Zynga's Mark Pincus Is What's Wrong With Silicon Valley

Raise your hand if you thought Zynga (NASDAQ: ZNGA  ) was a great company two years ago. Did you put real money on that belief when it went public at the end of 2011? Well, congratulations: You're out two-thirds of your money, and you're probably never going to get back to even.

Unless you're Mark Pincus, in which case you'll be just fine.

And maybe that's what's wrong with Silicon Valley.

The Valley delusion

Mark Pincus was, by all accounts, a pretty successful guy before founding Zynga in 2007. A pre-RSS news-delivery start-up he founded in 1995 became one of Web 1.0's earliest buyouts, delivering a $38 million payday after only seven months in operation. Pincus went on to create Support.com in 1997, a company that had the misfortune of mistiming the dot-com IPO market. Despite thie bad timing, Support.com's persistence (it remains operational to this day) was nevertheless worth millions to Pincus, even at its post-bust low points.

Pincus left Support.com in 2003 to start an early social network called Tribe.net. By the time the Tribe.net story played out (Pincus sold it to Cisco (NASDAQ: CSCO  ) months before founding Zynga), Pincus was already well established in Silicon Valley. Few digital entrepreneurs reach this level of success. Pincus decided to parlay his good fortune into a company built to make games for the nascent Facebook (NASDAQ: FB  ) platform -- or, in other words, "to change the world," as he told Gamesbeat just after Zynga's late-2011 IPO:

I've been interviewed by someone on NBC who said, "Isn't that what all you Silicon Valley people are about? Just trying to have more money or whatever?" And I said, "No, that's really not what we're about here. We're way more ambitious than that. We want to change the world, make history."

This is, more or less, of a like mind with the prevailing Silicon Valley attitude, but it's hard to take these claims seriously in light of what Silicon Valley, by and large, actually does. George Packer's recent New Yorker feature highlights the "cognitive dissonance" between what Valley luminaries like Pincus often talk about and what they're actually creating:

It's an article of faith in Silicon Valley that the technology industry represents something more utopian, and democratic, than mere special-interest groups. ... [T]he personal computer was seen as a tool for personal liberation; with the arrival of social media on the Internet, digital technology announced itself as a force for global betterment. The phrase "change the world" is tossed around Silicon Valley conversations and business plans as freely as talk of "early stage investing" and "beta tests."

[The following conversation is between Packer and Path CEO Dave Morin, who, like Pincus, is a Valley veteran.]

"San Francisco is a place where we can go downstairs and get in an Uber and go to dinner at a place that I got a restaurant reservation for halfway there," Morin said. "And, if not, we could go to my place, and on the way there I could order takeout food from my favorite restaurant on Postmates, and a bike messenger will go and pick it up for me. We'll watch it happen on the phone. These things are crazy ideas."

It suddenly occurred to me that the hottest tech start-ups are solving all the problems of being twenty years old, with cash on hand, because that's who thinks them up. [Emphasis added.]

One does not change the world by getting it to click on virtual cows, or by getting people to watch bike messengers deliver a bucket of moo goo gai pan on their smartphones. One can, however, get very wealthy while the world's distracted by frivolity.

Zynga certainly scaled up to the point where the entire world might have been down on the FarmVille, but this was a precondition of the venture capital Zynga relied on to fund its growth. One does not raise $850 million in venture funding if one does not plan to become the largest social-gaming enterprise in the world (Facebook, by comparison, raised approximately $2.25 billion before going public). It's worth asking, though, whether clicking on cows is an enterprise deserving of so much funding, so high a market cap, and so much dedicated technical talent and effort in the first place.

Did Zynga's roughly 3,000 employees think that they were changing the world by creating a Big-Data-informed Skinner Box full of freemium Facebook games? Several hundred are likely to be less inclined toward that line of thought after Zynga's latest layoffs -- but the strange thing is that so much of Silicon Valley venerates such frivolity at all.

"I want to change the world" is a great ambition, but it rarely matches up to the reality of Silicon Valley. "Push something frivolous really big really quickly and get a lot of money out of it before the next big trend kicks in" seems to be a far more popular business model, even if it's dressed up in a veneer of transformative revolution, or whatever the buzzwords might be this year.

Sinking ship
Mark Pincus may be many things, but he is most certainly not a bad entrepreneur -- or a bad investor, since the earliest seed funding for Zynga came from his own pocket. Whether or not he truly believes that Zynga will change the world, Pincus knew how to make the most of what he had while Zynga was on top of the gaming world. According to the most recent S-1 filing for Zynga's March 2012 secondary offering:

From our inception in October 2007 to date, Mr. Pincus, our Chief Executive Officer, Chief Product Officer, and the Chairman of our Board of Directors, has purchased an aggregate of 149,197,328 shares of our common stock. To date, Mr. Pincus has sold an aggregate of 43,629,310 shares of our common stock at prices ranging from $0.42 to $13.96.

