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Evernote: 2011 Company of the Year

The Company of the Year is rejecting industry trends, getting customers to pay for something that's free, and reinventing the way we remember.

Phil Libin remembers the moment he left childhood behind. It was nearly four years ago, when the funding for his Internet start-up fell through. He was 35.

It had all been so much fun until then. But at 3 a.m., out of cash and having waited in vain for a venture capitalist or angel or CEO or anyone at all to return his increasingly desperate calls, Libin knew that he would have to pull the plug on Evernote, a software application that helps people remember things. "I realized I was going to have to wake up tomorrow and lay off everyone in the company," he says.

Exhausted and demoralized, he was reaching for the light switch when his e-mail dinged. A momentary blast of hope—but no, just a message from a fan, something he had been getting more and more of lately. This one was from some guy in Sweden, a fellow software entrepreneur, and it was the usual "Evernote has changed my life" sort of thing. Libin almost missed the last line: "If you ever need any money let me know."

Feeling more awake, Libin typed back: "It just so happens we could use some cash. How much did you have in mind?"

The answer came right back: "Would half a million dollars be enough?"

Today, the company is swimming in tens of millions of dollars in cash from both VCs and profits. Evernote is buying companies, tripling in size each year, and drawing 40,000 new users a day. If you live in Silicon Valley or Tokyo, where Evernote has reached cult status, none of this probably surprises you. Otherwise, you must be wondering: What the hell is Evernote?

Libin has different ways of explaining it: It's your brain offloaded to a server. It's Google for the Web of your life. It's a spotlight on the dark matter of your universe. It's a tool for converting your smartphone from a time killer to a time saver.

Learn more about how Evernote works, and hear from some of its biggest fanatics in the tech industry.

OK, so Evernote is a little hard to explain—you have to get to know it to appreciate how subversively effective it is. You could say pretty much the same about Libin, as well as about the team of fellow managers—many of whom have stuck together through multiple start-ups—and the company they have built around memory. It's a company whose employees romp in spacious offices ringed with conference rooms named after video games. (So much for adulthood.) Whose customers are so dedicated that many eventually choose to pay for the service, even though they can use it for free. That's starting to change the way children learn in schools. And that has set its sights on affecting the lives of a billion people—a goal that's looking less fanciful every day.

Such lofty ambitions might have seemed absurd when Libin's family moved to the Bronx, New York, from the Soviet Union in 1979. Libin was 8 years old. Fourteen years later, he had managed to effect a trifecta of ancestral shame when he left Boston University one course short of his bachelor's degree, in a fit of pique over a questionable charge on a school bill. "I was the first one in my family for 200 years who had no degree, didn't play an instrument, and wasn't a chessmaster," says Libin, who, whatever his limitations, has raised acerbic self-effacement to an art form.

Degree, schmegree—Libin could code. He had been a computer whiz at New York's prestigious Bronx High School of Science and had been making good money at it on the side since age 16. After dropping out of college, Libin was snatched up by ATG, a company in Cambridge, Massachusetts, with a corps of brilliant coders who were helping invent much of what would become standard e-commerce technology. "It was the first time I had ever felt average," says Libin. After three years, in 1997, he left ATG along with a few of his fellow laid-back but hard-hacking pals and launched Engine 5, a company in Boston, developing e-commerce software. "I was the least productive programmer, so I got stuck with the management job," Libin says. Knowing nothing about raising money, the group didn't bother and simply started programming. In 2000, it sold the company for $26 million.

The following year, Libin began pulling together the core Engine 5 team to launch another company. Joining up with MIT computer scientist Silvio Micali, Libin aimed the venture, called CoreStreet, at producing high-tech security systems for government agencies and large financial institutions. But having cut his teeth on the Mach-speed, make-it-up-as-you-go world of the Web, Libin found the byzantine, multiyear cycles of government procurement maddeningly inefficient and—even worse—boring. In 2006, he left the company, which was sold three years later for $20 million. Though the experience wasn't an entirely satisfying one, it had convinced Libin that he and his team were the perfect solution in search of the right problem. Micali, who returned to academia after CoreStreet, thought the same. "It's an incredibly talented group, creative and fun to work with," he says. "And you have to love Phil. He's not only brilliantly original in his thinking; he can find humor in anything. You laugh all the time around him."

Libin immediately started casting about for inspiration for a third company. Given his experience with his first two ventures, Libin knew two things: He didn't want to be bored, and he didn't want to merely make money. "A billion dollars isn't cool," says Libin, contradicting the speech Sean Parker supposedly delivered to Facebook's Mark Zuckerberg. "What's cool is impacting a billion people. Whatever I ended up doing, I wanted people to get excited about it. I wanted long lines forming for it."

