I just came across a VC blog pondering the value to a start-up of operating in “Stealth Mode” or not.  I’ve amusingly come to the conclusion that all of this — particularly the “stealth” giveaway — is so much marketing hype.  When a start-up claims they’re coming out of stealth mode, grab your wallet.

The most interesting and telling example I have of this is Rearden Commerce, which was announced in a breathy cover story in InfoWorld in February 2005 about the company and its founder/CEO Patrick Grady.  The company has an obvious “in” with the magazine; in 2001 InfoWorld also carried a similar piece on the predecessor company to Rearden, Talaris Corporaton.

According to a recent Business Week article, Rearden Commerce and its predecessors reaching back to an earlier company called Gazoo founded in 1999 have raised $67 million in venture capital.  While it is laudable the founder has reportedly put his own money into the venture, this venture through its massive funding and high-water mark of 80 employees or so hardly qualifies as “stealth.”

As early as 2001 with the same technology and business model, this same firm was pushing the “stealth” moniker. According to an October 2001 press release:

“The company, under its stealth name Gazoo, was selected by Red Herring magazine as one of its ‘Ten to Watch’ in 2001.”  [emphasis added]

Even today, though no longer using the active name Talaris Corporation, it has close to 115,000 citations on Yahoo! Notable VCs such as Charter Ventures, Foundation Capital, JAFCo and Empire Capital have backed it through its multiple incubations.

Holmes Report, a marketing company, provides some insight into how the earlier Talaris was spun in 2001:

“The goal of the Talaris launch was to gain mindshare among key business and IT trade press and position Talaris as a ‘different kind of start-up’ with a multi-tiered business model, seasoned executive team and tested product offering.”

[Hmmm; grind me a pound!]

The Holmes Report documents the analyst firms and leading journals and newspapers to which it made outreach.  Actually, this outreach is pretty impressive.  Good companies do the same all of the time and that is to be lauded.  What is to be questioned, however, is how many “stealths” a cat can have.  Methinks this one is one too many.

“Stealth” thus appears to be code for an existing company of some duration that has had disappointing traction and now has new financing, a new name, new positioning, or all of the above.  So, interested in a start-up that just came out of stealth mode?  Let me humbly suggest standard due diligence.

This Friday brown bag leftover was first placed into the AI3 refrigerator on October 13, 2005. No changes have been made to the original posting, except the [grinding] bit.

However, as of last year, Rearden had upped its VC funding to $240 million (can we spell multiple ?). Today, it is now focused on the travel industry. Fly me to the moon!

(And Wishing All a Healthy and Prosperous 2010!)

According to iProspect, about 56 percent of users use search engines every day, based on a population of which more than 70 percent use the Internet more than 10 hours per week.[1] The average knowledge worker spends 2.3 hrs per day — or about 25% of work time — searching for critical job information.[2] IDC estimates that enterprises employing 1,000 knowledge workers may waste well over $6 million per year each in searching for information that does not exist, failing to find information that does, or recreating information that could have been found but was not.[3]

Vendors and customers often use time savings by knowledge workers as a key rationale for justifying a document or content initiative. This comes about because many studies over the years have noted that white collar employees spend a consistent 20% to 25% of their time seeking information. The premise is that more effective search will save time and drop these percentages. For example, EDS has suggested that improvements of 50 percent in the time spent searching for data can be achieved through improved consolidation and access to data.[4]

Using these premises, consultants often calculate that every 1% reduction in the total work time devoted to search works out illustratively on a fully burdened basis as a big cost savings benefit:

$50,000 (base salary) * 1.8 (burden rate) * 1.0% = $900/ employee

Beware such facile analysis!

The fact that many studies over the years have noted white collar employees spend a consistent 20% to 25% of their time devoted to search suggests it is the “satisficing” allocation of time to information search. (In other words, knowledge workers are willing to devote a quarter of their time to finding relevant information; the remainder for analysis and documentation.)

Thus, while better tools to aid better discovery may lead to finding better information and making better decisions more productively — an important justification in itself — there may not result a strict time or labor savings from more efficient search.[5] Be careful of justifying project expenditures based on “time savings” related to search. Search is likely to remain the “25% solution.” The more relevant question is whether the time that is spent on search produces better information or not.

This Friday brown bag leftover was first placed into the AI3 refrigerator on September 14, 2005. No changes have been made to the original posting.

Pinheads Sometimes Get the Last Laugh

The idea of the ‘long tail’ was brilliant, and Chris Anderson’s meme has become part of our current lingo in record time. The long tail is the colloquial name for a common feature in some statistical distributions where an initial high-amplitude peak within a population distribution is followed by a rapid decline and then a relatively stable, declining low-amplitude population that “tails off.” (An asymptotic curve.) This sounds fancy; it really is not. It simply means that a very few things are very popular or topical, most everything else is not.

The following graph is a typical depiction of such a statistical distribution with the long tail shown in yellow. Such distributions often go by the names of power laws, Zipf distributions, Pareto distributions or general Lévy distributions. (Generally, such curves when plotted on a semi-logarithmic scale now show the curve to be straight, with the slope being an expression of its “power”.)

