a founder and building a startup more so than they want to build something meaningful or solve a problem in an authentic way. This mentality is likely due to the troubling increase in individuals who “play house,” as Paul Graham dubbed it. This notion of being in stealth mode may thus carry some sex appeal for some individuals, however misguided. (I also think that in almost all cases nobody is going to try and steal your startup idea, so remaining in stealth mode for that reason doesn’t make much sense.)

The corollary to asking, “Is stealth mode right for us?” is to ask, “Should we announce our seed round or keep it quiet?” Again, on balance, I’m in favor of announcing your funding, particularly if you can couple it with product or other milestones that raise your startup’s profile. As a result, we see some seed stage companies delaying their funding announcement by a few months in order to do so.

In the end, being public about your company, product, and funding generally only helps to attract the attention of customers, employees, investors, and press.


Author
Lee Hower
Partner

Lee is a co-founder and Partner at NextView Ventures. He has spent his entire career as an entrepreneur and investor in early-stage software and internet startups.