Pincus sold at least 7.8 million shares at the $13.96 price, based on Zynga's reported share repurchases. He also sold another 16.5 million shares in the secondary at $12 per share. Within three months of Zynga's IPO, Pincus had already extracted at least $300 million from his stake in the company. Using back-of-the-envelope assumptions that the other shares were sold at roughly $7 apiece (the midpoint between Pincus' highest reported price and the lowest), then the total gain from Pincus' cashed-out shares might be as high as $650 million (this is just an estimate, and only the $300 million figure is confirmed). Incidentally, this is quite a bit more than all the reported free cash flow Zynga has earned throughout its existence.

This isn't unique to the Silicon Valley culture that preaches "change the world" but is often looking for that big payday as soon as possible. Groupon (NASDAQ: GRPN  ) , the other go-big-fast tech IPO (though there wasn't much "tech"-y about it at the time) of 2011, raised nearly $1 billion in venture funding in 2010 to line its early backers' and executives' pockets. A year and a half after its IPO, Groupon remains about 75% below its first-day closing price. Facebook executives and pre-IPO investors have already sold more than $12 billion worth of stock following its IPO -- there is only a single insider transaction recorded during Facebook's first year on the public markets that's a purchase instead of a sale. Similarly, LinkedIn (NYSE: LNKD  ) , which has been picked up as Wall Street's Valley favorite du jour, records only two insider stock purchases, compared with more than 330 sales since going public. Nearly every single sale has been made by an executive rather than an early-stage investor. If LinkedIn is the future of Silicon Valley, why aren't the people most invested in its long-term success buying into that notion?

At one point, Zynga's hypothetical pre-IPO valuation scraped against a $20 billion ceiling. Today it's a tenth that size, which may be generous for a company with declining users, declining revenue, and a declining workforce. Young tech companies (or any company, really) can be valued anywhere from nothing to infinity until a rate of "normal" growth can be determined. When a small company is growing exponentially, it's easy for optimists -- and charlatans -- to place its value closer to infinity when the reality is nearly always somewhere closer to zero.

Look around the landscape of well-known young tech companies, those around Zynga's age or a bit younger. What do you see? What strikes me isn't so much that most of these companies have gotten so big so quickly, but that many of them have done it in such a cynical way. Pincus has taken a lot of flak from the tech and gaming communities for his claims of "[doing] every horrible thing in the book just to get revenues" and his demands that his developers "just copy what [competitors] do and do it until you get their numbers," but these aren't exactly shocking statements from a Silicon Valley CEO -- sneaky tricks and copycatting are pretty popular strategies in the tech world. You hear a lot of optimistic gibberish about transformation and revolution from most of Zynga's peers, but the reality is closer to what Pincus says when he doesn't think the whole world is listening.

A year ago, I wrote about the problem with rewarding mediocrity and incrementalism in Silicon Valley and elsewhere in the American economy, and nothing's really changed. The high-profile decline of Zynga and other once-hot companies -- whose only purpose seems to lie in exploiting psychological weakness to drive ad clicks and virtual tractor sales -- may be a good start in highlighting the shortcomings of this cynical incrementalism. However, as long as investors at all stages continue to find more value in fast-growing frivolity than in real and lasting transformation, we'll keep seeing more Zyngas helmed by other Mark Pincuses rise and fall in the future, while big ideas wait on the sidelines.

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Read/Post Comments (17) | Recommend This Article (56)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 12, 2013, at 4:43 PM, TMFDiogenes wrote:

    Great stuff, Alex.

  • Report this Comment On June 12, 2013, at 5:25 PM, Seanickson wrote:

    so if zynga isn't the way to change the world, whats wrong with cashing out some shares and putting that cash to better use?

  • Report this Comment On June 12, 2013, at 5:42 PM, NotJesseL wrote:

    Seriously, it is wrong to pretend to change the world in order to enrich yourself at other people's expense. Sam Insull got convicted for actually changing the world using other people's money and when there were some hiccups he was made the scapegoat. But, yeah, there are now utility companies which use infrastructure and ideas built by Insull. So, after Pincus finishes with this latest crookery, we will have memories of playing fun facebook games and little else.

  • Report this Comment On June 12, 2013, at 6:04 PM, Proletarian wrote:

    Zynga gave me the willies from the moment I laid eyes on it. By all accounts, Pincus is a monumental a**hole. I've read the employees there are/were entirely miserable. They were well compensated, sure, but I think there's evidence to suggest that companies with miserable employees don't create revolutionary products. Or even particularly interesting ones at that. They can occasionally churn out short term profits though. But from a foolish investing perspective, most of Silicon Valley should probably be avoided. And my condolences to those who put their money behind this absurdly wealthy clown.

  • Report this Comment On June 12, 2013, at 6:35 PM, Bonefish100 wrote:

    Getting a little tired of these "in-and-out" millionaires. They just seem like kids with toys. How has Pincus helped the working men and women of this country? What has he contributed besides a few short term jobs for unhappy employees? Whatever happened to people with real vision who sought to improve the lives of people in the world...to feed, clothe and transport them? To offer them hope for a future?

    Facebook games? Really? Now there is something that makes me feel all warm and fuzzy.