An idea had been brewing for some time in the back of his mind: How do we remember something, like the name of a restaurant? It's largely through the associations we have with it in our heads. The trigger might be thinking about whom you were with when you heard about it, where you were, what else you were doing at the time, or a related word or image. From these bits and pieces, we can often dredge up a forgotten but important thought. But not always. Our brains have limited memory capacity, which is why no matter what you do, you still forget most things you come across. And that's a growing problem in an age in which information in all forms comes flying at us at ever-faster rates and you're not sure which of it will prove useful. Plus, aging baby boomers are finding themselves with less and less memory to work with. "No one is happy with their meat brain," says Libin. "It's overloaded by the time we're in high school. It's as universal a problem as you can get."

We try to compensate by storing data on our laptop computers and tablets and smartphones. But that works only if we trouble ourselves to enter the information in the right place in the right file in the right form, and even then it can be hard to track down where that crucial nugget of information is hiding. Is the name of that restaurant on my laptop or my phone? I could ask that guy from the conference who told me about it, but what did I do with his e-mail address?

Libin began to think about what a better electronic memory would be like. You could put in information in any form, be it a typed document, a handwritten note, a photo, a webpage, a spoken conversation. And you could instantly get the information into any of your devices on the fly without worrying about how to organize it. "When people want to capture a thought, they don't want to stop what they're doing," he says.

More important, you would be able to find whatever it is whenever you need it, as effortlessly and intuitively as we now dig up stuff via Google. "Google is great, but it only knows about public information," says Libin. "We needed something that could handle your information." It would be as if Google were indexing your life on an ongoing basis and putting it all at your fingertips. What's more, you wouldn't need to remember much about what exactly you were looking for. As with your brain, what you would need is only a vague clue, like a person, a place, a word, a time.

How great would that be for productivity? Especially if it worked well on smartphones, which more of us are pulling out more often throughout the day. As we do an increasing amount of our work outside of the office, realized Libin, there was a growing opportunity to make the bits of free time away from our computers count. But so far, says Libin, smartphone apps have been more time killers than productivity tools. "They've been great for wasting time on Facebook and Zynga when you have a couple of minutes," he says. "I wanted to make smartphones great for getting work done in those minutes." And, finally, Libin thought it was crucial that this memory tool be fun to use. "In the past five years, there's been a huge emphasis in giving us great tools for entertaining diversions," he says. "But no one has applied the same great user experience that we see on something like Facebook to productivity tools. Microsoft Office isn't fun to use."

Put it all together, and you would get what Libin calls "a ubiquitous platform for lifetime productivity." Now all he had to do was build it and get a billion people to use it.

They Go Way Back

Many of Evernote's managers worked with Phil Libin at his previous companies, Engine 5 and CoreStreet.

1. The Friend of a Friend
Dave Engberg is friends with Evernote programmer Brandon Volbright, who worked at Engine 5, Libin's first company. After Volbright made an introduction, Libin hired Engberg to work at CoreStreet. Engberg is now Evernote's CTO.

2. The College Buddy
Phil Constantinou—or Phil C., as he is called at Evernote, to differentiate him from Libin—lived across the hall from Engberg in their freshman dorm at Stanford. Engberg introduced him to Libin, who hired Constantinou as vice president of products at Evernote.

3. The Loyal Leader
Phil Libin, whose second company, CoreStreet, made high-tech security systems for the government, decided to ditch the slow-moving world of contracting. But he held on to his team.

4. The Childhood pal
Andrew Sinkov has known Libin since they were kids. Sinkov was working at a real estate firm—and knew zip about marketing—when Libin hired him to handle marketing at CoreStreet. Now, Sinkov is Evernote's vice president of marketing.

In 2006, Libin pulled the crew together again with the intention of starting a company called Ribbon, as in, tied around your finger. (As a big fan of Japan, Libin notes, it was a nice bonus for him that the name was similar to how people pronounce his name there.) But shortly after throwing himself into researching electronic memory aids, he discovered there was a tiny, two-year-old stealth start-up in Silicon Valley called Evernote. It was creating tools for extracting text from photos so that you could take pictures of notes and make them searchable. "I had thought of that," says Libin, "but these guys were already pretty far along with the technology."

In fact, this Evernote team had previously developed some of the key software for Apple's visionary but ill-fated Newton personal information manager, a sort of primitive iPad that came out in the late 1980s. It was a primarily Russian crew of talented coders, not unlike Libin's own team, and it was led by a brilliant techie named Stepan Pachikov. Libin flew out to meet Pachikov, liked what he heard, and suggested they merge the teams rather than compete. Libin became CEO of the company, which retained the name Evernote, while Pachikov gradually shifted his focus to other projects.

