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  • Zynga: Hyper-Valuations Mostly Hype

    Zynga can’t go into saturated Nintendo or Xbox markets, where the real money is won but the barriers are high. So how do you turn something capricious into a multi-billion dollar business?

    Game maker Zynga is preparing an initial public offering for today, which has been speculated that its valuation might reach $20 billion dollars.

    That’s a lot of Farmville.

    C’mon: $20 billion for Farmville. I believe that the venture capitalists are creating hyper-valuations to raise the share price, against all reason of business models and most importantly, how Zynga plans to make money in the future to validate such a lofty valuation.

    We have come upon that nebulous place again, where financial institutions start to make stuff up as they go  – because Zynga doesn’t have great business fundamentals: “free games” are a seemingly non-business business model. The majority of all Zynga users, who play the games through Facebook, don’t spend any money on the games, yet the company states that they will make a billion and a half dollars and be profitable this year: to me that is troublesome. Its not so much that they have leveraged all of those people on Facebook — it’s that they have all those people, who have used their products for over three years and only a small few of them see enough value in the games to pay for it.

    The other reason I don’t like these offerings, because they are based on ephemeral assumptions: Zynga and its shareholders are saying that they will be able to keep gamers proactively participating in their games, while creating new and more captivating ones over the long-term, which does not seem plausible, because Zynga cannot go into the Nintendo or Xbox markets (where the real money is won), due to the barriers being high and hyper-competition.

    So how do you start to turn Farmville, which is capricious even for a gamer, into a multi-billion dollar business? I don’t see hyper-growth to match the hyper-valuation. I believe games, especially mature games are like social media, they have a temporary shelf-life, due to the shifting priorities of their core demographic (see MySpace). Maybe I’m wrong, but Zynga eventually has to turn its 270 million facebook users into cash.

    At Upstart: Business and Management for 20-40 Year Old Professionals, we try to look at issues without bias and be clear-eyed, which makes me worry that not only will there be a bubble, because so many businesses not only don’t have great “bones,” but many of these businesses don’t make sense — don’t pass the, “are we creating this because we can, or because it’s valuable test.” How can anyone back another photo sharing site: another social media site – what’s unique here – most people are not using the two social media apps that they have now – why a third and fourth – which not only does the same thing that is already in market, most do less.

    I worry that this is how the economy gets adversely interrupted again, how money for new business and innovation slows down and how the labor market shrinks even further, yet I understand and respect that capitalism in its best regard: is no sure thing.

    Good Luck.

    Calvin Wilson
    Founder and CEO
    Upstart: Business and Management for 20-40 Year Old Professionals

    Filed Under: Tech/E-Commerce


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