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Klout, controversial service that measured online 'influence,' reportedly being acquired for $100 million

Klout, controversial service that measured online 'influence,' reportedly being acquired for $100 million


People couldn't resist checking their score, but often resented being ranked

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Klout, a San Francisco startup that quantified people's online influence by assigning it a Klout score, has reportedly been acquired by Lithium Technologies for $100 million. It seemed the service was struggling to build a successful business, and in fact founder and CEO Joe Fernandez blogged publicly about his trials and tribulations. Six days ago Klout launched a major redesign of its website that shifted the focus towards helping users improve their scores, but it seems that the final result was a sale and soft landing.

The final result was a sale and soft landing.

When Klout was founded back in 2008, the world of social networks was still maturing. The giant public companies of today — Facebook, Twitter, LinkedIn — were still startups. The premise of Klout seemed alluring enough: to measure people's influence across these networks and sell that information to marketers or back to the users themselves. The wrinkle was how to get people to link all their accounts to Klout so it could effectively measure and monitor them. Klout did this by assigning everyone a score and offering advertiser-backed perks like discounted meals or free T-shirts to users who created Klout profiles and had high enough scores.

The drawback was that many people hated the idea of being ranked, a sort of high school popularity contest writ large across the web. Klout scores could also vary wildly, angering users who had spent months building up their stats based on a certain set of assumptions, only to have the company tweak its algorithms. Klout managed to score a big partnership with Bing, but never managed to break into the mainstream with many users beyond the marketing world.

At $100M, the sale to Lithium is a passable exit. The company raised $40 million in total, with the last round valuing it at $200 million. In that sense the sale price was below what investors thought the company was worth. This could have bad fallout for employees holding shares. According to Dan Primack at Fortune,

My understanding is that the deal’s actual value is ultimately tied to whatever price Lithium can get on the public market, when it goes public later this year. Klout’s investors are basically being told to expect a market cap of between $1.5 billion and $2 billion (yes, a heady prediction given where rival Jive is trading), and that the final deal will likely fall between 10% and 20% of that figure (once options and around $30 million or $40 million in cash is figured in). Worth noting that Klout’s last VC round came at a $200 million pre-money valuation, but was preferred stock (i.e., the VCs should get paid back and then some).

Preferred stock guarantees the venture capitalists who invested will be paid back before anyone else. Typically, preferred shareholders get back the capital they invested, plus some multiple of the remaining profit to be split with common stockholders. That means if the sale of Klout returns $100 million on a $200 million valuation, the VCs will pocket their money, $40 million, plus a piece of the $60 million, with whatever is left over going to the company's employees.