Pssst: Wanna See a Great Business Plan?

Welcome to the world of stealth startups, where hype gives way to passon for anonymity. But does it make sense to keep secrets in an age of instant communication? Mum's the word.

Lots of people would love to know what fabled software developer Ray Ozzie is up to. More than a decade after he dazzled the world by creating Lotus Notes -- the remarkably durable "groupware" program -- he has formed Groove Networks Inc., a Beverly, Massachusetts-based startup. His company is believed to be working on a new form of collaborative software that might represent a huge leap beyond Notes's capabilities.

But don't expect to hear that from Ozzie. At industry conferences, he greets curious colleagues, smiles, and says, "We're in stealth mode." A visit to his company's Web site (www.groove.net) doesn't yield much more information. Even a section labeled promisingly "All about Groove Networks" consists mostly of whimsical, long-ago photos of a shoe factory in Beverly. A brief note says that Groove Networks is "a jam session" that Ozzie will explain only to people who come to work for him. But don't bother trying to glean tidbits from unsuccessful job candidates. "Of the 100 people we've hired," declares Ozzie, 44, "you can count on one hand the number who knew what they would be working on before they joined us."

A few years ago, Ozzie's brand of my-lips-are-sealed secrecy might have seemed eccentric. Now it's routine. More and more Internet startups are going through their initial year (or years) of development with no publicity, with no clear explanation of their business on their Web site, and, in some cases, with strict instructions to employees not to talk to outsiders about what they do. Silicon Valley venture capitalists say that typically three or four of their portfolio companies are keeping utterly mum -- becoming the business equivalent of pupae sitting still before emerging as butterflies. In March, at the PC Forum conference in Scottsdale, Arizona (the high-profile annual gathering convened by Esther Dyson), nearly half of the new companies making presentations announced that they were emerging from as much as a year of being in "stealth mode."

This spring, in perhaps the weirdest twist of all, the venture-consulting firm Atomic Tangerine bought more than three dozen ads on Silicon Valley radio stations, urging people to go to the Web (www.sri.com/secret) to learn about an amazing career opportunity at a "pre-IPO company." At that time, Atomic Tangerine hadn't yet publicized its name. So, in language that veered close to parody, the consulting firm told job applicants that they couldn't even learn the name of their possible future employer until they signed a nondisclosure agreement.

What's behind this passion for secrecy at Internet startups -- companies that are, after all, planning to do business in a medium that is all about open communication, instant connection, and, increasingly, endless hype? Are we suddenly in a world where people pay lip service to the teachings of Michael Dell and Jack Welch -- but model their actual behavior on the communication style of the late Howard Hughes? Has the new mantra of the dotcom world become "I'd tell you, but then I'd have to kill you"?

It's not quite that bad. Intelligent advocates of corporate stealth see it as a short-term tactic -- one that should be used only briefly, when a startup is trying to sort out initial business decisions and could use a little camouflage. They acknowledge that stealth per se isn't good and that isolation from the rest of the world creates its own hazards. As Ozzie himself puts it, "You should never stay in stealth longer than you need to."

The best way to evaluate the case for stealth is to look at the five main justifications that startup executives and their VC backers offer for it. Each argument turns out to be double-edged. In the right situation, stealth can be a boon. But if it's taken to extremes, or misapplied, it can wreck an otherwise promising new venture.

Sneak Up on the Big Ones

Stealth can make it easier to snap up scarce resources. This argument gets made a lot, and, in one sense, it's absolutely true. Almost any startup needs a strong Internet domain name, and getting one usually means acquiring the rights to it from its current holder. Announcing that you plan to build a multibillion-dollar business around that name isn't going to help you keep the price down. Even making your first phone calls from Silicon Valley's 650 area code may tip off a domain-name seller. So it's best to keep a low profile. One sly California startup admits to practicing "the Mississippi ruse" -- that is, conducting domain-name negotiations from a less wealthy state located 1,500 miles away.

But stealth isn't likely to be of much help in wooing key employees or customers. When a startup operates in the open, even minor contacts with the outside world can help with recruiting or business development. Speak at a conference. Get quoted in a trade journal. Place an ad in the newspaper. Soon people you never expected to hear from are calling you, asking if there's a way that you and they can work together. Stealth may add a little intrigue to the courtship of well-known key players -- but it smothers the chances of having good things happen unexpectedly.

