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Pincus makes power play with Zynga IPO

Zynga CEO Mark Pincus speaks at the Zynga Unleashed event in San Francisco
Zynga CEO Mark Pincus speaks at the Zynga Unleashed event in San Francisco

By Liana B. Baker and Alistair Barr

(Reuters) - For years, a group of about 20 guys would gather in San Francisco's Golden Gate Park or the neighboring Presidio Park for weekend games of soccer. Among them was a man whose 5-foot 6-inch stature belied his ruthless competitiveness and who was usually accompanied by his American bulldog, Zinga.

That man was Mark Pincus, the chief executive of online games developer Zynga Inc, which aims to list shares on the Nasdaq stock exchange this week in an initial public offering that would value the company at around $9 billion.

Investors eyeing Zynga would be wise to understand its CEO, who will retain firm control over the company even after it goes public: a special class of shares help to give Pincus 37 percent of voting power, even as his equity stake falls to 12 percent.

Friends, business associates and soccer buddies describe Pincus as a serial entrepreneur who does not like to be told what to do by his venture capital backers. He is a control freak to his critics, but is praised for his ability to spot new trends and unrelenting drive to expand Zynga, his best chance at joining Silicon Valley's elite.

At work, like on the soccer field, Pincus is full of energy, takes every game very seriously and never gives up, they say.

"He is definitely competitive. He is playing to win for sure," said Chris Law, who founded one of the earliest online social networks, Tribe.net, with Pincus. "It was almost a little frustrating because he kept coming up with new ideas of things we should be doing and we're like, 'we can't keep up with you.'"

Zynga makes free games such as "FarmVille" and "Mafia Wars," which are among the most popular on Facebook. It makes money by selling virtual houses, poker chips and other items for use in the games.

At around $925 million, Zynga's IPO would be the largest from a U.S. Internet company since Google Inc raised $1.7 billion in 2004.

Zynga's stock structure grants Pincus his own class of C shares that carry 70 times more voting power than regular A shares. The company also has B shares for other insiders that offer a 7-to-1 voting ratio to regular shares.

Pincus' 70-to-1 ratio is very high compared with other companies such as LinkedIn Corp, which has a 10-1 voting ratio.

One of Pincus' soccer friends said the reason he wanted more control was directly related to his experience at online tech services provider, Support.com, the first company he co-founded that went public, in 2000.

Pincus has said that he was booted from Support.com, now known as SupportSoft Inc, after clashing with its venture capital backers.

"Mark's willingness to be ruthless is necessary," said the soccer friend, who did not want to be identified. "He learned that by getting burned by VCs and investors."

Pincus, through representatives, declined to comment for this story, citing the quiet period ahead of the IPO. But Bruce Golden of venture capital firm Accel Partners, which backed Support.com, said Pincus' departure was amicable.

"He was clear he wanted to move on and pursue some other entrepreneurial interests and was constructive in bringing on board the next CEO," Golden said.

CONTROL FREAK?

Pincus' large voting power at Zynga dovetails with his reputation as a control freak. The New York Times recently wrote a story that painted Pincus as a "data obsessive" who tracks employee performance like Big Brother.

Law, of Tribe.net, recalls arguing for weeks with Pincus over where the log-in box on their website should be.

"He was very intense about it. I think I wanted it on the upper right and he wanted it in another location, and we literally went four rounds on that thing," Law said, adding: "Is it draining to work with someone like that? Yes. But is it energizing? Yes."

Law views Pincus' desire to maintain control at Zynga as a sign of how much he cares about the company. Law and other supporters see him in the tradition of other obsessive but visionary tech icons, such as Apple Inc's Steve Jobs.

Since Support.com, Pincus has often lobbed harsh criticism at the venture capital community in blog posts and interviews.

Several years ago, ahead of a meeting about a potential investment in Zynga, one venture capitalist said he warned his partner that the first half hour would likely involve Pincus describing how VCs don't know what they are doing. This VC's advice to his partner was to suck it up and keep quiet because Pincus would likely make them a lot of money later.

Pincus has fought back against the autocratic perception, sending staff emails emphasizing how Zynga is a "meritocracy" -- one of the core values it lists in its IPO prospectus.

