Incognito Mode: Understanding Stealth Startups

Incognito Mode Understanding Stealth Startups

Stealth startups are startups that operate in obscurity until they are ready for a big reveal.

In the changing world of startups, marked by record-breaking fundraising rounds, evolving products, and lucrative partnerships, the rare startup sometimes chooses to avoid the public eye. These companies choose to instead operate on stealth mode.

Stealth startups are startups that work incognito – they do not reveal the details of their solutions or technology to outsiders, and sometimes not even their own employees have the full picture. All the juicy details of what the company is working on are usually locked away tightly.

There are clear reasons for a startup to operate in stealth. For one, by holding information close to the vest, a company can protect its solutions and intellectual property from competition and replication and thus stretching their first-mover advantage.

Operating in stealth also gives startups the ability to work uninterrupted, giving them the space to focus on building and launching their solutions without concerning themselves with media and public relations.

Stealth mode, while beneficial to certain companies in short spurts, is not meant to continue for a prolonged period of time. Doing so would be a significant red flag for investors, since it could indicate that something is amiss behind the scenes.

As a startup in stealth moves closer to product-market fit and launch, or if it’s looking to raise more funding, it may start coming out of stealth to generate public interest. Coming out of stealth can also take different forms – partial or full, depending on the founders’ and investors’ strategies.

For instance, Retalio, a Saudi Arabian B2B ecommerce company, recently came out of stealth with a US$2.3 million pre-seed round led by Emirati investor Shorooq Partners. The company is a marketplace for SMEs such as small grocery stores to get their hands on inventory.

Uni is another stealth startup to have recently garnered media attention. The Indian fintech, which aims to disrupt the credit card, recently announced that it had raised $18.5 million in a seed funding round led by Lightspeed Venture Partners and Accel. Details of the product itself, however, were not revealed.

Is stealth mode worth it?

On a surface level, operating in stealth – at least for a time – seems like a smart decision. The catch, however, is the absence of verified information and the requirement of blind trust from investors, employees, and customers.

In other words, by not divulging information about the product or the company, startups in stealth must work harder to win the attention and trust of investors, employees, and the public.

For instance, Uni may have a valid product that may indeed reinvent the credit card in India. Yet, it is unclear how the company will contend with the other startups in the same space trying to do the exact same thing, or if their product will even click with the debt-averse Indian public. This is because information about their product is simply not available, and there are no base facts on which to center the company’s narrative.

For an investor or an employee, this means engaging with the company with a blindfold on – and this can have consequences for all stakeholders involved.

Take, for instance, the case of blockchain startup Block.one. The company made a splash two years ago after it raised US$4 billion through an initial coin offering (ICO) for its cryptocurrency, EOS. Leveraging the company’s stealth status, Block.one was able to raise billions from investors without disclosing how it intended to use the money.

ICOs are a high-risk method of raising money. If the startup’s plans go bust, the cryptocurrency that the investors hold is worthless. And that’s exactly what happened with Block.one.

This year in May, investors filed a class-action suit against Block.one, the second class-action filed against the startup this year. The new lawsuit alleged that Block.one had duped investors through the ICO by making a “wild-card coin offering that profited the company handsomely but ultimately left investors holding little more than crypto-dust,” according to a statement by investor law firm Grant & Eisenhofer.

Other than the odd case like Block.one, some investors believe that there is no real point to operating as a stealth startup.

Lee Hower from NextView Ventures suggests in his blog that while it may make sense for some startups to go into stealth in the pre-product stage, it can actually make things more complicated in product development, and tends to offer no real benefits at that stage.

With product development so much faster today than it was in the early days of the Internet, former entrepreneur and investor John Greathouse also suggested that the first-mover advantage to be gained from stealth is now vastly diminished, as competitors can rapidly replicate innovations.

While noting that it is appropriate in some cases – such as in situations where IP is vulnerable – Greathouse otherwise flagged it as more of a hindrance than a help. In particular, he noted, startups in stealth are unable to bring on strategic partners and stakeholders without revealing their work. This leads them to fall behind competitors and ultimately cede some of their limited first-mover advantage.

Additionally, the longer the stealth period drags on, the greater the chance that the air of mystery will turn into an air of suspicion. Block.one is only one of many examples of how much this can hurt a company.

Ultimately, prevailing opinion seems to suggest that building a startup in stealth is only right for a narrow subset of startups. Companies utilizing stealth as a marketing gimmick to stir up buzz around their solutions may be unwittingly pushing investors and media in the opposite direction. Stealth mode, like the startup ecosystem, has come a long way from its roots – which is all the more reason to consider where it fits and how it should work in today’s startup community.

Header image by Rostyslav Savchyn on Unsplash

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