In the last couple of days, it was announced that social customer experience company Lithium Technologies would be acquiring social scoring platform Klout for a figure reputed to be around $100 million.

If the deal goes through, it’ll be the close of a five year journey for Klout since its inception – a journey that saw it initially praised as a conduit to determine online influence, and then berated for various missteps that included profiling minors, privacy concerns, and questions around its algorithm and whether it measured influence or simply social signals.

On first look, $100 million looks a great number for Klout, and validation of seeing through the criticism that’s plagued the service, especially in the last 12 months or so.

However, far from being a success story, the sale of Klout highlights its failings, and in more areas than simply the evaluation.

$100 Million Ain’t a Whole Can of Beans

For any start-up looking to be acquired, $100 million probably looks an attractive figure on face value. However, given the financial history of Klout, it’s closer to a loss than a win.

Take a look at their investment history:

  • Initial seed funding in 2009;
  • $ 1.5 million Series A funding in April 2010;
  • $8.5 million Series B funding in January 2011;
  • $30 million Series C funding in January 2012.

Just by these “standard” investment rounds, Klout had received $40 million in funding by the start of 2012, which saw the company valued between $200 – $300 million just a couple of short years ago.

Add to that venture round funding in September 2012 by Microsoft (to utilize Klout’s services in their Bing search engine), along with further venture round funding by Draper Nexus Ventures in August 2013, and it’s safe to say that a large chunk of the $100 million price from Lithium will be eaten up by investors looking for return on their earlier capital.

When you take away the minimum numbers that need to go back to the investors, the number that’s left – $60 million – doesn’t add up to a success story for Klout.

On average, a company that’s received $40 million in funding is usually expected to be valued around the $400 – $500 million mark.

Look at Foursquare as an example – before their recent Series D investment round that brought in another $35 million, Foursquare had been valued at $600 million, with investment total of approximately $72 million.

Given that Klout’s investment of $40 million is just over half the Foursquare amount, it stands to reason you’d expect the overall valuation to stand at just over half of Foursquare’s $600 million – yet that isn’t the case, despite Klout claiming to have data on 500 million profiles, versus Foursquare’s 45 million users.

Yet it’s these physical numbers that highlight the low dollar numbers when it comes to Klout.

Physical Users Versus Fabricated Users

One of the biggest criticisms leveraged against Klout has been their method of forcing “users’ to opt-out of their service, versus opting in to be profiled. Klout’s method of operation was to create a profile of you on the Klout database, based on your public Twitter profile – but it didn’t matter whether you liked this or not, you had no choice in the matter.

When questioned on why they used opt-out versus opt-in, Klout’s response was their practice was no different from Google indexing websites via their platform. Except… people that wanted to be found on Google opted-in to be indexable. People that didn’t want to be found on Klout had to essentially log in to the Klout platform to delete a profile that had been created, that the person never wanted or agreed to in the first place.

While Klout would never admit to it, this opt-out practice was viewed by cynics as a way to buffer user numbers. It didn’t matter if people knew they had a Klout profile or not – all that mattered was Klout could sell their service to brands and advertisers as “500 million profiles”.

About Klout

Yet there’s a big difference between a profile and an active user. Whereas Foursquare’s 45 million users are active, and therefore valuable to marketers looking to understand shopping behaviours, etc, Klout’s profiles included bots, automated accounts, multiple accounts set up for news feeds only, etc.

You can have 500 million “users” to sell to a potential advertiser – but if only a limited percentage of these users are real people actively offering up useful data, then your service is immediately devalued.

A Lack of Future Strategy

Perhaps where Klout failed most, and in turn lost a lot of the previous evaluation of a few hundred million dollars, is failing to adapt their platform to not only the “influence” industry they in part created, but meeting user needs and reacting to an ever-changing, and more demanding, content-led space.

Klout’s raison d’etre has always been to determine how influential someone is online, and allocate them a score between 1 and 100 – the higher the score, the more influential the person. At least, in theory.

However, the problem with any generic scoring solution – no matter how technical you claim the algorithm to be – is that scores can be gamed, and they don’t reflect the bigger picture.

Even in the early days of Klout being seen as a darling of the nascent social influence space, its algorithms were pulled apart in spectacular fashion when Justin Bieber had a perfect score of 100, while President Obama – arguably the most powerful person in the world – had a score of 88, while the Dalai Lama scored at 90.

