Raise your hand if you thought Zynga (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 (META 2.98%) 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 (GRPN 10.02%), 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 (LNKD.DL), 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.