Libin and his team moved from Boston to Silicon Valley, where Libin found the culture vastly more welcoming of his offbeat, high-tech entrepreneurial style than Boston had ever been. After the teams merged, the new company was left with enough money for a year or so. That would be long enough to get a product up and running, if everyone was focused. To that end, Libin cut loose most of the projects Pachikov's team had been working on to concentrate on the key characteristics of his revolutionary memory aid: free-form capture of any type of information, simple associative retrieval, super-smartphone-friendly, fun to use.

In 2008, the company launched a "private beta" version of the software intended mostly for Silicon Valley insiders. The night before, at 3 a.m.—apparently the time at which he produces his key insights—Libin realized that the team had forgotten to put together any sort of tutorial. So Libin threw together and narrated a quick demo and put it on YouTube. "I've gotten death threats over it," he says. "I've been said to have the most annoying voice ever heard anywhere in the world." That video would eventually get more than a million hits.

Word started to get around pockets of Silicon Valley about this cool new app that helped you remember stuff. It worked more or less as Libin had envisioned. Most types of information can be added to Evernote in a few seconds, from any computer or smartphone. You can type in a note, handwrite a note on a touchscreen, take a photo with your phone's camera, record an audio conversation, put in a Web address, save all or part of a webpage, or forward an e-mail to Evernote. The software takes it from there, sucking the data into Evernote's servers, which are backed up religiously, as well as storing it on your computer. The system also labels the incoming data with any information that could come in handy, including when it was added and where you were when you added it. Thanks to the software developed by Pachikov's team, any visible text in a photo becomes searchable. "Before I go to the supermarket, I take a snapshot of the list my wife has on the refrigerator," says Daniel Kuperman, CEO of Aprix Solutions, a Silicon Valley Web start-up focused on helping companies manage marketing efforts, and an early user of Evernote.

You can add titles or tags to the notes, though you don't have to. You can also file notes—any piece of information in Evernote is a "note"—in different "notebooks," and share these notebooks or individual notes with others. To find your note later, you need recall only one key point about it and then search on that. Want to remember that restaurant you went to? Search on French toast, because that's what you had there, and you took a picture of the menu. Or on Seattle, because that's where you were. Or on Janet, because she was with you, and you took a picture of her. Or on black holes, because you remember clipping an online article about them that day, and once you know the date, you can bring up other notes from that day. "It's the electronic version of having something at the tip of your tongue," says Libin.

To the delight of Silicon Valleyites, the tool is a boon at meetings. You can type notes while recording audio and cap it off by taking a picture of the whiteboard. And all of it winds up in Evernote, ready for easy recall. By tying Evernote into other services, you can have even more ways of finding things: Audio recordings can be transcribed (at extra cost) to allow searching by anything said at a meeting, and one add-on tool even allows for searching photos by color—if all you remember about a meeting was that the other fellow was wearing an orange sweater, you will be able to dig it up. "Evernote finds the way your mind works and gives you more and more hooks into your memories," says Andrew Sinkov, a childhood friend of Libin's who worked at CoreStreet and now heads up Evernote's marketing.

No wonder the Silicon Valley crowd loves it—these are people who grew up navigating constant multiple streams of information. "So many things are happening in life that make me end up with more data," says early Evernote devotee Jason Freedman, who co-founded FlightCaster, a Web-based travel-information service, and recently launched an online real estate start-up, 42Floors. "Evernote is the technology version of what the Container Store does for my bedroom," he says. "It's a simple solution that brings sanity to the situation."

Despite the enthusiastic reception for Evernote's beta version, which went public in mid-2008, the company's cash was running out fast, and Libin struggled to raise more. VCs confronted him with a host of concerns. For starters, Evernote didn't play off social networks at a time when Silicon Valley was looking for the next Facebook. Plus, Evernote eschewed the widespread wisdom that everything was moving to the cloud. It relied on native apps—software that does most of the work while running on your computer or smartphone instead of letting an Internet server somewhere else handle the job. Though there's a Web version, Evernote is mostly intended to run as a native app, because it runs a lot faster that way, and Libin was convinced that a snappy response was critical to delivering a satisfying memory-retrieval experience.

There was one more concern, and it was a big one. Evernote was being pitched as a so-called freemium service. In other words, people could either use it for free or upgrade to a paid premium version, which is how the company would make money. So far, so good; the freemium model was seen as a smart one. The problem was that, unlike virtually all other entrepreneurs relying on that model, Libin refused to cripple the free version, removing the incentive to upgrade to the paid version. You could pay $5 a month and get additional file storage, but why would anyone do that? asked the VCs. The free version was full featured and offered generous storage.