As a result of the criticism they received about this, Klout updated their algorithm to show more real-world influence as having a bigger impact. Yet they resolutely continued to use scoring as a measure of influence, despite the flaws that strategy continued to show and despite their peers moving away from the public scoring game.

This lack of innovation and fresh direction was highlighted even more when compared to products like Traackr, who came out with solutions like their Influencer Network Analysis.

Traackr Influencer Network Analysis

This allowed users of Traackr to not only see who was influential based on real metrics like Relevance and Resonance, but also who essentially influenced the influencers – an added depth of identification that really laser-targeted the people you wanted to connect with.

Or consider Appinions, who measure offline influence as well as online influence, to offer a full spectrum of data and insights. This includes identifying the originating source of something that’s impacted discussion across the web, and how offline news stories and journalists drive online conversation and actions.

When comparing Klout’s social scoring algorithm as a measure of influence against real influence platforms that drive the insights needed for business goals, it was always going to be an uphill battle for Klout to be taken seriously as an influence marketing platform.

And then there were the Perks.

The ROI of Reach and Noise

Touted as a way to connect brands to the army of influencers in Klout’s database, Klout Perks were introduced in 2010 and were seen as one of Klout’s business models to monetize their platform.

Advertisers and brands would pay Klout a premium, which would differ based on the target audience and size of the promotion, and Klout would offer that brand’s product as a freebie to people who qualified based on their Klout score.

The problem was, there was no real relevance or context to the Perks. All that would happen is Klout would identify a bunch of people they perceived as influential in the brand partner’s niche, and – by giving them freebies like car test drives and airline trips – the Klout influencers would share their experiences and drive sales for the brand.

Klout Perks

Except that never really happened – or at least, not in the numbers that the brands probably expected, given the investments and amount of influencers promoting the brand’s goods.

The reason was simple – Klout didn’t dig deep enough into the audience of the influencer. They didn’t know if the followers of an influencer were in the market for the product being promoted; they didn’t know if they had brand loyalty elsewhere; and they didn’t know how contextual the influencer truly was in the area of the promotion.

This meant that, essentially, the Klout influencer was simply promoting without any knowledge of where their audience was in the purchase life cycle – a key factor in successful influence marketing campaigns (and something Sam Fiorella and I talk about extensively in our Influence Marketing book).

When you look at the public case studies Klout shares about their Perks, very few talk about tangible financial ROI. There are lots of examples of social shares, blog posts, etc., which is great for brand awareness. But for actual ROI and sales? Little evidence of success.

For brands that are spending upwards of $25,000 and more on Klout Perks, you want to see returns for your investment. The occasional example of ROI success after at least 400 campaigns and 1 million Perks being claimed is not a number designed to inspire confidence when it comes to breaking down your latest fiscal year’s marketing budget.

Klout’s Failure is Good News for REAL Influence

As I mentioned at the start of this post, $100 million isn’t chump change. However, given the financial history of Klout investment-wise, its business model of Perks, and its uncertainty as to what exactly it wanted to be (a recent pivot to a content curation platform seems too little, too late), you have to wonder what Lithium saw in the platform.

Perhaps it’s to identify influential customers (since Lithium serves the social customer industry), so that their issues can be resolved before they become an online crisis. However, that path could be fraught with negative feedback if customers feel they’re being ignored in lieu of “influencer customers”.

Perhaps it’s access to the data that Klout has. While there’s no question some of the data is for inactive accounts, there’s still a lot of information available for Lithium to integrate into its own solutions.

However, that’s for a future discussion once Lithium’s plans become clear. What’s clear right now is that Klout’s failure is a victory for real influence marketing technologies and strategies.

Social scoring was always a popularity game, with little relevance attached to actual influence – swaying a customer’s purchase decision at exactly the moment they make it – and more weight on social signals and amplification.

Now, with the flag-bearer of social scoring acquiescing to what almost looks like a desperation sale, the companies that are truly pushing the influence conversation forward can do what they do best, and meet the needs of brands and marketers that are looking for more than social shares when it comes to an influencer campaign.

Social scoring is dead – long live influence.

Update March 31: The Klout/Lithium deal has been signed off, valuing the company at $200 million in a mix of cash and shares in Lithium.

image: Jamie Koroluk

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Danny Brown
Co-author Influence Marketing: How to Create, Manage and Measure Brand Influencers in Social Media Marketing. #1 marketing blog in world as per HubSpot. Husband. Father. Optimist. Pragmatist. Never says no to a good single malt. You can find me on Twitter - Google+ - LinkedIn.

