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05 October, Mon
The inside story of how $1 billion Evernote went from Silicon Valley darling to deep trouble

“Unicorn” startups, joining the exclusive club for private tech companies worth $1 billion or more.

That year, Evernote passed 30 million registered users, brought its total funding to $270 million, and seemed like a sure-fire candidate to hit the public market in the coming years.

Fast forward three years, and the tables have turned.

Despite reaching 150 million registered users this year, Evernote has been slow to develop the revenue side of its business and is grappling with departures and cost-cutting, according to interviews that Business Insider conducted with more than a half dozen current and former employees of the company.

Evernote has laid off roughly 18% of its workforce in the past nine months, and said it will shut down three of its 10 global offices last week. Earlier this year, it replaced its long-time CEO Phil Libin with former Google exec Chris O’Neill.

“It’s going to be a tough road ahead,” one source familiar with the matter told us. “They want to go public, and, to do that, the focus on revenue now has to be a ruthless prioritization on things that make money.”

Depending on where you stand, Evernote is either a sinking ship or a maturing company going through a normal transition cycle. But most people we spoke to seem to agree that the company has failed to take advantage of its red-hot growth and make enough money from much of its huge user base — and is starting to show early signs of being an ailing unicorn.

It's a sobering reality check about the business challenges that can derail even the hottest tech sensations.

Wrong priorities

Several former employees believe a lack of focus hampered Evernote's growth. Instead of focusing on its core note-taking product and on converting users to the paid service, Evernote spent more time releasing a bunch of new products and features that only helped it grab news headlines, they said.

For example, in early 2014, a former TechCrunch writer published a scathing blog post hammering Evernote’s glitch-filled product. Libin quickly addressed the issue, even personally reaching out to the writer and vowing in an all-hands meeting to focus on improving “quality” that year.

But six months later, Evernote was back to pumping out new releases that often didn’t live up to expectations.

“There was a feeling that we were working on the wrong priorities,” a former employee said. “It was clear the motive was to just continually drum up press. They had no idea how to optimize and improve growth.”

This person said Evernote didn’t have a formal market-research or usability-testing team as robust as what companies of its scale have until earlier this year.

Another source said that until last year A/B testing was not always taken seriously, referring to a standard web-company technique in which two different versions of the same product are tested in the market.

That resulted in inferior products with lots of bugs, drawing bad reviews and heavy criticism from its users. PenUltimate, a handwriting app Evernote acquired in 2012, received a lot of complaints when it rolled out an updated version for the first time in 2014, causing the company to issue an apology and another update within a week.

Skitch, an app that lets you add captions or markups to photos, has a three-star rating (out of five) on the Apple App Store, while Work Chat, the new messaging feature it released last year, is seeing a lot of negative feedback on its own forum.

Evernote Food, a standalone app that lets users share recipes and food photos, entirely shut down last month, as did other experimental products like Evernote Hello and Peek.

“It was kind of like move on to the next shiny thing, let’s just talk about the next thing we’re going to do,” another former employee said. “There was no prioritization circled down. None of that structure existed at all.”

But another former employee notes that the seemingly scattershot approach was not as random as it appeared. "Everything was done with intent," he said. The messaging feature, which was criticized as being a naked attempt to mimic hot messaging-upstart Slack, was conceived as a way to draw more people into Evernote's "ecosystem" and ultimately to boost paying subscribers.

And elements of some shuttered products, such as the structured data technology used in Evernote Food, have since been incorporated into the core Evernote product.

Failure to convert 'free' users

Evernote originally grew users quickly by following the “freemium” model, in which the product is offered for free in the hopes of eventually turning those users into paying customers.

The problem is most of those users haven’t converted to the paid service, taking a toll on Evernote’s overall business — last year, TechCrunch pegged the company's revenue at around $36 million, and while revenue has increased, we've heard the numbers are still short of internal expectations.

Evernote recently began adding new pricing tiers, designed to offer more options for nonpaying users to give the company money.

That move is long overdue, say some people close to the company, who say the company spent too much time experimenting with random products instead of refining its monetization efforts.

