Startups in Stealth
Magnifying the first move
Stealth has been prized in warfare for a long time, and it’s pretty clear why — being difficult to detect is an advantage.
Stealth aircraft were a major technological achievement of the late Cold War. To this day, they, along with stealth cruise missiles, are seen by many as destabilizing technologies within the context of nuclear strategy, because they are more difficult to detect — and to destroy.
Some startups also choose to operate in stealth.
What is stealth for a startup?
In one sentence, stealth means that a startup operates in secrecy.
Their investors and employees know who they are, but nobody else really does. Certainly nobody talks about it publicly. The startup engages in no marketing, or preparation for sales, or external brand building.
A good, relatively recent example of this in the space industry is Astra — which had roots in a firm started in 2005, incorporated as Astra in 2016, stayed in stealth mode until 2020, and went public via SPAC in 2021.
Stealth enables a role reversal
If we were to put all the people involved with entrepreneurship onto a spectrum of exuberance, the order as I understand it is quite clear.
Founders are the most exuberant, almost ostentatious group. This makes sense. They have to be exciting enough to:
sell their vision to customers
attract the talent they’re going to need to create their vision
attract the funding they’re going to need to execute their plan
Venture capitalists tend to be a little less excited about being public-facing. They have to be audacious and public enough to attract great founders, but not much more than that. The nature of their work doesn’t require them to be quite as out there as founders.
Early employees tend to be even less interested in being public-facing. This may change over time — famously, many early PayPal employees become founders later on.
Limited Partners (LPs) who invest in VC, to the extent that I’ve interacted with them, prefer to act behind the scenes.
Stealth is fascinating to me because it enables founders (and their early employees) to behave like LPs. This is antithetical to how founders behave during most of the rest of a startup’s lifecycle. Eschewing the spotlight, they can prepare their company to make bigger, better first moves in public.
This creates some tension from the perspective of a venture capitalist.
On one hand, the rejection of present bias by founders who choose to build in stealth is interesting, and perhaps a strong positive signal to investors, because building a multi-billion dollar company takes a very long time.
On the other hand, it’s something of an atypical risk to invest in founders purely on the basis of what they’ve built, without any signal at all as to their interest in or ability to sell this particular vision to customers. The risk is mitigated somewhat for repeat founders or those who come from a sales background, but it’s still quite real.
What they do in the shadows
While I generally think of the founders’ key function as sales (to employees, to customers, to investors) being in stealth mode allows them to focus solely on building, with as little external pressure as possible.
The benefit of this is clear, in that all the useless distractions are just avoided by default. But there’s also some risk in that by working in isolation, founders may manage to avoid external sources of support.
This focused effort magnifies the consequences of their first public announcement, because whatever they’ve been working on will be farther along than just an idea. However, this is a double-edged sword. If the startup isn’t building something customers want, then the startup’s problems will be bigger.
Consequently, there’s a tension that founders pursuing this path have to recon with: they must be quiet enough that the organization flies under the radar, but also noisy enough to have confidence that they’re building something that somebody will eventually pay for.
If you’re a founder considering this decision, and you want to chat about it, please reach out!
Alternatively, if you invest in startups, like my writing, and want to chat about possible career opportunities, don’t hesitate to be in touch. The best way to get ahold of me is via email:
Final Thoughts
The idea of building in stealth remains controversial. Adam Draper over at Boost VC isn’t a fan. Shaun Gold over at OpenVC has a more nuanced take.
My view is, first and foremost, that I’m not entitled to a view. I’ve not built a startup either in or outside of stealth mode, so I’m not really qualified to opine on whether or not it’s a great idea for founders.
However, I do believe that it makes my job more difficult as a venture investor.
As an investor in general, I want to be as helpful as possible to as many founders as possible. If I don’t know a team is building, it’s impossible for me to offer connections (let alone funding).
I also think that building in stealth makes it even harder for those who are new to VC. It create information asymmetry in terms of who’s looking to buy and sell equity that makes it difficult for all investors, but particularly new ones, to understand the state of the market. My anecdotal understanding is that this favors older funds, enabling them to maintain proprietary deal flow.
I don’t like that for two reasons.
First, I don’t like that because it feels like founders are telling investors to not be entrepreneurial. That seems…methodologically unsound for a founder.
Second, I think it’s harder to compete against. I’m particularly unconvinced this element actually works in favor of founders during the negotiations. I think if I was a founder (at my current stage in life), I’d rather have as my counterparty somebody as entrepreneurial as I was, with a similar mindset in that respect.
Having said that, nobody ever said that becoming a great investor was supposed to be easy, or fair.
Furthermore, I’ll happily agree that this all may work to the advantage of founders — if they pick, engage with, and close the right investors. The tricky part is that nobody can know whether or not they’ve accomplished that ex ante.
Building in stealth is ultimately the founder’s call. My job as investor is simply to seek out and support great entrepreneurs, to whatever extent they want it.