64 comments
Danny Brown
Danny Brown

@Simon McDermott Cheers for the correction - thought it looked funny, but didn't dig in as much, my bad. Here's hoping the deal pays off - if the amounts are in the ballpark you mention, it's an even bigger risk for investors. Gotta love the tech space. :)

lizstrauss
lizstrauss

CatherineMcNair I agree with DannyBrown 's analysis.

Simon McDermott
Simon McDermott

Danny Brown - the stock ticker LTHU refers to a different company "Lithium Technology Corporation engages in the design, manufacture, marketing, and delivery of rechargeable energy storage solutions."  As far as I know Lithium (the one that may buy Klout) are a private company that are well funded but do not have the cash to buy Klout outright. My guess is that they would spend $15-25M in cash and rest will be shares based on a valuation set by their last round plus 20-30%.  By the way Nadia Comanceci won a silver medal in Montreal too ;)

samfiorella
samfiorella

Danny Brown Too bad there weren't people out there warning everyone that social scoring isn't really effective influence marketing - and that there was another way. ;)

wordwhacker
wordwhacker

Danny Brown wordwhacker AmyVernon  Now that might be an idea for a startup. Ego boost metrics. #justkidding Agree with you totally.

Danny Brown
Danny Brown

samfiorella  Great points, Sam - you should write a book on this topic! ;-) I think your last point is perhaps the way it's going to play out - the fact PeerIndex stopped public scores to strengthen their platform (from a perspective viewpoint) says a lot. If one of the key players/early leaders in the scoring space stops publicly scoring to stop its service from being devalued, it tells you all you need to know about scoring in general.

Danny Brown
Danny Brown

@Simon McDermott  Hi Simon - that's a fair point, although it carries extra risk for the investors of Klout looking for return (depending on how the split works). http://www.marketwatch.com/investing/stock/lthu/financials, down from a 52-week high of $0.0050. So they've been having their own issues. Now add to the mix the purchase of a company that hasn't made any great revenue numbers, given the amount of data it sells, and that could lead to a tough return. A podium placing might be fine - but who remembers who came second to Nadia Comaneci in the '76 Olympics? It's always the winners that get remembered. :)

Simon McDermott
Simon McDermott

I may have this wrong but if Klout is acquired for ~$100M it will be a mix of cash and stock. If Lithium want to IPO I imagine the share price may go up, so that adds good risk to Klout shareholders. Klout VCs would make sure that a new deal would come with that upside, some early shareholders may just take cash. 

The bigger concern would be if Lithium can execute on winning value with their acquisitions. The Scout Labs acquisition had challenges and they later pulled out of the social media monitoring space. 

In the end an acquisition of this scale is in the top 5% of exits, i.e. >$100M with final go at the big one (i.e. potential IPO), so Joe doesn't win a gold medal but he gets on the podium. 

Simon McDermott
Simon McDermott

I may have this wrong but if Klout is acquired for ~$100M it will be a mix of cash and stock. If Lithium want to IPO I imagine the share price may go up, so that adds good risk to Klout shareholders. Klout VCs would make sure that a new deal would come with that upside, some early shareholders may just take cash.  The bigger concern would be if Lithium can execute on winning value with their acquisitions. The Scout Labs acquisition had challenges and they later pulled out of the social media monitoring space.  In the end an acquisition of this scale is in the top 5% of exits, i.e. >$100M with final go at the big one (i.e. potential IPO), so Joe doesn't win a god medal but he gets on the podium.

samfiorella
samfiorella

Social scoring is dead. I wish. I doubt it's gonna die because there will always be vanity in marketers...and  there will always be companies out there - including the new Klout - that will want to profit from it. Not to mention marketers looking for shortcuts in this new 15-minutes of fame space. Instead of doing the work necessary to identify who really moves product and sales for their businesses and clients, Klout offers a way to justify marketers' jobs without having to work. 

In its own words, Klout added its new content aggregation service in response to its players constantly asking: "How do I increase my score?"  The new service is not meant to support marketers do their jobs better, like Curata or other content services, but to help players better game the system.  

