San Francisco Chronicle - (Sunday)
How old ‘startup’ shatters ‘fail fast’ gospel
Evernote has had ‘Long and Winding Road’
Smiling cryptically, Ian Small, the chief executive of Evernote, handed me some socks. Nice ones: black in the calf, striped in the foot, with matching pops of sky blue at the toe, heel and welt. The knit was Japanese, dense and springy, and contained 1% polyurethane. Marketing language described them, insanely, as “smart covers for your feet” that shared design principles with productivity software.
Small had retrieved the socks from a small cabinet at Evernote’s headquarters in Redwood City, where coders work on its popular notetaking app. At the peak of Evernote’s success, as part of an ambitious plan to expand from software factory to lifestyle brand, the company sold the socks and other “exceptional products that satisfy our desires for greater ease and efficiency,” like highend scanners and backpacks made by Côte&Ciel, a French boutique. The company even opened a physical storefront in its lobby called “Noteworthy by Evernote.” It gave the Evernote groupies — groupies! — who kept showing up at the office something to peruse.
But that was a century ago, in startup years. When I visited Small in May, the shelves laden with branded goods were gone. There was a wall full of aging trophies, and in the back, an old mural describing the shop’s lofty vision was still faintly visible beneath a layer of Evernotegreen paint.
Small was goodnatured about it. “We treasure our history,” he said.
For a startup (if it can still be called that), Evernote has a lot of
it. Founded in 2004, it was among the first companies to ride the wave of smartphone adoption, and many expected it would achieve a triumphant initial public offering. Instead, the company cycled through four chief executives, several rounds of layoffs, three office closings and the shuttering of numerous side projects, including Japanesemade smart covers for your feet. Last September, when four top executives left at once, tech blogs declared that the company was in a “death spiral.”
In a season of multibilliondollar IPOs for Slack, Pinterest, Zoom, Uber, Lyft and others, Evernote is nowhere close. While younger startups are minting hundreds of millionaires and creating a generation of semiretired tech Millennials, Evernote is in the midst of a difficult turnaround led by Small, an unassuming, undertheradar entrepreneur who took over in October.
In Silicon Valley, the idea that most startups won’t make it to a splashy public offering or acquisition is not just understood, but embraced. “Fail fast, fail often” is one of the region’s earliest and bestrecognized catchphrases. The implication is that people and companies that don’t find success can transition, efficiently and without stigma, to more promising ventures. But Evernote’s struggles illustrate a harsher truth: For many startups of a certain size, failure rarely happens abruptly.
More often, after early momentum wanes, the missteps and bad press accumulate until a company enters a slow, difficult rehabilitation that stretches on for years. But in and around San Francisco, no one likes to talk about getting stuck in startup purgatory. Once venture capital investors have sunk in considerable sums, they’re willing to let struggling companies flounder for years on the off chance they hit on something big. “They’re not in it for a breakeven or a slight loss or a slight gain,” said Jeffrey Cohen, a bankruptcy lawyer at Lowenstein Sandler. “They’re willing to let it ride a little longer to see whether it explodes.”
It’s a common trap for the most recent generation of startups, which has been marked by the proliferation of “unicorns” worth $1 billion or more. For fledgling companies, taking enough investor money to become one of these magical ungulates was supposed to show customers, employees and the world that they were sure bets — that they were too special and big and valuable to fail. But many companies that chased threecomma valuations are now stuck trying to live up to almost impossible expectations.
Since 2015, according to CB Insights, a research firm, more than 40 unicorn companies have had “down rounds” or “down exits” — that is, investments or sales at reduced valuations. The list includes wellknown brands like Shazam, the namethatsong app, and Jessica Alba’s consumer products startup, the Honest Co.
Several unicorns have laid off staff in recent months, including Clover Health (which does health insurance), Udacity (online education) and Instacart (grocery delivery). Stumbles and shifts like that won’t kill a company, but they harm the perception that they are growing rapidly — and that, in turn, harms their ability to recruit, raise capital and, well, grow rapidly.
Evernote’s headquarters, bearing its green elephant logo, loom over Highway 101, where billboards advertise financial services to the latest class of IPO millionaires. From the building’s fifth floor, Small looked out over the suburban sprawl of Silicon Valley. He pointed out the offices of companies that are younger than Evernote, including Box, a cloud storage company that went public in 2015. Its revenue is sixfold that of Evernote and its staff is nine times its size.
“There are companies in Silicon Valley that are rocket ships,” Small said, making a whistling noise and upward motion with his hand. He paused to contemplate how I’d render that sound in print and continued in the easy tone of light, wellpracticed dad joke. “We’re a little more like the Beatles song. It is ‘A Long and Winding Road.’ ”
Hype — the jet fuel that propels hot startups — has a short memory. Remember Farm-Ville? The agrarian simulation was a phenomenon, topping 80 million users and leading its parent company, Zynga, to a valuation of $7 billion at the time of its 2011 IPO. But the buzz wore off as losses continued and the company cycled through chief executives. At various points, the value of Zynga’s cash stockpile plus its headquarters topped its entire market capitalization. This year the company sold its real estate for $600 million, netting a greater profit than it ever earned on its games.
