Why Stealth Startups Are Completely Overrated

There’s a phenomena in the startup world where startups think it’s in their best interest to operate in “stealth mode.” They believe that by doing so, they’ll get a leg up on the competition because people won’t be able to copy what they’re doing, but here’s what it really is — it’s a complete waste of everyone’s time.

Here’s the thing: if your idea is so easy to steal that you have to hide it, then it’s not that good of an idea to begin with. Stealth startups really don’t mean anything, and they don’t generate any hype. On the contrary, instead of gaining an advantage over the competition, it actually puts you behind because you don’t get feedback on your project. I’d much rather tell everyone what I’m doing so they can provide help and feedback, than I would to operate in stealth mode.

What follows are three common reasons people give for staying in stealth mode and an argument against each. Below that is an explanation of why Facebook is not a good example of a reason to stay in stealth mode.

Reason #1: People will steal your idea.

The thought that people will steal your idea and put you out of business if you talk about it is bogus. Why? Because there are likely multiple people who have or are working on your exact idea right now. You can keep it a secret, but if you’re idea is really that good, there’s a great chance that someone else is already working on it.

Not only so, but the people who are most likely to steal your idea are too busy working on their own projects anyway. In the end, the feedback you can get by talking about an idea is greater than the benefit of keeping it secret.

And besides, I’m pretty sure more ideas fail because they never see the light of day while being kept a secret than get stolen because people talk about them. Do you really think that not talking about your idea with friends, family, potential customers, and possible investors is going to guarantee your success, or is it more likely that keeping it a secret will guarantee that it never gets off the ground? My money is on the second option (but this doesn’t mean that you can’t be smart with how you talk about it by making sure you don’t ever share your secret sauce.)

Reason #2: The idea is what separates you from the competition.

Stop kidding yourself. If your idea is so awesome, people are going to copy it at some point if they aren’t already working on it now. Once you prove a product-market fit and show that there’s money to be made, there will be competition no matter how stealthy you are. If you’re worried about competition and you’re idea is the only thing separating you from them, then it’s not a good business idea in the first place. Great businesses run on more than just a good idea.

To prove the point, let’s talk about Facebook. They started first at Harvard, spread out campus to campus from there, and the first couple of years, users had to use .edu e-mail addresses to gain access. The competition had plenty of time to create a knockoff Facebook and compete. Why didn’t any big companies like Google or Microsoft create something for non-.edu users to take advantage of that market? Why didn’t competitors spring up left and right?

The difference is execution. What set Facebook apart is not necessarily the idea or any kind of patentable intellectual property but how well they built the product and grew it. By starting small and growing larger, they gained traction with a limited user based and then expanded from there. In the end, the success was from the execution, not stealth. They out-executed the competition and grew so fast that people couldn’t catch up.

That’s one side. The other side is that someone did have a similar idea — the folks at LinkedIn. They created a “Facebook” for professionals, the complete opposite of a network for .edus. Oh no! Facebook has competition! Not at all. There’s always room for more than one company. If a market is big enough, there’s room for more than one business. For every McDonald’s, there’s a Wendy’s, and for every Facebook, there’s a LinkedIn. If the only thing that separates you from competition is a unique idea, then you have a long road ahead of you (or really short depending how you look at it).

Reason #3: You want to benefit from first-mover advantage.

Let me be as clear as I can: first-mover advantage is not that big of a deal. If there’s a market for your product or service, then it just means that you’re the first in a line of businesses that will compete in the space. If there’s not a big enough market for the product or service, then it means that you’ve created a business that can’t be sustained. Either way, first-mover advantage doesn’t guarantee your success.

Every great business that proves a market at one point or another will face competition. At that point, you’ll need to compete on something other than the idea, and your competition will benefit from the successes and failures you’ve learned along the way. So being the first to move isn’t always the advantage it seems cut out to be because you might be the first to move into a market that isn’t sustainable or you might just learn lessons that your competition benefits from later. Eventually, if there’s money to be made, competitors will sprout up.

And it’s ok if they do. Why? Because most markets can sustain more than one business. Kia, Hyundai, and Sketchers didn’t move first. Instead, they moved way late, but they were able to push themselves into the market through good marketing and smart product development and pricing. Being first to a market isn’t the only way to be successful.

Here’s an article from the Harvard Business Review that talks about this in more detail — The Half-Truth of First Mover Advantage — and a Wikipedia article that talks about the benefits of second-mover advantage.

Facebook Case Study: The Winklevoss Twins vs. Mark Zuckerberg

At this point, you probably have a question about Facebook. You want to know more about what happened to the Winklevoss twins. Didn’t they get their idea stolen? The answer is yes…and no…

Yes, they had their idea stolen by Mark Zuckerberg. They hired him to build a social network, and Mr. Zuckerberg turned it into Facebook and ran with it on his own. That much lives on as social-media-entrepreneurial lore.

But the Winklevoss twins did win a settlement worth at least $65 million by proving that they were at least partially responsible with coming up with the original idea. Yes, that’s paltry compared to the billions that Zuckerberg is worth, but it’s also enough to position them as angel investors and entrepreneurs.

And here’s the kicker: Facebook may have never gotten off of the ground if they hadn’t talked about it. Yes, the idea ultimately was hijacked and developed by someone else, but it’s entirely possible that if they hadn’t hired Mark that the idea wouldn’t have gone anywhere. What if they kept it to themselves because they didn’t want anyone to know about it? What if the site was never developed? Instead of ending up with a $65 settlement, they’d be left with nothing.

Ok, yes, this is speculation, but it’s also possible. Another point is that this story is more the exception than the rule. More companies don’t launch successfully because they stay in stealth mode and don’t get feedback to grow quickly than because the idea gets stolen. If you’re not willing to talk to people about what you’re doing and to get the word out, then you’re not going to get the feedback you need when you need it. The result will be a startup that looks great on paper but never gets the wings it needs to take off.

All I can say is that more often than not, the majority of startups operating in stealth mode waste everyone’s time in an attempt to generate hype. Instead of creating an awesome product that solves a real problem, they run around hiding behind a stealth-mode cloak that really means they don’t have a legitimate business or business model to begin with. They’re busy creating the next big Facebook-sharing-social-media-thingy behind closed doors, when really, they don’t have a realistic business worth talking about at all.

So the choice is yours. You can stay in “stealth mode” and not tell anyone about your idea for fear that it will get stolen. That’s fine. But don’t be surprised when six months to a year from now your business hasn’t grown as fast as it could have if you went out and told more people about it. Remember this: the feedback you can get from talking about your idea and iterating your product in order to grow quickly has a far greater value than staying in stealth mode and releasing the “perfect” product two years down the road. That’s what I think anyway.

How about you? What do you think? Leave a comment and let’s talk.

  1. davidhauser posted this