Social media is an industry built on ego and so there will always be scoring systems that feed on it. Let's just hope marketers will tire of it, realize that broadcasting is not influence, and that new methodologies and technologies now exist that will truly help identify who (measurably) helps them sell their products.  The best we can hope is that social scoring platforms become marginalized, looked upon as the online game that they are so that marketers can move forward and do the right thing for their businesses/clients.  

samfiorella
samfiorella

Social scoring is dead. I wish. I doubt it's gonna die because there will always be vanity in marketers...and  there will always be companies out there - including the new Klout - that will want to profit from it. Not to mention marketers looking for shortcuts in this new 15-minutes of fame space. Instead of doing the work necessary to identify who really moves product and sales for their businesses and clients, Klout offers a way to justify their jobs without having to work.  In its own words, Klout added its new content aggregation service in response to its players constantly asking: "How do I increase my score?"  The new service is not meant to support marketers do their jobs better, like Curata or content services, but to help players game the system more.   Social media is an industry built on ego and so there will always be scoring systems to feed on it. Let's just hope marketers will tire of it, realize that broadcasting is not influence, and that new methodologies and technologies now exist that will truly help identify who (measurably) helps them sell their products.  The best we can hope for is that Klout continues to be marginalized as the online game that it is, not a true marketing tool.

Danny Brown
Danny Brown

AmyVernon  Yeah, I'm thinking it's more a data buy than anything else. Still, for half a billion "users", $100 million is a poor return. Heh, I recall reading that interview back in the day. As HughAnderson mentions, be interesting to hear his take now his company has ponied up. :)

Danny Brown
Danny Brown

wordwhacker Interesting point. Though I can't help but think this was what Empire Avenue was meant to be, but has failed miserably in their attempt. Besides, what return would there be on narcissism? Apart from the boost on ego, that is. ;-) AmyVernon

Danny Brown
Danny Brown

@ZootRock  Just checked out your site - do you have case studies to share? I couldn't find any, and I'd be interested to how your platform increases engagement and activity around content. Cheers.

AmyVernon
AmyVernon

HughAnderson Right? It'll be interesting to see what happens from here.

HughAnderson
HughAnderson

AmyVernon  Ha! That post is an awesome find, Amy. Some media-hack should put some of those quotes to him - "An influence score is really just a measure of how well people game the influence scoring algorithm." !! So, why are they buying Klout? I don't know enough about Lithium, but they must be able to do something awesome with Klout's data as from that post it doesn't look like Klout is going to survive in its current form.

ZootRock
ZootRock

Klout clearly sees that the future lies in being able to offer great and relevant content but they haven't thought through how best to offer this service to their customers.  New Klout is a rush job at best.  ZootRock, by contrast, offers very personalized and tailored service.  The content curation is intuitive and not just keyword based. Its not just topics, ZootRock lets people get in touch with personas.  http://www.zootrock.com/

ZootRock
ZootRock

Klout clearly sees that the future lies in being able to offer great and relevant content but they haven't thought through how best to offer this service to their customers.  New Klout is a rush job at best.  ZootRock, by contrast, offers very personalized and tailored service.  The content curation is intuitive and not just keyword based. Its not just topics, ZootRock lets people get in touch with personas.  

wordwhacker
wordwhacker

Great piece Danny. LIke @AmyVernon I am curious to see whether Klout survives as a platform. But there's this.

There are many people on social who thrived on Klout, who learned to game it early, continued to do so, and have many people in the echo-chamber that social media can become believing that they are indeed important because they have a high score (or 500K bought Twitter followers). 

I'm thinking that there could be some financial return for a company who was able to tap into these narcissistic gurus. Of course, it has nothing to do with influence and marketing; it would just be a product that would appeal to the many who want to appear shiny on social.  

Klout failed to make money off of these transparent and authentic. ahem, opaque and delusional, social media users. But . . .  ;) 

wordwhacker
wordwhacker

Great piece Danny. LIke AmyVernon I am curious to see whether Klout survives as a platform. But there's this. There are many people on social who thrived on Klout, who learned to game it early, continued to do so, and have many people in the echo-chamber that social media can become believing that they are indeed important because they have a high score (or 500K bought Twitter followers). I'm thinking that there could be some financial return for a company who was able to tap into these narcissistic gurus. Of course, it has nothing to do with influence and marketing; it would just be a product that would appeal to the many who want to appear shiny on social.  Klout failed to make money off of these transparent and authentic. ahem, opaque and delusional, social media users. But . . .  ;)

mdyoder
mdyoder

DannyBrown Will do. Thanks!

