## What would \$100 Billion Valuation for @Evernote Look Like?

In a recent article in Inc magazine, Evernote CEO, Mr. Phil Libin, wrote

” there is a good chance that it will be worth \$100 billion in a few years”

You likely want to ask what “good chance mean”.

Mr. Libin wrote this in the context of  Evernote’s current one billion valuation and comparing it valuation of The New York Times. Mr. Libin’s makes a very valid point that such comparisons are point less and valuations are based on future expected value from a business’ growth.

I agree.

Most public companies have relatively predictable levels of growth, so their valuations are heavily based on the current values of their businesses. In other words, few investors expect The New York Times‘s profits to grow tenfold in the next few years.

Such valuations on future growth are valid as long as they are computed by taking into account all possible future scenarios and not just the most optimistic outcomes. In many cases, and I don’t mean it is the case with Evernote, we not only overestimate the size of positive outcomes but also overestimate the chances of such outcomes. In such cases the valuations become segregated from reality.

Back to the \$100 billion valuation for Evernote. What would it look like?

Let us say it gets the same revenue multiple of 5.51 (say 5 for ease of math) as Google. That would mean \$20 billion in yearly revenue. Where would that come from?

From its current sources I estimate that Evernote makes \$63 to \$84 million a year from 34 million users (1.4 million paying subscribers). If the current business model is the only option that would mean one of following (or combination)

1. Every customer generates \$45 a year, meaning 444 million paying customers (13 times current user numbers and 31 times current paying subscribers)
2. 50% paying customers, meaning  888 million users
3. 100 million customers (not users), meaning \$200 a year revenue per customer – that means either their subscription price goes up or they found other ways to monetize customer. \$200 a year just from subscription does not make sense (NYTimes yearly subscription costs \$195 and it did not find 100 million subscribers). Regarding other revenue sources even Google and Facebook have not found a way to get \$200.

Even if Evernote does deals like Moleskine tie-up that generate \$4-\$6 million a year, that is a larger number of deals to get to \$20 billion a year sales.

That leaves other sources of revenue that are not yet known from its current strategy. Which means one must consider higher uncertainty in such large outcomes given insufficient information.

Mr. Libin said, “there is a good chance”. Given what is known today and the uncertainties I am not sure what “good chance” means.  But given the current valuation of \$1 billion, investors seem to think the expected value of the valuation (considering all good and bad chances) is \$1 billion. Or in other words, the numeric value of good chance is much less than 1%.

A question you must ask is,

Is there also ‘good chance’ of \$200 million valuation? (See: Zynga)

Finally  I am not going to run a complete scenario analysis here as I have done for other valuations before. That is left as a homework for you.

## What is worse than a meaningless Social Media metric?

The answer is, meaningless social media metric presented in the form of a infographic. And it comes to us via MediaBistro from, not Social Media Gurus, no not witch doctors, and if you guessed Social Media Scientist that would be a good guess  but not correct, because it comes from SocialBakers.

If you have not figured out the flaw in the metric (shown left) or you are one of those 311 people who tweeted the link, I will try to point out the problems with bakers’ recipe.

The bakers give us a simplistic formula for what they arbitrarily define as Average Engagement Rate. This is not a model derived based on theory, data collection and experimentation but simply a formula thrown together with a mix of arithmetic operations. Disregard for a minute how it is computed (which is beyond ridiculous) and ask the following questions:

1. What does this really mean in the context of your marketing spend?
2. Why is this important?
3. What is the marginal benefit from a change in this metric?
4. More broadly, what does the curve look like ( Revenue = f(Average Engagement Rate))
5. What is the cost of moving the AER, if at all one could?

Well keep asking as you are not going to find any such answers from the eye candy infographic.

Now to the computation.

First the units of this metric. It is stated as a percentage. And percentages are? Dimension less. The numerator at best is a dimensionless ratio and at worse has a complicated unit of Interaction/Activity. The denominator has units of number of people – fans, followers etc.  In other words the ratio is not a dimensionless quantity because you are dividing  a quantity that is NOT number of people by a quantity that is number of people. So how can anyone simply multiply this number by 100 to state this as a percentage? Like Baker’s Dozen, they should call this Baker’s percentage.

Second the ratio is specifically designed to show as low a value as possible and hence the possibility for improvement and potential sales. The numerator is divided by total number of followers (or fans) a brand has. So larger the number of followers, smaller the magical AER. The thermometer in the infographic tells us the maximum any brand currently has is 0.7%. This also explains why they chose to multiply by 100 and call it a percentage. Otherwise, 0.007 would look too awful for anyone to pay attention.

Third, this is indeed genius move in targeting, after all those brands with millions of followers likely have higher marketing spend and hence are likely to divert some of it to improve their measly AER.

There you have it, yet another pointless and wrong Social Media engagement metric, presented as a stunning infographic that not surprisingly found many takers.

Final note, if you are tempted by any of the social media engagement metrics that talk about anything except dollar values you can cure that temptation by reading Ron Shevlin‘s book Snarketing 2.0.

## Yet Another Groupon Clone Level Up: Cost of Buying Loyalty

LevelUp is yet another Groupie – a Groupon clone. In their website copy and videos they go after Groupon. Look at their use of Groupon logo but with the words Daily Deal.

LevelUp says they address the biggest problem of Groupon and other Daily Deal sites – People buy the “ridiculously large discount”, try it once and never come back.

LevelUp say they have solved the problem for small businesses with their model – Level Up. People  Try (Level 1), Like It (Level 2) and Love It (Level 3).

LevelUp puts money behind this claim as well – they do not get paid unless people move up the level. So should your business do it?

I do not understand the subtle different between Like and Love. But that bigger question is how do those who try the discounted coupon move to higher levels? With bigger and better coupons.

The deal levels are called Good, Better and Best. They tell their subscribers,

“Had a great time? Then “level-up” and go back with an even better deal!

So they incentivize people to go back by giving them BIGGER discounts than the first time.

In other words, those who try with discounted coupon do not become a regular customer who is happy to pay full price but just a regular drain on profit.

Anyone can BUY loyalty by giving away price discounts. What will happen if the promotion is withdrawn? What is the cost of that FALSE loyalty?

LevelUp still does not address the key problem – How can a small business convert the deal seeker attracted by steep price discount into a full price customer?

In the case of Groupon and LivingSocial, I discuss their role as a Marketing
Channel and Sales Channel. As a Sales Channel all these sites are very good ways to off-load excess capacity that cannot be inventoried and businesses can protect against cannibalization.

In case of LevelUp it can never be a Sales Channel with its increasing discount levels.  Your business can hire LevelUp only as a Marketing Channel – which requires you to do the hard math before accepting their promise of Delivering Loyal Customers.