Practice in Private

Stealth hides early missteps, enabling a startup to refine its product without embarrassment. That's Ozzie's main argument, and it's hard to quarrel with his track record. Back in the 1980s, he built Lotus Notes as a stealth project, coming up with basic software architecture that has proven sturdy enough to accommodate countless upgrades without requiring a top-to-bottom rebuild. If public attention arrives too early, Ozzie contends, it's hard to make midcourse corrections without being seen as a company in trouble. That loss of flexibility can cause a company to press on with what prove to be second-best business decisions.

But spending too much time in stealth can drain away all sense of urgency -- and leave a company's leaders out of step with the market. A poignant recent example involves Interval Research, the Silicon Valley think tank funded by Microsoft cofounder Paul Allen. Interval did most of its work in secret and ultimately had trouble commercializing its ideas. Earlier this year, Allen pulled the plug on the operation.

One of the "debutantes" at the PC Forum conference this spring, FireDrop Inc., ran into a lesser version of this problem. Its founders spent months in stealth, developing Zaplet, an advanced form of email that's designed to help groups schedule events. Their demonstrations emphasized all of the things that they wanted Zaplet to do. At first, audiences were impressed, but they grew uneasy when they learned that Zaplet hadn't been widely tested in the rough-and-tumble real world -- where, it turns out, many email programs still don't support HTML, the language used to display many of Zaplet's most interesting features.

Stealth Means Safety

When a startup is battling an industry giant, secrecy may increase its odds of survival. That's the argument made by Transmeta Corp., which announced last January -- after five years in stealth mode -- that it had developed a new microprocessor that would increase the battery life of laptops and wireless devices. "We're up against the mother of all competitors, Intel," says Frank Priscaro, 49, director of brand development at Transmeta. If Transmeta had been too explicit about its plans a year or two ago, he says, Intel might have devoted more resources to developing a competing chip, or at the very least might have staged a PR war by announcing plans that appeared to undercut Transmeta.

Such thinking is appropriate in areas like chip design, where lead times are long, sunk costs are huge, and the sheer size of incumbents is a daunting competitive advantage. But for Internet-driven businesses, none of those conditions apply. Getting to market is comparatively quick and easy, and agile startups can hold their own just fine against bigger (and slower) incumbents. On the Web, too much stealth can mean obscurity.

Everyone Is Desperate to Know

When a stealth company is finally ready to talk, it can make for a dazzling debut. It's fun to dream, and every founder of a stealth startup envisions the day when the curtain will come up. If everything goes right, there will be a flurry of press releases, standing-room-only news conferences, and visits from CNN camera crews. "You really only get one or two shots at telling your story," says Thomas Blaisdell, 38, a venture capitalist at DCM (Doll Capital Management), in Menlo Park, California. "You want to be able to do it right."

The best such launches can create an unstoppable momentum for a new company. But these days, despite the ardent efforts of thousands of high-tech PR specialists, it's a rare "stealth launch" that comes anywhere near achieving that goal. Too many companies are trying the same gambit. For jaded news reporters, being told that a new company is about to pull away the veil of secrecy is about as exciting as being told that it's offering stock options or that its offices are filled with cheap furniture from Kmart. That's just part of the background ambiance now.

"Stealth" Sounds Cool

Cynics can snicker all they want, but even Atomic Tangerine got some useful mileage from its campy version of stealth. It spent about $10,000 on radio ads and got 100 résumés as a result. Two of those résumés translated into instant hires, and four or five more could lead to job offers, according to Diane Kegley, 32, VP and chief marketing officer at Atomic Tangerine. "That's a great return on our spending," she says.

The catch, of course, is that stealth alone won't build a great company. Ask Geoff Yang, 40, a venture capitalist at Redpoint Ventures, in Menlo Park. His firm has worked with more than its share of stealth startups, but Yang is one of the first to acknowledge that Silicon Valley's current fixation on secrecy is overdone. Coming up with a brilliant idea is only a small part of what it takes to build a successful company, he observes. The best companies execute superbly against their business plans -- doing thousands of small things well in ways that can't easily be copied, even if competitors take a peek.

"I get a little worried if an entrepreneur says his idea is so brilliant that he can't tell anyone about it," Yang says. "It makes me wonder if there's much else there."

George Anders (ganders@fastcompany.com), a Fast Company senior editor, is based in San Francisco. Your secrets are safe with him.

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