Lots of oncehyped companies live on the “Remember this?” spectrum. On one end, there is a cluster of fast flameouts — the YoElloPeachMeerkatStolenClinkleSecretColor coterie. On the other end is a group of hit startups that showed enough promise and raised enough money to stay alive even after they fell out of the zeitgeist. Remember Foursquare, the checkin app? It transformed into a location-tracking technology provider and raised $150 million in fresh funding in May. Remember Quora, the questionandanswer site? It “still exists,” Recode wrote in a burn of a headline recently, and plans to raise funding at a valuation of $2 billion. “Remember Everything” is one of Evernote’s slogans. It’s been a remarkable journey. From its origins as a simple notetaking app, Evernote hit euphoric highs. Jobseekers submitted elaborate, unsolicited application videos, like Karen X. Cheng, a designer, who filmed herself performing a song she wrote about her dream gig at the company. (“I wanna help the world remember / I wanna go extend their brains,” she sang.) Some who did get hired describe feeling as if they’d won “American Idol.” The company reached unicorn status in 2012. The next year, Phil Libin, a showmanstyle chief executive, declared that Evernote aspired to be “the Nike for your mind.”
It seemed natural for Evernote the Lifestyle Brand to use its hundreds of millions in venture capital to expand in every direction. In addition to its flagship app, Evernote built a chat app, a recipe app, a contacts management app and a flashcard app. It hosted elaborate conferences for its partners and users. It sold business gear — including $32.95 Evernotebranded Moleskine notebooks — in an ambitious ecommerce effort. It struck a partnership to digitize Postit notes. It had more than 150 million registered users, and Libin talked up his vision of a “100year startup.”
When Evernote’s growth began to slow in 2015, though, the company replaced Libin with Chris O’Neill, a former Google executive. He laid off employees, scaled back side projects, canceled lavish perks like a weekly sushi lunch and free house cleaners, shuttered three international offices and hiked the price of an Evernote subscription. His strategy was to focus Evernote on business software and compete with more robust enterprise offerings. But Evernote’s product lacked essential features, and the distinct versions of its apps on Windows, iOS and Android systems made collaboration across devices and teams difficult, former employees say. Sales of Evernote’s business product never exceeded 15% of revenue, according to two people familiar with the company.
Employees wishfully passed along rumors about a buyout from Microsoft or Google. A sense of malaise crept into team meetings, where employees gathered on a wide staircase with seat cushions in the center of the building under a large cardboard elephant head mount. “You got this collective sense of, ‘It’s fine, but it’s probably not going to be successful,’ ” a former employee said.
Startups rarely drop the veneer of perpetually “crushing it,” no matter how ugly things get. But in the summer and fall of 2018, four top executives quit. An August article in the New York Times Styles section about O’Neill’s workout routine came off as oblivious, and he soon left the company too. Within a few months of replacing him, Small calculated that he could not ignore the swell of angry message board posts and “death spiral” headlines.
He published an unusually frank blog post aimed at Evernote’s users in January. The company’s foundation was not strong, he wrote, and its products had developed a “unique collection of bugs and undesirable behaviors.” It would take most of the year to get all that fixed, he wrote, adding that “undoubtedly we will still disappoint some of you.”
Customers responded to his candor with a mix of optimism and skepticism, Small said. “The fact that we were able to tell the truth — that they already knew to be true — was a change of pace, not just for Evernote but for every techcompany relationship they probably have,” he said.
Now Small faces the challenge of recruiting engineers to fix Evernote’s “unique collection of bugs,” when they could be riding a bullet train to riches at a newer company. Hot startups can spend lavishly on engineering talent; they can always raise more if they’re growing quickly. Evernote has a different, more mature goal. It expects to reach positive cash flow this year, with annual revenue of nearly $100 million. “We used to be a movement,” Small said. “When we were a movement, we weren’t a business.”
Distaste for the venturefueled model of hypergrowth is becoming more common among founders and executives, even ones whose reputations and bank accounts benefited from the narrative on the way up. Techies tend to blame amorphous entities — the press, investors or “Silicon Valley” in general — for the perils of hype.
It’s true that in many other contexts, a company like Evernote might be considered a success and not some cautionary zombiecorn. “The core business of Evernote is what most companies outside of Silicon Valley would look on with envy,” said Vincent Toolan, Evernote’s former chief financial officer. “The problem is it’s in Silicon Valley.”
Roelof Botha, a partner at Sequoia Capital and a member of Evernote’s board, dismissed the idea of the company adrift as noise, expressing enthusiasm for its prospects. With Evernote, “the narrative around the company was more positive than reality,” he said. “Right now, the narrative is more negative than reality.”
Small also resisted the industry’s ageold boomandbust narrative. “Silicon Valley likes it when people stumble,” he said. “It makes good news.” But he pointed out that Evernote’s apps were still downloaded 50,000 times a day — user complaints and internal tumult notwithstanding.
Erin Griffith is a New York Times writer.