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Think Big. Move Fast.

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

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Through Mashable, found a link to an excellent article at Adweek that talks about why the value of a pageview at web 1.0 companies like Yahoo! are higher than the value of pageviews at social network companies like Myspace and Facebook.

The short of it is that audience engagement matters as well as pure volume of pageviews. If users are not spending much time on pages, they are not in the mood to click ads. This is compounded for performance based advertisers as multiple explosure to the same audience eventually leads to dramatically lower click through rates. But don’t let this summary dissuade you from reading the whole thing.

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I’ve seen a few startups recently that are relying on launching a new form of advertising as their business model. These can include product placements, sponsorships of various flavors, new forms of local advertising, interactive out-of-home advertising, and lots of variations of mobile advertising. This is a hard business. If successful, it can be very, very successful (e.g. Overture/Google with sponsored links in search) but entrepreneurs often underestimate how long it will take for revenues to ramp.

To understand how new forms of advertising get adopted, you need to understand how advertising is bought today. In most instances, ad agencies control the ad budgets for the largest advertisers in the world. Within those ad agencies, one of the functions is media buying. A media buyer’s role is to optimize reach (and sometimes quality of audience) for their client across all possible advertising channels. The problem with new forms of advertising is that they are often not represented in the media buyers’ spreadsheets and models. And if it’s not in the model, it doesn’t get allocated any ad spend.

Startups sometimes get traction with a new form of advertising because there are always some forward thinking advertiers who are willing to experiment. This early traction is often a customized program negotiated with an advertiser that is friendly with the startup through personal relationships. However, crossing over from a “business development” focused model (where each new deal is custom crafted) to an “ad sales” focused model (where standardized products are sold off of a rate card) is the key to massive scalability of revenues. To do this you need to get into the media buying model; you need to sell a standardized product.

For internet companies, that usually means that you need to get the IAB (Internet Advertising Bureau) to issue a new “Standard” ad unit, in much the same way that the IAB issued its first set of “voluntary guidelines” that set up 8 standard banner ad units in 1996, a massive reduction from the over 150 ad sizes that were in use at the time. This standardization greatly eases logistical complexity for both advertiers and media companies.

The process of creating a new standard can be quite a lengthy one. It usually involves a coalition of both media companies and advertisers coming together and negotiating the key elements of the standard. The composition of the IAB board is usually dominated by larger online media companies and it can be hard for a startup to have much influence on this decision making process. It can often be easier to align youself with the interests of a larger media company and let them carry the water up the hill, rather than trying to do it independantly as a startup. If you’re Dogster, you’ll have less success pushing a new standard for “sponsored profiles” than MySpace/FIM or AIMpages/AOL. So making sure that your sponsored profiles packages contain the same elements as those of the big guys will make your life easier as they take this new ad unit through the standardization process

The alternative approach is to make sure that your new form of advertising so closely parallels an existing standard ad unit that it can be considered within the existing bucket. 30 second online video ads (same format as TV),online leads (similar to phone leads) and new variations of CPC advertising (similar to search) have all been “close enough” to an existing ad unit that they have been able to tap existing ad budgets and grow quickly.

In either case, when building business plans on the assumption of the adoption of new ad units, make sure you give yourself enough time in your plans for the market to be created before it can grow to scale.

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There was a TechCrunch post today regarding a new search service from Healthline called Symptom Search which attempts to provide an information service suggesting common illnesses related to symptoms that a user is experiencing.

Symptom Search is a great idea. …

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Great post from Dana Boyd about the new digital gifts that Facebook released recently. After ranting randomly about rampant commercialism, she gets to the good stuff; analyzing gift giving dynamics (self worth, scarcity, levels of value, reciprocity, importance of timing) …

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I’ve been thinking a bit about the many different flavors of user generated content models; wikis, blogs, discussion boards, etc, and trying to come up with some sort of framework about what works best for which purpose. It seems that …

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New York Magazine has a great article in its current edition where it attempts to understand the psyche of the users of social networks, especially the younger users. Although as investors and entrepreneurs, we do our best to get into …

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I subscribe to Harvard Business Review but rarely read it – the long articles intimidate me! However, a friend of mine recently pointed me to a fantastic article in the October 2006 edition entitled “Strategies for Two-Sided Markets” …

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I’ve previously posted on the importance of distribution during the initial phase of a startups life. To be more accurate, I think that distribution is the most important factor for a consumer facing company competing in a new category.

However, …

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Deciding to take outside investment from a VC firm and bring in a new co-owner for your business is a critical decision. Entrepreneurs often want to know how exactly a VC will help once they’ve invested and what could change …

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