Is stealth a must for startups in China?

Recently a few friends asked me whether they should keep their ideas stealth and require NDAs (non-disclosure agreements) when discussing ideas with others. In every instance, I firmly insisted that staying stealth during development is a useless tactic that does not materially protect your idea. In the US, this is largely a topic that first time entrepreneurs dwell over only to quickly discover that their fears are unjustified. You’re far more likely to fail because you fucked up, not because someone fucked you.

But does the same hold true for China? In this dog-eat-dog environment where the lines of ethics are far more blurred, there’s definitely a hesitation to share ideas and information even among some of the most seasoned and respected entrepreneurs and investors. At the China ICT conference in May 2010, Kaifu Lee echoed the same concern: “In the U.S. one of the benefits of joining incubators like Y-Combinator is getting early exposure, in China, exposure is often feared. At Innovation Works, we see copy-cats at even the slightest hint of what we’re building.”

Most arguments for staying stealth in China boil down to three reasons:

1. China has more hungry talent that lacks original ideas
2. Copy cats have a proven track record of success
3. First mover advantage is critical, especially when building clones or products with close analogs overseas since business models are often identical

Still, the above reasons pale in comparison to the day-to-day decisions confronting a startup. Say you were the first to build/clone Groupon in China. Even if the seed ideas are identical–to build a group buying platform for heavily discounted goods & services–consider the additional variables in building this business:

• Who do you target first? The wealthy, the middle class, men, women, students or everyone?
• What products or services do you provide? Food, travel, activities, apparel, electronics?
• How big is each product vertical and customer segment? Which has higher profit margins? Do you possess an unfair advantage?
• How do you acquire your first deals? Direct sales, joint ventures, partnerships, existing relationship?
• How do you acquire your first customers? Online advertising, local campaigns, traditional media, grassroots efforts?
• How do you hit critical mass? What do you do before that?
• How do you optimize your conversion funnel? Are you running the right A/B tests?
• What if no one buys the initial deals? Do you find new deals, increase discounts, change your call-to-action, adjust marketing efforts or something else?
• What if customers don’t like your product? How quickly can you collect feedback and adapt?
• What pricing model and revenue sharing do you offer your vendors? Are you maximizing revenue & profit?

The above is not an exhaustive list, but quickly  illustrates how multiple companies starting with the same idea can end up miles apart.

By contrast, what do you lose by staying stealth? Prominent venture capitalist Fred Wilson argues that “stealth = lost opportunity”. By getting your idea out early, regardless of how infant it may be, you’re giving yourself the opportunity to collect valuable customer feedback before writing heaps of code. Getting to product market fit is an iterative and exhausting process, why not start that on day one?

In light of all the factors that can derail the destiny of a startup, the importance of the original idea quickly pales in comparison. Successful companies are rarely built on their original ideas but rather through an evolutionary process rooted in diligent observation, creativity, execution, execution and execution. PayPal started as a tool for transferring money between mobile devices. It wasn’t until waves of eBay sellers began using PayPal as an alternative to money orders and cashiers checks before PayPal realized a larger opportunity. Google had no business model until Goto.com pioneered today’s search advertising model. Twitter was a pet project for Silicon Valley geeks to share there status with friends until users began breaking news and sharing photos and links. The list goes on and on…

Often times the most pivotal decisions yield little instant gratification or assurance. As business and tech writer Sarah Lacy pointed out in a recent TechCrunch article: “Business professors and journalists can later dissect what companies did right, but frequently at the time pivotal decisions were a fluke.” Though there may be exceptions depending on the niche, but by and large, the same should hold true for China. Do you agree?