When you finally stop laughing at Zynga -- the developer of Facebook games such as MafiaWars and FarmVille -- feast on the economics.
Zynga is currently valued at a staggering $4 billion to $5 billion, after a recent $147 million investment by Japan's SoftBank. More amazing: The Wall Street Journal's Venture Capital Dispatch now says Zynga in its three years of existence has raised over $400 million in venture funding, making it the second most-venture-funded company in history -- behind only Facebook .
But the company Zynga just displaced from second place is WebVan, an extraordinary Web 1.0 failure.
Which nicely frames the question: Is Zynga likely to be the next WebVan... or another Facebook, a glittering Web 2.0 success?
First, a fast recap of what Zynga sells, which are multi-player games such as MafiaWars, primarily on Facebook. Lately, Facebook has expressed some annoyance with Zynga's games. They definitely aren't core to Facebook founder Mark Zuckerberg's vision for the platform.
Further, Facebook has muscled in on Zynga's revenues by insisting Zynga players spend Facebook credits on such necessities as virtual cows (for FarmVille) or virtual bullets (for MafiaWars). In the process, Facebook has demanded 30 percent
of Zynga's action on such purchases. Ouch.
So why the VC love -- at the very moment when the primary distribution vehicle is showing powerful signs of annoyance?
More bluntly: What do VCs know that we mortals don't?
"Zynga -- plainly put -- is a perfect example of what VCs want," says Jeffery Payne, CEO of enterprise software firm Coveros Inc. and an active investor in new companies. "Investors like to invest with rock stars -- that's Zynga." From appointing a CEO, Mark Pincus, with a track record in leading startups to financial glory, through an early investment by Kleiner Perkins Caufield & Byers , Zynga has played its end of the money game exactly right, says Payne.
Zynga also recently inked a five-year pact that will keep its games on Facebook, and -- prodded by Facebook -- Zynga has toned down the annoyance factor of its games by making it much easier for "friends" of players to block the stream of updates ("Marla now is at Level 4 of MafiaWars"). Of course, that also reduces the viral factor of Zynga games: As Marla progressed up the MafiaWars ladder, didn't you find yourself curious about the game? Curious enough to sign up yourself?
Even with restraints on viral messaging, the June 9th launch of FrontierVille, Zynga's newest game, proved to be "the most successful launch we have ever had," according to a gloating Pincus. The latest count is that FrontierVille already has 5 million daily players.
You have to believe Zynga is doing a lot right. "It's an amazing success story," says Larry Weintraub, CEO of Los Angeles-based social media marketing agency Fanscape. He adds that -- importantly -- whether Zynga wins, loses, or draws in the battles for eyeballs that loom ahead, "it has shown that there is an audience for social gaming, and the audience is much, much bigger than expected."
Meantime, Zynga also has extended its distribution into the iPhone universe, as well as into MySpace , Yahoo Inc. (Nasdaq: YHOO), and a few more outlets. That, say the VCs, will give Zynga some leverage with Facebook, and the upshot just may be still more users added to the company's roster of some 230 million active gamers. FarmVille alone has some 100+ million players. No competitor comes close to Zynga's numbers.
Zynga also has its arms around a money machine: In 2009 its gamers reportedly spent $200 million on those virtual necessities for playing Zynga's games well. To play FrontierVille successfully, for instance, most gamers need a supply of "horseshoes" which cost real money -- 2,600 of them fetch $200 real dollars, and determined players apparently buy lots of them. Ka-ching.
Certainly, experts are adamant that despite the chuckles at Zynga’s business, the company will indeed laugh all the way to the bank, via either a rich IPO or an acquisition. John Rogers, a member of the Venture Capital/Emerging Growth practice group at Herrick, Feinstein LLP, a New York law firm, says "Zynga appears to have unlimited profit potential." (He is not a Zynga investor.)
— Robert McGarvey is a widely published author and expert on social media.
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