Aug 19, 2022
Mark Pincus was at the forefront of mobile technology when it was just being born. He is a recovering venture capitalist who co-founded his first company with Sunil Paul in 1995. FreeLoader was at the forefront of giving people the news through push technology, just as the IETF was in the process of ratifying HTTP2. He sold that for $38 million only to watch it get destroyed. But he did invest in a startup that one of the interns founded when he gave Sean Parker $100,000 to help found Napster.
Pincus then started Support.com, which went public in 2000. Then Tribe.net, which Cisco acquired. As a former user, it was fun while it lasted. Along the way, Pincus teamed up with Reid Hoffman, former PayPal executive and founder of LinkedIn and bought the Six Degrees patent that basically covered all social networking. Along the way, he invested in Friendster, Buddy Media, Brightmail, JD.com, Facebook, Snapchat, and Twitter.
Investing in all those social media properties gave him a pretty good insight into what trends were on the way. Web 2.0 was on the rise and social networks were spreading fast. As they spread, each attempted to become a platform by opening APIs for third-party developers. This led to an opening to create a new company that could build software that sat on top of these social media companies. Meanwhile, the gaming industry was in a transition from desktop and console games to hyper-casual games that are played on mobile devices. So Pincus recruited conspirators to start yet another company and with Michael Luxton, Andrew Trader, Eric Schiermeyer, Steve Schoettler, and Justin Waldron, Zinga was born in 2007. Actually Zinga is the dog. The company Zynga was born in 2007.
Facebook was only three years old at the time, but was already at 14 million users to start 2007. That’s when they opened up APIs for integration with third party products through FBML, or Facebook Markup Language. They would have 100 million within a year. Given his track record selling companies and picking winners, Zynga easily raised $29 million to start what amounts to a social game studio. They make games that people access through social networks. Luxton, Schiermeyer, and Waldron created the first game, Zynga Poker in 2007. It was a simple enough Texas hold ’em poker game but rose to include tens of millions of players at its height, raking in millions in revenue.
They’d proven the thesis. Social networks, especially Facebook, were growing.. The iPhone came out in 2007. That only hardened their resolve. They sold poker chips in 2008. Then came FarmVille.
FarmVille was launched in 2009 and an instant hit. The game went viral and had a million daily users in a week. It was originally written in flash and later ported to iPhones and other mobile platforms. It’s now been installed over 700 million times and ran until 2020, when Flash support was dropped by Facebook. FarmVille was free-to-play and simple. It had elements of a 4x game like Civilization, but was co-op, meaning players didn’t exterminate one another but instead earned points and thus rankings. In fact, players could help speed up tasks for one another.
Players began with a farm - an empty plot of land. They earned experience points by doing routine tasks. Things like growing crops, upgrading items, plowing more and more land. Players took their crops to the market and sold them for coins. Coins could also be bought. If a player didn’t harvest their crops when they were mature, the crops would die. Thus, they had players coming back again and again. Push notifications helped remind people about the state of their farm. Or the news in FreeLoader-speak.
Some players became what we called dolphins, or players that spent about what they would on a usual game. Maybe $10 to $30. Others spent thousands, which we referred to as whales. They became the top game on Facebook and the top earner. They launched sequels as well, with FarmVille 2 and FarmVille 3.
They bought Challenge Games in 2010, which was founded by Andrew Busy to develop casual games a well. They bought 14 more companies. They grew to 750 employees. They opened offices in Bangalore, India and Ireland. They experimented with other platforms, like Microsoft’s MSN gaming environment and Google TV. They released CastleVille. And they went public towards the end of 2011. It was a whirlwind ride, and just really getting started. They released cute FarmVille toys.
They also released Project Z, Mafia Wars, Hanging with Friends, Adventure World, and Hidden Chronicles. And along the way they became a considerable advertising customer for Facebook, with ads showing up for Mafia Wars and Project Z constantly. Not only that, but their ads flooded other mobile ad networks, as The Sims Social and other games caught on and stole eyeballs. And players were rewarded for spamming the walls of other players, which helped to increase the viral nature of the early Facebook games.