Libin explained his theory: The more stuff you put in Evernote, the more important the service would be to you. Who would begrudge $5 a month to a company that was storing your memories and helping you retrieve them? "Your notes, your restaurants, your friends, a year of your life, then years of your life," says Libin. "That's worth thousands." The danger wasn't that people wouldn't upgrade, he argued; it was that they wouldn't try the service in the first place or wouldn't stick with it because the free version was skimpy and failed to impress. Get them to fall in love with the service, and they would eventually pay, because they would be invested in its success. "I want to build a 100-year company, and I'm serious about that," says Libin. "I don't need to squeeze money out of you. I'll have the rest of your life to take your money. It's my long-term greedy strategy. Our slogan is, 'We'd rather you stay than pay.' Basically, I wanted a business model that rhymed."

The VCs were not impressed. "No one would touch us," says Libin. In desperation, Libin turned to Europe and managed to cut a $10 million deal with an investment firm there. The deal was set to close in October 2008—smack in the middle of one of the worst crashes in the history of the stock market. The investor called the deal off the morning both parties were to sign.

Libin, unable to find another investor or even anyone who would return his call in the postcrash chaos, realized that he would have to close the company. Then the Swedish guy wrote, offering half a million dollars. Libin now had maybe six months to try to prove that his stay-versus-pay strategy could work. "That's when everything started happening," he says.

In mid-2009, Gary Little, a partner at Morgenthaler Ventures and an influential figure in Silicon Valley, received an e-mail from Guido Appenzeller, a Stanford professor who was working with the VC firm to launch his second company. "Guido said I had to check out this hot new application that was taking Stanford by storm," recalls Little. Little checked the app out, was impressed, and invited the CEO of the company, who happened to be looking for funding, to come in and pitch the firm. The CEO was relaxed, amiable, and humble, and he soon had the group cracking up at his deadpan humor. The type of guy who says he chose his business plan because it rhymed. And that his international strategy was focused on Japan because he liked Japanese food.

At a following meeting, Libin stunned the group with a series of slides that Little calls "one of best analytical dissections of a business I've ever seen." Libin showed the group that the rate at which Evernote users were upgrading to the paid version within a month of signing up was half a percent. This was not good—and not surprising, given that the free version worked fine. But then Libin showed the upgrade rates over longer periods of time. Normally, this would be an even grimmer picture, because at almost all companies with freemium models, users who upgrade tend to do so pretty quickly. They sample the hobbled free version, and if they like it, they upgrade right away to get all the features; if they don't like it enough to upgrade, they tend to abandon the service altogether or use it lightly. But Libin showed that Evernote users became more likely to upgrade over time. For those users who had been using Evernote for a year, the upgrade rate was an impressive 8 percent. If Evernote could get to a million users, explained Libin, sales would be close to $4 million a year. And, at the current growth rate, Evernote would reach 10 million users within two years.

Then Libin showed activity rates, or, roughly, how often an average user was actually using Evernote over time. For many software companies, that curve runs relentlessly downward. Most people who try an app abandon it pretty quickly or use it less frequently as time goes on. But for Evernote, the curve was a smile. There was a slight drop-off in usage after the first few months, but then it went up again—not only because active users were finding the service more and more useful, but also because customers who had stopped using the service were returning to it. People who left Evernote missed it.

Morgenthaler invested. So did Sequoia Capital, another top Silicon Valley VC firm. So did other VCs. Altogether, Evernote has raised $95 million. "We didn't need most of the money," says Libin. "But that's when you can get it, so we took it." Evernote didn't need it because the company became profitable early in 2011, not long before hitting 10 million users and reaching annual sales of about $16 million.

Today, the company is in a large, airy, colorful, storefront-like space in Mountain View, California, whose layout has a random feeling to it. It's cramped here, wide open there, toys and boxes scattered around. There are 80 employees—15 of them from Russia—and there's a development team in Moscow and an office in Tokyo. When Libin travels, he is represented at the office by a garish wheeled robot with a video camera and laser pointer, which Libin controls from his laptop. When he is present, he looks like a coffee-shop poet trying to appear respectable as he roams around sipping from a mug apparently glued to his hand. The features of his face seem designed to showcase his formidable goatee.

The company is passing 15 million users, with users signing up at the rate of more than a million a month. And this for a company that doesn't have any salespeople. Evernote doesn't do anything to encourage people to pay it, which is one of the reasons it's so popular. "When you eliminate trying to get people to pay you, your goals change," says Sinkov. "Our role is educational, not promotional. All we need to do is tell people what Evernote does."

