That didn't take long.
Only a week after Zynga (Nasdaq: ZNGA) filed for a secondary offering to enrich its early shareholders, the company filed an amendment that adds one very high-profile shareholder to the sell side. CEO Mark Pincus will be selling the single-largest amount of shares in the secondary offering, far more than any other named shareholder and approximately 15% of his total stake in the company. Because Pincus is selling only Class B shares and retains hold of his exclusive 70-vote Class C shares, the sale barely dents his voting power. But such a large divestiture at so early a stage in the company's life sends a terrible message to those who might want to pick up his scraps.
Watch your back
Zynga's been a public company for all of three months and has been a company for just under five years. Its available information shows a company growing rapidly, but also one whose growth is now slowing rapidly. Zynga's business model offers relatively minimal moats, a quality driven home by its recent buyout of out-of-nowhere competitor OMGPOP. To drive home just how fast a hot property can be surpassed, the latest Angry Birds iteration flew (angrily, of course) over OMGPOP's top-selling game the day after the acquisition.
So what kind of message is Pincus sending? Steve Jobs sold his early shares when ousted from Apple (Nasdaq: AAPL) in the '80s, but he held every share the company granted him after returning until the day he died. Google's (Nasdaq: GOOG) founders filed to sell about 17% of their holdings by 2014, but that filing came more than a decade after the company's Stanford genesis. Executives have every right to sell their shares, but a large sale so soon is not a vote of confidence in a company that has no secure path to long-term success in a cutthroat industry with little barrier to entry.
Zynga can't buy out every competitor that crops up. Its business model has been allegedly codified as "copy what [our competitors] do … until you get their numbers." There's nothing necessarily wrong with lifting the best elements off other games. Activision Blizzard (Nasdaq: ATVI), for all its success, still relies largely on formulas set down by earlier games -- World of Warcraft lifted liberally from Everquest and other first-generation MMOs, and Call of Duty is, well, a shoot-'em-up game, a format relatively stable since Doom. But there's a difference between improving on standards and simply replicating things as closely as possible.
Pincus isn't a dumb guy. He's built a billion-dollar business in half a decade. But that doesn't mean he sees his company staying dominant, and a big sale so soon after the company's post-IPO run-up sends me the wrong signal. If you're looking for long-term growth, there are better companies -- and better industries -- to invest in.
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