The world of startups is always in a state of flux, with new companies popping up every day in various corners of the globe. Recently, we've been keeping a close eye on the number of stealth mode founders, and we've identified a surprising trend: Israel is punching above its weight when it comes to early-stage startup creation.

Increasingly more startups choose to stay under the radar with one small country dominating the trend: Israel. Here is why founders choose to avoid the limelight at least temporarily and how VC investors can still detect them and gain a first-mover advantage.

What is a stealth startup?

A stealth startup is a company that is in the early stages of development and typically operates in secrecy, keeping its business model, technology and other details confidential, before it's ready to launch and go public. They are also called "stealth mode" startups as they work in stealth mode and avoid publicizing their existence until they are ready to launch their product or service. According to CB Insights, global funding for stealth startups saw a significant increase in 2020, rising by nearly 140% compared to the previous year.

Startups typically come out of stealth mode when they are ready to launch their product or service to the public or when they need to raise significant funds such as a Series A round.

Why do startup founders choose stealth mode?

Staying in stealth mode has several advantages over coming out of stealth. For one, it allows companies to focus on product development and user acquisition without the pressure of public scrutiny. This can be especially beneficial for early-stage startups that are still trying to find their footing. Additionally, staying in stealth mode can protect a company's intellectual property, as they don't have to disclose their technology or business model to the public before they're ready.

Shishir Mehrotra, CEO of Coda, puts it like this:

Another advantage of staying in stealth mode is that it can help companies avoid the "valley of death" - the period between the end of seed funding and the start of Series A funding. By staying under the radar, companies can avoid the pressure to scale up prematurely and instead focus on developing a product that is ready for the next round of funding.

There are several reasons why startups come out of stealth mode:

• Product development: Once a startup has a working prototype or a minimum viable product (MVP) that is ready for the market, they will typically come out of stealth mode to start promoting and selling their product.
• Fundraising: Startups that are looking to raise significant funds, such as a Series A round, will typically come out of stealth mode to attract investors.
• Building a team: As a startup grows, it will need to attract talent to join its team. Coming out of stealth mode can help to increase visibility and attract the best talent.
• Building a user base: Startups that have a product ready to go and want to build a user base will come out of stealth mode to target and acquire customers.
• Market validation: Startups that are looking to validate their business model or market will come out of stealth mode to test their product with real-world customers and get feedback.

Ultimately, the decision to come out of stealth mode depends on the individual startup and their goals. Some companies may want to remain in stealth mode for longer to focus on product development, while others may come out of stealth mode earlier to start building a user base or raising funds.

Why Israel creates overproportionally more early-stage startups

We have identified more than 10,000 stealth mode founders in 2022, and about 40% of them are located in the US. Where it gets interesting is the longtail distributed across the rest of the world: While UK and India present their fair share in proportion to their respective population or to the background as IT hubs, Israel with only 10 million inhabitants contributes a whooping 5% of global stealth startups. To put this into perspective: Israel has more stealth founders than France, Sweden, and the Netherlands combined!

Raized.ai’s Stealth Startup Discovery in 2022

Israel’s perfect breeding conditions for stealth startups

Israel has a strong focus on innovation and entrepreneurship. The small country has a long history of creating successful startups, and this culture of innovation is deeply ingrained in the country's DNA. Accordingly it has a well-developed ecosystem of venture capitalists, angel investors, and accelerators that support early-stage startups. Compared to other countries, Israel offers easier access to funding and mentorship, which is especially crucial for early-stage startups so they can get their ideas off the ground.

This means that companies can stay under the radar until they need to raise more significant funds, such as a Series A. Staying in stealth mode has several advantages over coming out of stealth, including the ability to focus on product development and user acquisition, protecting intellectual property, and avoiding the "valley of death."

Why stealth startups are hidden gems for VCs

Here’s why our customers are excited to reach out to stealth mode founders:

1. First-mover advantage: By reaching out to stealth mode founders early on, venture capitalists (VCs) can gain a first-mover advantage and potentially secure a spot in the company's first round of funding. This can give them an edge over other investors who may not have the opportunity to invest until the company is further along in its development.
2. Low valuation: As a company is still in stealth mode, it is not yet well-known, which means that the valuation of the company is likely to be lower than that of a company that has already made a name for itself. This can be an attractive opportunity for VCs looking to invest in a company with a high potential for growth at a lower cost.
3. High-quality product: Companies in stealth mode are often still in the product development stage, which means that they have the potential to create a high-quality product that is ready for the next round of funding. By reaching out to stealth mode founders early on, VCs can get in on the ground floor and potentially reap the rewards of investing in a company that has a strong product that is well-positioned for success.

How to hunt for/detect stealth startups

Finding startups in stealth mode requires persistence, networking, and creativity. The 5 tips below give you an idea how Raized.ai uncovers information about founders and companies that are operating in secrecy:

1. Networking: Entrepreneurial communities and startup networks can be a valuable source of information about stealth startups. By connecting with entrepreneurs, investors, and other industry professionals, you can learn about companies that are operating in stealth mode.
2. Social media: Stealth startups may be active on social media, but they are likely to be more guarded about what they share publicly. However, you may be able to find hints about their products, services, or business models by following their social media accounts.
3. Job postings: Stealth startups may post job listings on sites like LinkedIn or Glassdoor to find talent. By reading job postings, you can get a sense of what the company does and what skills it is looking for.
4. Legal databases: Companies in stealth mode are still required to file paperwork with the government, such as business formation documents or patent applications. By searching legal databases, you may be able to find information about a company's founders, location, and business activities.
5. Press releases and media coverage: Sometimes, stealth startups are mentioned in press releases or media coverage, especially if they have a high-profile founder or investor. By keeping an eye on industry news, you may be able to find out about stealth startups that are making headlines.

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