It is a common observation that virtually everything measurable on the Internet — site popularity, site traffic, ad revenues, tag frequencies on del.icio.us, open source downloads by title, Web sites chosen to be digg‘ed, Google search terms — follows such power laws or curves.

However, the real argument that Anderson made first in Wired magazine and then in his 2006 book, The Long Tail: Why the Future of Business is Selling Less of More, is that the Internet with either electronic or distributed fulfillment means that the cumulative provision of items in the long tail is now enabling the economics of some companies to move from “mass” commodities to “specialized” desires. Or, more simply put: There is money to be made in catering to individualized tastes.

I, too, agree with this argument, and it is a brilliant recognition of the fact that the Internet changes everything.

But Long Tails Have ‘Teeny Heads’

Yet what is amazing about this observation of long tails on the Internet has been the total lack of discussion of its natural reciprocal: namely, long tails have teeny heads, the red portion of the diagram. For, after all, what also is the curve above telling us? While Anderson’s point that Amazon can carry millions of book titles and still make a profit by only selling a few of each, what is going on at the other end of the curve — the head end of the curve?

Well, if we’re thinking about book sales, we can make the natural and expected observation that the head end of the curve represents sales of the best seller books; that is, all of those things in the old 80-20 world that is now being blown away with the long tail economics of the Internet. Given today’s understandings, this observation is pretty prosaic since it forms the basis of Anderson’s new long tail argument. Pre-Internet limits (it’s almost like saying before the Industrial Revolution) kept diversity low and choices few.

Okaaaay! Now that seems to make sense. But aren’t we still missing something? Indeed we are.

Social Collaboration Depends on ‘Teeny Heads’

So, when we look at many of those aspects that make up what is known as Web 2.0 or even the emerging semantic Web, we see that collaboration and user-submitted content stands at the fore. And our general power law curves then also affirm that it is a very few who supply most of that user-generated content — namely, those at the head end, the teeny heads. If those relative few individuals are not motivated, the engine that drives the social content stalls and stutters. Successful social collaboration sites are the ones that are able to marshal “large numbers of the small percentage.”

The natural question thus arises: What makes those “teeny heads” want to contribute? And what makes it so they want to contribute big — that is, frequently and with dedication? So, suddenly now, here’s a new success factor: to be successful as a collaboration site, you must appeal to the top 1% of users. They will drive your content generation. They are the ‘teeny heads’ at the top of your power curve.

Well, things just got really more difficult. We need tools, mindshare and other intangibles to attract the “1%” that will actually generate our site’s content. But we also need easy frameworks and interfaces for the general Internet population to live comfortably within the long tail.

So, heads or tails? Naahh, that’s the wrong question. Keep flipping until you get both!

This Friday brown bag leftover was first placed into the AI3 refrigerator on April 6, 2007. I remain convinced that only a few “movers” are required to start shaking the user-generated content tree. I made two changes from the original post: 1) I had to find a grainy replacement for the initial great graphic of the “teeny head”; and 2) I added the red portion to the graphic. No other changes have been made.

Venture capitalists, when the straw gets short or the proverbial hits the fan, are famous for calling for new managerial blood. After all, we did our due dilgence on this company, it is not profitable — perhaps even bleeding excessively — so what went wrong?

Actually, to be fair, perhaps the founding entrepreneurs are having the same thoughts. We wrote the business plan, we beat the odds to even get angel and (”Isn’t that special,” says the Church Lady) VC financing, thus we have had affirmation about our markets, technology, team and other aspects from the “smart” money, so why is it not working? Why aren’t we profitable? What went wrong?

Getting external financing from professional VCs is non-trivial and itself is putting a company in the “less-than-0.1% club.” And, of course, getting any financing is hard to do, be it an angel, your own checking account, your spouse or your friends and family. Forsaking Janie’s college education for a chance on a start-up requires tremendous belief and suspension of dis-belief for any early investor.

But, the initial financing hurdle has been met. Some time has passed. Neither profits nor the plan are fulfilling themselves. What do we — obviously the smart ones since we put up the money or had the ideas — do about our belief while return is not being fulfilled?

Time for Superman?

In nearly two decades of mentoring various ventures I’ve observed one possible reaction is to look for Superman. If only the company had the right missing individual in a CEO or senior manager position, then many of the current problems would go away. But as my Mom used to say, nothing is easy. Easy answers can lead to uneasy situations. And, I think, the myth of Superman more often than not fits into such a facile error.

When things go wrong (or, at least, are not going as desired), things are tough for all of those with a stake in success. Is the source of discomfort that money was put up and is now at risk of loss? Is it that individuals were supported but are not yet achieving success? Is it ego that due diligence was made but success is looking tenuous? And, if things are going wrong or progress is disappointing, what is the root cause? Is the market needful or ready? Is the technology or product responsive or ready? Is the business model correct? Are other pieces such as partners, advisors, infrastructure, collateral, or whatever in place?

New people do not need to be hired to pose these questions nor to spend purposeful and thoughtful time addressing them. And, even if new people and skills are deemed critical to supplement the skills presently available, setting expectations that are too high or too superhuman are likely to not be fulfilled, take to long to do so if even achievable, and cost too much in focus and precious resources.

