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Evernote’s Capital-Intensive Freemium Model Works

Posted on Tuesday, Apr 9th 2013

A report by Juniper Research released last year estimated that the market for consumer mobile applications will be worth $52 billion by the year 2016. Growth will be driven by the increasing adoption of smartphones and tablets by consumers. Last year, tablet apps accounted for 7% of global app revenues. That number is projected to grow to 25% by 2016.

Evernote’s Financials
One of the useful apps being used by consumers is that released by Mountain View–based Evernote. Evernote’s app lets its more than 41 million users save text, images, media, voice memos or even handwritten notes onto the cloud so that they can access them later over multiple platforms, including Microsoft Windows, Mac OS, Android, iOS, BlackBerry, and Symbian.

Evernote has been operating since 2007 on a freemium model. Of its 41 million users, an estimated 1.5 million users pay the nominal fee of $5 per month or the further discounted $45 per year for the services. This 3.7% conversion rate is considered astronomical in the freemium business world. Most companies following this model monetize at rates lower than 1%.

Evernote’s revenue is probably in the $75 million -$80 million annual run rate rate at present, a reasonable business for sure. However, it has taken an enormous amount of capital to get to this point.

Evernote’s Product Expansion
As part of their expanding product range, last year end, Evernote recently released their app for business users. Known as Evernote Business, the app features the Basic and Premium Evernote versions, with added features focused on businesses. For instance, the administrator of the business console has the ability to invite and manage access for users. The app also features a Business Library, which includes a collection of Business Notebooks available to all team members where users can share and use the collected knowledge of their colleagues. The business app is priced at $10 per user per month.

To enhance their consumer business, they partnered with Moleskine to release a smart notebook that makes it easier for users to digitize their handwritten notes. The Evernote Smart Notebook by Moleskine is the first notebook of its kind that uses special paper designed specially to translate handwritten physical notes to the user’s Evernote account. The handwritten notes can be organized and tagged in the user’s account automatically by using Smart Stickers and Evernote’s Page Camera feature that is available for iOS and Android mobile devices. The notebook retails for nearly $30 and has received positive market reviews.

While Evernote figures out what product and business model combinations work for them, they have delayed their IPO plans. Analysts were expecting an IPO by the end of this year, but Evernote believes the IPO will probably not be ready before 2015 or 2016.

To date, they have received $251 million in venture funding from investors that include T.Rowe Price Associates, Harbor Pacific Capital, Allen and Company, Meritech Capital, CBC Capital, Sequoia Capital, Morgenthaler Ventures, and DOCOMO Capital. Their most recent round of funding was held last year end when they raised $85 million from investors, including AGC Equity Partners/m8 Capital, Valiant Capital Partners, and other existing investors at an estimated valuation of $1 billion.

As always, though, I remain skeptical of  valuations that are not supported by a strong monetization model. I hope that Evernote’s product line expansion will help them build a business model that justifies the valuation, or the conversion rate for the core business will rise sufficiently to backfill what seems to me like a rather overvalued company.

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