Hi, my name is Matt and I used to be addicted to Mafia Wars.
It all happened really quickly. A few friends started doing it and suggested that I try it out. When I finally gave in, I thought I'd be able to just do it a little bit -- you know, on weekends and maybe a night or two during the week. But before I knew it, I was fully hooked and my Mafia Wars page was one of the first stops I made every morning when I turned on my computer.
Luckily, I'm recovering now. I cut myself off cold turkey and now cross my fingers that my many friends and family members who are still heavily involved with Mafia Wars and sister games like FarmVille can find a way to free themselves.
A great business, no?
I'm far from the only one who was hypnotized by one of the games created by Zynga -- the name behind Mafia Wars, FarmVille, and Cafe World. Some estimates suggest that there are about 25 million digital Mafiosos taking on Mafia World. Though there's no subscription or fee to play these games, the guess is that Zynga's 2009 revenue was more than $100 million. And the company is opening itself up to an even wider audience as it launches FarmVille on Microsoft's (Nasdaq: MSFT ) MSN site.
Zynga has already gotten a pretty strong vote of confidence from the venture capital world. Back in 2008, the company raised $29 million in a financing that included Kleiner Perkins -- a revered VC shop known for investments like Amazon.com (Nasdaq: AMZN ) and Google (Nasdaq: GOOG ) . More recently, Russian outfit Digital Sky Ventures pumped $180 million into the company.
Though it's not yet publicly traded, it may be in the not-so-distant future. But I think there are at least a couple reasons why this company is a model for the kind of investment that I'd keep my distance from.
"I did every horrible thing in the book"
Investor views on management run the gamut -- from thinking that it's a primary key to success to requiring only that it's not blockheaded enough to screw up a good company. That last view is where I tend to fall, and is also roughly in line with Peter Lynch's famous quip: "Go for a business that any idiot can run -- because sooner or later, any idiot probably is going to run it."
However, there's a clear difference between someone who isn't exactly a Jack Welch or a John Chambers and someone who actively sells his customers down the river. In the case of Zynga, CEO and co-founder Mark Pincus had this to say in a speech about starting up Zynga:
Like I needed revenues now. So I funded the company myself but I did every horrible thing in the book to, just to get revenues right away. I mean we gave our users poker chips if they downloaded this zwinky toolbar which was like, I don't know, I downloaded it once and couldn't get rid of it. (Laughs.) We did anything possible just to just get revenues so that we could grow and be a real business ...
Is Pincus the next Jeff Skilling or Bernie Ebbers? Maybe not, but I'm not sure he's the kind of CEO I'd feel comfortable investing in.
Dude, where's my moat?
Potentially a bigger issue, though, is whether the company will be able to fight the inevitable influx of competition. Sure, its games are hot right now and there is a network effect from having so many players signed up, but the online audience can be a fickle bunch when it comes to new, popular offerings -- just ask one-time search king Yahoo! (Nasdaq: YHOO ) about how that works.
There's talk that Electronic Arts (Nasdaq: ERTS ) is close to offering its uber-successful Madden football series on Facebook. And if the Chinese online world -- where a host of companies including The9 and Shanda Interactive battle it out for gaming supremacy -- is any model for what's to come, plenty more challengers will be on their way.
Should we care about any of this? After all, Zynga is still a private company and the investment from Digital Sky probably means that an IPO this year is unlikely.
However, even though we can't invest in Zynga yet, we do have the option to invest in companies just like Zynga -- that is, young, hot companies with short track records and unproven (if not suspect) management teams. Screaming growth and the promise of being "the next" something often make these stocks tempting investments.
But as Wharton professor Jeremy Siegel proclaimed in The Future for Investors, the "tried and true" tend to triumph over the "bold and new." More specifically, he found that boring old companies like Altria (NYSE: MO ) and Coca-Cola have outperformed newer, flashier upstarts over the long run.
So go ahead, call me a fuddy-duddy or a stick-in-the-mud, but I'm steering clear of the "hot new" whatever-it-is when it comes to my investment portfolio. If you're with me, you may want to check out the Motley Fool Income Investor newsletter service, where steady, dividend-paying, and (yes) boring companies like Diageo and Johnson & Johnson (NYSE: JNJ ) rule the roost.
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Coca-Cola and Microsoft are Motley Fool Inside Value recommendations. Google and Shanda Interactive Entertainment are Rule Breakers choices. Amazon.com and Electronic Arts are Stock Advisor recommendations. Diageo, Johnson & Johnson, and Coca-Cola are Income Investor recommendations. Motley Fool Options has recommended a buy calls position on Johnson & Johnson and a diagonal call position on Microsoft. Try any of our Foolish newsletters today, free for 30 days.
Fool contributor Matt Koppenheffer owns shares of Coca-Cola and Johnson & Johnson, but does not own shares of any of the other companies mentioned. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...