DannyBrown
DannyBrown

mdyoder Would love to, mate, thanks. If you want to ping an email to danny (at) dannybrown (dot) me and we can chat more?

mdyoder
mdyoder

DannyBrown My pleasure. We should talk about getting you to Grand Rapids to do an event. Much needed.

Danny Brown
Danny Brown

HughAnderson  Hi mate, Hasn't been verified yet - the verbiage was "low nine figures", so at least $100 million. But given their valuation a couple of years back, this is a big loss for Klout, and the investors must be wondering about some of the decisions they made.

DannyBrown
DannyBrown

@hughforth Cheers mate, looking forward to real influence marketing tools and strategies taking centre stage

DannyBrown
DannyBrown

hughforth Cheers mate, looking forward to real influence marketing tools and strategies taking centre stage

DannyBrown
DannyBrown

alistairtweet Agreed - given all the investment and hype, very poor return. hughforth traackr nicochabs

DannyBrown
DannyBrown

nicochabs Thanks, mate - now the real stuff can begin.

DannyBrown
DannyBrown

mdyoder Cheers for the kind words and share, Michael, appreciated!

Danny Brown
Danny Brown moderator

@Simon McDermott  Hi Simon - that's a fair point, although it carries extra risk for the investors of Klout looking for return (depending on how the split works). Lithium's share price is currently at $0.0026, down from a 52-week high of $0.0050. So they've been having their own issues. Now add to the mix the purchase of a company that hasn't made any great revenue numbers, given the amount of data it sells, and that could lead to a tough return.

A podium placing might be fine - but who remembers who came second to Nadia Comaneci in the '76 Olympics? It's always the winners that get remembered. :)

Danny Brown
Danny Brown moderator

@samfiorella  Great points, Sam - you should write a book on this topic! ;-)

I think your last point is perhaps the way it's going to play out - the fact PeerIndex stopped public scores to strengthen their platform (from a perspective viewpoint) says a lot. If one of the key players/early leaders in the scoring space stops publicly scoring to stop its service from being devalued, it tells you all you need to know about scoring in general.

Danny Brown
Danny Brown moderator

@ZootRock  Just checked out your site - do you have case studies to share? I couldn't find any, and I'd be interested to see how your platform increases engagement and activity around content. Cheers.

Danny Brown
Danny Brown moderator

@wordwhacker Interesting point. Though I can't help but think this was what Empire Avenue was meant to be, but has failed miserably in their attempt. Besides, what return would there be on narcissism? Apart from the boost on ego, that is. ;-) @AmyVernon  

Danny Brown
Danny Brown moderator

@AmyVernon  Yeah, I'm thinking it's more a data buy than anything else. Still, for half a billion "users", $100 million is a poor return.

Heh, I recall reading that interview back in the day. As @HughAnderson mentions, be interesting to hear his take now his company has ponied up. :)

HughAnderson
HughAnderson

@AmyVernon  Ha! That post is an awesome find, Amy. Some media-hack should put some of those quotes to him - "An influence score is really just a measure of how well people game the influence scoring algorithm." !! So, why are they buying Klout? I don't know enough about Lithium, but they must be able to do something awesome with Klout's data as from that post it doesn't look like Klout is going to survive in its current form.

mdyoder
mdyoder

@DannyBrown My pleasure. We should talk about getting you to Grand Rapids to do an event. Much needed.

Simon McDermott
Simon McDermott

@Danny Brown - the stock ticker LTHU refers to a different company "Lithium Technology Corporation engages in the design, manufacture, marketing, and delivery of rechargeable energy storage solutions." 

As far as I know Lithium (the one that may buy Klout) are a private company that are well funded but do not have the cash to buy Klout outright. My guess is that they would spend $15-25M in cash and rest will be shares based on a valuation set by their last round plus 20-30%. 

By the way Nadia Comanceci won a silver medal in Montreal too ;) 

samfiorella
samfiorella

@Danny Brown Too bad there weren't people out there warning everyone that social scoring isn't really effective influence marketing - and that there was another way. ;) 

DannyBrown
DannyBrown

@mdyoder Would love to, mate, thanks. If you want to ping an email to danny (at) dannybrown (dot) me and we can chat more?

Danny Brown
Danny Brown moderator

@Simon McDermott Cheers for the correction - thought it looked funny, my bad. Here's hoping the deal pays off - if the amounts are in the ballpark you mention, it's an even bigger risk for investors. Gotta love the tech space. :)

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