RISK TAKER

Unlike Facebook CEO Mark Zuckerberg or Twitter co-founders Biz Stone and Evan Williams, Pincus did not spend his whole career devoted to technology. He started out in consulting at Bain & Co and did stints for John Malone's cable company TCI and, ironically, a venture capital fund.

The Chicago-born entrepreneur, at 45, is older than his peers in social media -- Zuckerberg, for one, is only 27.

"Pinky" -- the nickname Pincus' wife has for him on her Facebook page -- is also not as well known as other Internet entrepreneurs, such as Google's Larry Page and Sergey Brin.

"In my perfect world ... who am I kidding, in my perfect world I'm Richard Branson or Rupert Murdoch or better, Larry or Sergey, and I own a controlling share and don't waste any time buttering up board members!" Pincus wrote in 2005 in a blog post. "Until then, I'll toil as a mere mortal."

While Pincus may not share the fame of his peers, he does share their singular vision. He arguably foresaw the social network revolution before anyone else with Tribe.net, which Cisco later acquired in 2007.

Pincus also invested in Napster, Facebook, Twitter and Friendster, all of which appeared to be risky in their infancies.

In April 2007, Pincus started online games company Presidio Media, which released "Texas Hold'Em Poker." Presidio soon secured $10 million in funding and Pincus renamed the company Zynga, after the dog who had accompanied him everywhere.

Pincus took a risk by focusing Zynga's games on the Facebook platform, before it was so well established. At the time, rival game developers such as Activision Blizzard Inc had questioned the viability of such a move.

Now, Zynga is set to price its shares at nine times its sales for the last 12 months, a much richer multiple than Activision's current three times 12-month sales.

"It's crazy how no one thought it was a great opportunity until Zynga got massive because it was risky and no one knew if it was going to last," said Wedbush Securities analyst Michael Pachter.

Pincus has said he got the idea for Zynga from playing the game "Rise of Nations," where he would be beaten by kids on the Internet. He told Vanity Fair magazine that he wished there was a way he could pay for tools to give him an edge in the game, and that's how he came up with the idea for Zynga.

Law said Pincus, while at Tribe, was aware of companies in South Korea that made money off virtual gifts. "He saw that happening over there and was thinking of doing experimentation around it. It was less about games and more about what do users really care about and what would they pay for," Law said.

BEYOND FACEBOOK

Some analysts are still are not convinced Zynga can build a lasting business that relies so much on Facebook, where it derives all but 5 percent of revenue. They also question the sustainability of a business model that is dependent on a few core users -- so-called "whales" -- to drive revenue.

Of Zynga's more than 240 million players, less than 3 percent pay for virtual items, according to the company. Its net income fell to $30.7 million in the first nine months, from $47 million in the year-ago period as Zynga had to spend more on new games and to expand internationally.

Indeed, Pincus' main task during Zynga's IPO roadshow was to convince investors the company can live and innovate outside Facebook, and wring more money out of the casual gamer.

"I think you are seeing their acquisition costs go up, marketing costs go up and they have very high churn," Strauss Zelnick, CEO of video game publisher Take-Two Interactive Software, said of Zynga's business model.

Zynga's business practices were also criticized in its early days, when it offered users in-game currency if they downloaded phony tools or signed up for dubious advertising offers.

Pincus admitted he pushed the limits in what is a now famous speech. "I knew that I wanted to control my destiny, so I funded the company myself but I did every horrible thing in the book to -- just to get revenues right away," he said.

Despite the criticism, Greg Cohn, a former Yahoo Inc employee who worked with Zynga, said Pincus was right to leverage Facebook's openness and "Wild West" culture at the time.

"There was no doubt he was aggressive on that, but that's the job of an entrepreneur," Cohn said. "He was very clearly among the first people to recognize the potential of an open platform."

Forbes in September estimated Pincus' net worth, inclusive of his Zynga stock and other investments, at $2 billion, though that could change depending on the final IPO price.

"Mark Pincus is absolutely going to call the shots going forward, so if you believe in him and what he says and what he has done, then you can bet he will keep up or stay a step ahead of the competition," said Lise Buyer, an IPO adviser at Class V Group in Silicon Valley.

(Reporting by Liana Baker in New York and Alistair Barr and Sarah McBride in San Francisco, editing by Peter Lauria, Tiffany Wu and Maureen Bavdek)

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