Pincus and the team built a successful, vibrant company. They brought in Jeff Karp and launched Pioneer Trail. Then another smash hit, Words with Friends. They bought Newtoy for $53.3 million to get it, after Paul and David Bettner who wrote a game called Chess with Friends a few years earlier. But revenues dropped as the Facebook ride they’d been on began to transition from people gaming in a web browser to mobile devices.
All this growth and the company was ready for the next phase. In 2013, Zynga hired Donald Mattrick to be the CEO and Pincus moved to the role of Chief Product Officer. The brought in Alex Garden, the General Manager for Xbox Music , Video, and Reading, who had founded the Homeward creator Relic Entertainment back in the 1990s. The new management didn’t fix the decline. The old games continued to lose market share and Pincus came back to run the company as CEO and cut the staff by 18 percent. In 2015 they brought in Frank Gibeau to the board and by 2016 moved him to CEO of the company.
One challenge with the move to mobile was who got the processing payments. Microtransactions had gone through Facebook for years. They moved to Stripe in 2020. They acquired Gram Games, to get Merge Dragons! They bought Small Giant Games to get Empires & Puzzles. They bought Peak Games to get Toon Blast and Toy Blast. They picked up Rollic to get a boatload of actions and puzzle games. They bought Golf Rival by acquiring StarLark. And as of the time of this writing they have nearly 200 million players actively logging into their games.
There are a few things to take from the story of Zynga. One is that a free game doesn’t put $2.8 billion in revenues on the board, which is what they made in 2021. Advertising amounts for just north of a half billion, but the rest comes from in app purchases. The next is that the transition from owner-operators is hard. Pincus and the founding team had a great vision. They executed and were rewarded by taking the company to a gangbuster IPO. The market changed and it took a couple of pivots to get there. That led to a couple of management shakeups and a transition to more of a portfolio mindset with the fleet of games they own. Another lesson is that larger development organizations don’t necessarily get more done. That’s why Zynga has had to acquire companies to get hits since around the time that they bought Words with Friends.
Finally, when a company goes public the team gets distracted. Not only is going through an IPO expensive and the ensuing financial reporting requirements a hassle to deal with, but it’s distracting. Employees look at stock prices during the day. Higher ranking employees have to hire a team of accountants to shuffle their money around in order to take advantage of tax loopholes. Growth leads to political infighting and power grabbing. There are also regulatory requirements with how we manage our code and technology that slow down innovation. But it all makes us better run and a safer partner eventually.
All companies go through this. Those who navigate towards a steady state fastest have the best chance of surviving one more lesson: when the first movers prove a monetization thesis the ocean will get red fast. Zynga became the top mobile development company again after weathering the storm and making a few solid acquisitions. But as Bill Gates pointed out in the 1980s, gaming is a fickle business. So Zynga agreed to be acquired for $12.7 billion in 2022 by Take-Two Interactive, who now owns the Civilization, Grand Theft Auto, Borderlands, WWE, Red Dead, Max Payne, NBA 2K, PGA 2K, Bioshock, Duke Nukem, Rainbow Six: Rogue Spear, Battleship, Centipede, and the list goes on and on. They’ve been running a portfolio for a long time. Pincus took away nearly $200 million in the deal and about $350 million in Take-Two equity. Ads and loot boxes can be big business.
Meanwhile, Pincus and Hoffman from LinkedIn work well together, apparently. They built Reinvent Capital, an investment firm that shows that venture capital has quite a high recidivism rate. They had a number of successful investments and SPACs.
Zynga was much more. They exploited Facebook to shoot up to hundreds of millions in revenue. That was revenue Facebook then decided they should have a piece of in 2011, which cut those Zynga revenues in half over time. This is an important lesson any time a huge percentage of revenue is dependent on another party who can change the game (no pun intended) at any time. Diversify.