The Kryptonite

In fact, pursuing the myth of Superman can actually worsen a current situation for the following reasons:

• Supermen Are Rare — there are thousands of new startups formed each year, hundreds of which receive significant venture funding from VCs, angels, or small business R&D efforts or grants. Only a very small percentage achieve high returns and only a small percentage of those can be ascribed to the “superstar” performance of a specific individual. Sure, names are known and the business and trade press love to lionize these individuals. But the statistical occurrence of a clearly superior manager or executive is measured in the tenths of a single percent or less
• Supermen Are Not Infallible — even that small minority of individuals that do receive recognition as “superstars” may have achieved that lofty status as much due to luck or circumstance. Serially successful entrepreneurs are rarer still than one-off “superstars.” And, for those few individuals that have shown repeated success, they are more often interested in pursuing their own loves and interests and are not for hire for someone else’s venture
• Supermen Are Not Obvious — perhaps because of serendipity and some of the reasons above, “superstars” also defy characterization by sex, background, age, appearance, personality, education or other discernible metric. So, if a Superman is not reliably a Superman in his next engagement, nor if there is a way to reliably identify Supermen-in-waiting, then why is so much time spent on finding the unfindable?
• Supermen Are Expensive — both in terms of equity and compensation, any individual brought in as a savior will cost the startup plenty. Resources are always most precious and constrained for startups. Perhaps, if the identification of the “superstar” could be reliably assured, then this expense could be justified. But since that reliability is not there, the hiring may only drain limited cash and resources and create resistance by the key founders who don’t receive the Superman rents
• They Can Screw Up Dynamics — by the time the Superman option is considered the company has alreadly likely achieved some success, visibility and funding. Founders and key employees, not to mention early financial backers, have worked hard to bring things to their current point. Raising the Superman spectre not only affects the morale of existing players and sends a negative message but, if an individual is then subsequently hired, existing dynamics can be challenged and irreparable harmed. Of course, outside money that controls such decisions may have reached the conclusion that dynamics were already broken and needed fixing, but the likelihood of a new player augmenting and bolstering existing positive interactions is less than the opposite prospect
• Finding Superman Diverts Attention — a Superman initiative poses a huge opportunity cost to the limited bandwidth of existing executive and director attention within a startup. Defining the qualifications, collecting the names, conducting the recruiting, interviewing the prospects, and then deciding to offer and negotiating the compensation package are extremely time consuming activities. All time spent on this stuff is time not spent on building the company, its products and pursuing sales
• In Fact, Superman May Not Exist — this is actually the most interesting observation. It is seductive and a statistical error to look at the instance of a managerial or entreprenenural success and conclude it is repeatable. After all, haven’t some individuals beat the track, the stock market, or the start-up venture odds? Let me first say there are perhaps the spectacular individuals — say a Warren Buffet — who consistently outperforms the normal. But Howard Hughes did the same and still ended up with a Spruce Goose that barely flew and fingernails inches long, and there are compelling few numbers of billionaires for the millions of existing businesses. At the statistically low numbers here, we can safely say that for practical purposes Superman does not exist.

Change the Perspective, Change the Mindset

Raising the Superman option only occurs when a company is in trouble and needs help. The key individuals associated with a startup — Board and management alike — are better advised to concentrate on business model, strategy, execution and maintaining focus than searching for the impossible or (at least) statistically highly unlikely.

When problems arise, look to problem identification and problem-solving approaches before copping out with easy Superman answers.

Efforts should be focused; business models should be clear; execution should be emphasized; resources should be zealously protected and stewarded; questions should be constantly asked; and team efforts and building should be fostered. Patience is not a four-letter word, especially if progress is steady and being accomplished in a cost-effective manner.

Nurture and training of initial founders and staff is important. Financing would not have been initially achieved without some belief in these individuals. Not now actually performing to plan is, in fact, an expected outcome, not one warranting excoriation.

These positive mindsets are hard to keep when the venture’s performance or sales is not meeting plan. And, of course, some of these instances will warrant abandonment of the venture rather throwing more good after bad. There are no guarantees. And mistakes get made.

But make the choice. Commit to the venture and improving its prospects through hard work and engagement, or walk away. Superman is a false middle ground.

Don’t Get Me Wrong

Please, don’t get me wrong. Without a doubt some people are better managers, some are some are better salespeople, some are better intellects, some are better strategists, some are better marketers and some are better networkers than others. Anyone who is superior, committed and a believer in the cause of your venture will likely bring some value. And there are indeed rare individuals and rare circumstances when hiring the right new executive could and should make all of the difference toward success.

The more important point, however, is that startups are more often than not constrained in their team and resources. Be smart about where to spend limited time and focus. Hiring good and even great people is a good focus. Searching for Superman is not. Rather than the impossible combination in a single person, look to a collective team that embodies the needed and valuable traits deemed important for your venture’s success.

This Friday brown bag leftover was first placed into the AI3 refrigerator on November 13, 2005. I was having issues with investors in my then-current gig at that time. No changes have been made to the original post.