An Evernote spokesperson said the number of paying users is currently in the "millions," that 20,000 businesses use the company's business version of the product, and that the number of users paying Evernote for the first time is up 40% from the same time last year. But she declined to provide specific revenue figures, as the company is privately held and does not disclose its financials.

Tightening the belt

With the greater focus on revenue growth, Evernote is becoming more disciplined with its spending, according to multiple sources.

The layoffs were the first signs, but cost-saving is showing up in perks too.

Evernote used to provide house-cleaning services every two weeks to all employees, but that’s gone now. Most people could easily request to work in overseas offices for three weeks, fully covered by the company, but that’s more tightly controlled, a former employee said. Any new requests for the monthly electric-car-charging stipend have been suspended too. Some offices say their food has been downgraded from specialized delivery service to a mix of vendors catering food.

But perhaps the biggest savings will come from canceling its annual developers conference, called Evernote Conference, which has been held in San Francisco for the past four years. Last year’s conference featured celebrities like the hosts of “MythBusters” and LinkedIn cofounder Reid Hoffman.

“If someone cancels a developers conference, it’s usually a sign that there’s stress around cash management,” said Jason Lemkin, a veteran tech entrepreneur and venture investor. “It doesn't mean the company's going under, but it's usually one of the first things to go.”

Evernote appears to be downsizing the team in charge of the platform it provides for developers. Among the employees let go in the recent round of layoffs were its director of developer relations, Chris Traganos, as well as several members of his team.

But contrary to recent rumors of Evernote closing off its API, the company said it's still open, and we've heard its platform integrations could get even stronger in the coming weeks.

Evernote also told us it never intended to have its annual developers conference in the Bay Area this year, because 75% of its users come from outside of the US. Instead, it recently held a 1,500 person event in South Korea and large events in other cities as well.

All of the changes are causing some employees to leave the company, according to various insiders. One former employee said companies like Uber, Twitter, and Dropbox have been poaching a lot of its talent. One of the floors at its Redwood City headquarters is like a "ghost town," said one insider.

“There’s been a fair number of people who left, not necessarily because they’re disgruntled or unhappy. People are just making decisions to figure out if this new version of Evernote is for them or not.”

A respectable move

Despite all the troubling signs, the fact that Evernote is taking the initiative to try to fix its problems is encouraging, said Byron Deeter, partner at Bessemer Venture Partners.

"They could have probably BS’d around a little longer. But if you actually want to build a great company and try to make a run at the big vision, then you do need to take a step back when things aren’t working optimally, and then try to take the two steps forward," said Deeter, whose firm has investments in Evernote competitors such as Box.

“I suspect what they’re doing is cutting now so they can control their own destiny later,” he added.

Lemkin also agreed, pointing out that new CEOs could often bring renewed energy to the company. “Having a new CEO can often reinvigorate a company, especially if he or she can bring in good management team. [O’Neill’s] got a huge customer base and a great brand,” he said.

One former employee said the team at Evernote has been excited about O'Neill's arrival about two months ago. "I really think Chris O’Neill is making some smart decisions, and I would say most people in the office, even though it’s pretty painful, thinks this guy has a good plan," the source said.

Evernote isn't in dire straits yet.

It still has a large user base, and as most subscription-based software companies do, it could probably improve its cash flow by cutting back on some of its investments.

But being a billion-dollar “unicorn” and being truly worth its perceived value is another story — and Evernote may be quickly drifting away from the glorified "unicorn" status.

“It’s not a fundamentally flawed business. It’s just not working as well as people expected it to,” Deeter said. “They’re still likely worth hundreds of millions of dollars. They’re just probably not worth billions today.”

Some VCs we spoke to anticipated Evernote will have to show substantial improvement in the next 12 to 18 months, or, otherwise, it could even be sold off to others. But the real damage, perhaps, may not be in its business: It's that Evernote is losing its edge as a cool company in the Valley, making it harder to recruit talent and form partnerships for the future.

As one of the former employees told us, “It’s a shame because Evernote used to be the place you wanted to go. It was the top-tier company where you pretty much did cutting edge stuff. And little by little, that faded away.”

By Eugene Kim, BusinessInsider

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