    I think we all just need to unplug for a few years, listen to the sounds of the world around us, reconnect in person with one another and rediscover what we've lost.

  • Report this Comment On June 12, 2013, at 7:22 PM, foolhardy7 wrote:

    Great commentary. Well done.

  • Report this Comment On June 12, 2013, at 7:23 PM, TMFTomGardner wrote:

    Very interesting article. Often enough, the VC model drives companies to develop a story. A great narrative can last a few years. . through late-round financing and the first six months of an IPO. What happens after that? Who cares.

    That said, someone like Elon Musk is doing extraordinary things. The world should be cheering all out for him. I think it would be great if Musk University existed on Sand Hill Road. . and to ask for financing, you had to graduate first.

    Tom Gardner

  • Report this Comment On June 12, 2013, at 8:41 PM, wannalivelife wrote:

    Silicon valley calls IPOs or buyouts an "exit". For a reason. Great article, very true. Yes there is innovation in Silicon Valley but there are ample "visionaries" who will not hesitate to kill hoards to get their big bucks.

  • Report this Comment On June 13, 2013, at 12:52 AM, somethingnew wrote:

    Awesome article...I keep wanting to hear someone say all of this but I never read it in the mainstream financial press. Thank you for stating the reality of Silicon Valley and it's self congratulatory way of thinking and what the majority know but are too afraid to admit.

  • Report this Comment On June 13, 2013, at 4:09 AM, mannamoney wrote:

    Watching the decline of Silicon Valley over the past 20 years is painful. The signs are clear as you accurately point out in your take on Zynga. For me the first signs of decay showed up in great companies going bad, i.e. HP, Varian, Litton, Fairchild, to name a few. In a way the devaluing of our core technology companies and the destruction of the dollar are on parallel trend-lines and functionally linked. We had better wise-up before the dive gets so steep, there's no recovery possible.

    Mi dos centavos

  • Report this Comment On June 13, 2013, at 8:47 AM, ziq wrote:

    Not all "technology companies" are. Writing complex code is technology, or building electronics with ever smaller, lighter, more efficient semiconductors. Certainly building an iPhone or iPad.

    Using new technologies to order take out food is not a novel concept. The land line worked fine for that. This is pure P.T. Barnum stuff.

    Take a look at what's actually being created before investing.

  • Report this Comment On June 13, 2013, at 8:52 AM, tominpittPA wrote:

    This article reminds of a time when Disney market cap first surpassed US Steel (history)- I wondered if entertainment is more important than infrastructure.

  • Report this Comment On June 13, 2013, at 12:52 PM, deckdawg wrote:

    If you want to see an example of a couple of guys who really are changing the world with zero profit motive, check out the YouVersion bible app (available for free on Apple and Android stores everywhere). This thing puts the bible in your hands (in hundreds of languages and translations) everywhere you go. This is a very sophisticated app that lets you pursue reading plans (like read the bible in a year, for example), annotate, search, share across social media, etc. It's installed on close to 100 million devices around the world. Zero cost. Zero adverts. It will never be monetized. Bible readers actually change the world.(Mother Theresa vs. Mark Pincus)

  • Report this Comment On June 14, 2013, at 5:27 PM, wannalivelife wrote:

    deckdawg - Generalization based on one?

  • Report this Comment On June 15, 2013, at 10:51 AM, youyi wrote:

    Why take Pincus to task?? All he did was create a product that people used. If you or anyone bought Zyngaz stock on a vision of 'changing the world' you must not have done your homework on the initial public offering or thought games like farmville or whatever he called them had world shattering stuff. Fact is, Zynga is an entertainment company, NOT A TECHNOLOGY COMPANY as you state. With this in mind, if you group ZYNGA with technology companies, it must be asked, why would anyone that is a thinking investor want to pay good money for your report, when you cannot even properly classify the ZYNGA company as entertainment,,, not technology. What technology did ZYNGA create ... suggest you stop hawking financial advice until you truly understand the background of the company you analyze.

  • Report this Comment On June 15, 2013, at 1:43 PM, TMFBiggles wrote:

    @ youyi -

    If Pincus wants to identify himself as part of Silicon Valley and take up the "change the world" mantle, then he opens himself up to criticism on that front, regardless of his company's actual product. Zynga is a part of the Silicon Valley culture and expresses the hypocrisy of the Silicon Valley mindset very well, so it made an ideal focus for this article. If Pincus had set up in, say, Austin, Texas and just said "I want to make great games," we wouldn't be having this discussion.

    You can call Zynga whatever you like, but the fact is that the company uses technology both to deliver its games through cloud servers (Amazon's and its own proprietary system) and to optimize its games to extract the most money it possibly can. A big part of the reason why Zynga got so big so quickly is that it hired so many engineers to optimize the delivery and effectiveness of its games.

    I have been recommending investors avoid Zynga since day one.

    - Alex

  • Report this Comment On August 26, 2013, at 8:27 PM, Texasrecurve wrote:

    Is Zynga Destined for Greatness?

    You didn't see that Don Mattrick thing coming did you??

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