The irony and genius of that nonsales strategy, of course, are that so far, at least, it has resulted in terrific sales. The long-term conversion rate can now be tracked out to three years, and it turns out to be more than 15 percent. Will new users keep upgrading at these rates? Kuperman, the entrepreneur and early Evernote user, thinks Evernote has adopted the right approach. "People end up feeling they need to pay as a thank-you for having such a great product," he says. "And Evernote has the benefit of not having to spend much money marketing. Every time I use Evernote, someone asks me what I'm doing, and then they want to try it out. I'm doing their marketing."

One thing Libin says he refuses to worry about is competition. And there are, in fact, vaguely competitive products and services. Most notable among them is Microsoft's OneNote, which has some of the same features and comes with Microsoft Office. But it doesn't provide Evernote's effortless toss-in-any-kind-of-note-on-any-device environment and hasn't achieved nearly the traction that Evernote has. Nevertheless, it's inevitable that more and better competitors will emerge. When that happens, Evernote users will be able to painlessly take their memories and leave, because Libin has insisted that the information be made easy to export, so that no one feels locked in to the service. "We used to have a saying in the Soviet Union: 'Any country that you're free to leave, you're free to live in,'" he says. "We want our users to feel free to leave."

Instead of defending the company's flanks, Libin is forging ahead into new markets. "There are millions in Thailand who will be getting smartphones next year," says Dave Engberg, the CTO and another CoreStreet alumnus. Japan has already been an unmitigated triumph for the company. It now accounts for 20 percent of Evernote's user base, compared with 35 percent in the U.S., and Japanese users are on average twice as active as are U.S. users. "There's an archival culture there," says Hitoshi Hokamura, who heads the company's Japan efforts.

Evernote is a cult in Tokyo. Bookstores have Evernote sections—there are 32 Japanese books on Evernote—and when Libin is there, he is sometimes stopped in the street by fans. NTT Docomo, the largest cell-phone service provider in Japan, provides Evernote's premium service for free with its Android phones, a big draw. (And Docomo's VC arm invested $2 million in Evernote.) Elsewhere in the world, the adoption of Evernote tends to parallel the growth in smartphones, which would suggest a pretty steep growth curve internationally over the next several years.

What's more, a vast ecosystem of products and services has sprung up around Evernote. Computers, phones, tablets, printers, and scanners have Evernote compatibility built into them, in some cases via a physical, dedicated Evernote button. (It doesn't hurt that many leading electronics vendors are based in Japan.) When you take your brand-new HTC tablet out of the box and turn it on, it immediately asks you to sign in to Evernote. Some 6,000 software developers have tied or are working on tying their apps and services into Evernote.

And as an unusual tribute, Boston University has taken to listing Libin as a distinguished alumnus, even though he never graduated. Libin is being a good sport about it but with an ulterior motive. "I'd like to be the first person in history to get an honorary bachelor's degree," he says. It would be easier than mastering chess or the violin.

For now, Libin, who is truly serious about the 100-year thing, is thinking hard about how not to end up another flavor of the month in the fast-churning world of Internet apps. Part of the answer, he believes, is to expand the company beyond simply being a way to remember stuff. "We want to go from being one app to being a family of apps, all of which have something to do with memory," he says. "Our test for whether we should build something is: Will 100 million people use it right away?" This year, the company released its second product, Evernote Peek, an iPad app that turns the tablet into a flash-card system for studying. It became the most popular educational iPad app virtually overnight. (K-12 schools are already going gaga over Evernote, and many that provide laptops to students are installing Evernote—it's never too early to start recording those memories.)

More products will be coming. The company announced in September that it's opening a studio in Austin—the term studio is borrowed from the computer-game industry, which tends to set up fairly independent shops to develop new games. Libin says he wants to follow that model. "It will be a local team that can develop pride in what it does," he says. Libin plans to open additional studios in Singapore and somewhere in Europe—presumably he will be trying out the food in different countries there to make his choice.

In the long term, Libin wants to figure out how to do more to help people remember, learn, understand, and communicate. Noting that images can be more evocative than text, he would like to see Evernote be able to recognize objects and faces in photographs, and perhaps one day even recognize smells. "Your own brain," says Libin, "might end up being the last place you search for information."

From the December 2011 issue of Inc. magazine

DAVID H. FREEDMAN: A Boston-based contributing editor, Freedman is the co-author of A Perfect Mess, which examines the useful role of disorder in daily life, business, and science.

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