How not to scale: Zynga edition

How not to scale: Zynga edition

ON JUNE 4, 2013

The story of how Zynga grew from zero to 2,800 employees, and then back down to its current headcount of around 2,300, is not pretty. That the company laid off 18 percent of its work force yesterday was a drastic move; the realization that 18 percent of its work force is 520 freaking people is almost more shocking.

After Zynga went public in December 2011 at a valuation of $7 billion, the company had plenty of cash to throw around, even as question marks arose over whether the games could stay hot and new hits would emerge. Cracks were showing. Zynga’s symbiotic arrangement with Facebook was disintegrating, and changes to the Facebook algorithm hurt engagement. A particularly brutal quarter last summer sent shares as low as $2.Meanwhile employee unrest had already become a running narrative. Reports claimed Pincus was impossible to work with; news that Pincus had used clawbacks to take shares away from employees went over particularly badly. Pincus had to answer questions of “issues with (him) as a person” on his quarterly earnings calls. He’s worked hard to fight that impression by offering insane perks to its employees — at our PandoMonthly last July, he said they live “better than VCs.”

Zynga’s people problem, which in a tech company translates into an innovation problem, was one of scaling way too fast. To amass 3,000 employees in a few short years, Zynga had to poach. The company hired away a massive number of employees from competing game studio EA, including top executives like John Scappert, EA’s COO; Barry Cottle, the EVP of EA’s interactive division; and Colleen McCreary, director of human relations at EA. A LinkedIn search from 2011 showed more than 200 ex-EA employees at Zynga.

The talent funnel from EA to Zynga was so huge that EA’s CEO had tried to engage Zynga in a “no-hire” agreement that would stop Zynga from poaching employees from EA. Zynga used this illegal hiring practice against EA when the company sued the Zynga for copying its game, “The Sims.”

Well, you could say Zynga got what it hired in EA. As Zynga struggled with criticism under the microscope of Wall Street, Pincus tried to work on his communication skills and allowed himself to delegate to other executives. The startup turned bureaucratic almost overnight, several former employees say.

The infusion of EA culture was particularly harmful in the acquisition of three mobile gaming startups in New York. Zynga purchased Area/Code, Astro Ape, and OMGPop. The office had around 70 people at its peak.

OMGPop’s $189 million price tag seemed crazy when, shortly after the deal, user growth peaked, and Zynga wrote down the company’s acquisition price by half. OMGPop founder Dan Porter has publicly joked about having a fad hit that quickly spiked and faded out.

But behind the jokes, OMGPop employees felt burned. As a backlash to the deal emerged in the press, members of the team felt resentment that Zynga didn’t publicly come to the company’s defense. It didn’t help that on day one of the acquisition, OMGPop employees were asked to stop whatever they were working on and start pitching new games. Thanks to the influence from its ex-EA employees, Zynga had become bureaucratic, running itself just like a large studio.

In April, Porter left the company, which employees saw as a bad sign for their unit. The founders of Astro Ape quietly left around the same time, leaving no obvious successor to run the New York office. Zynga parachuted in VP Sean Kelly from San Francisco to manage the team.

The problem with Zynga’s crazy growth in the early days is that the startup’s way of doing business hadn’t caught up to its size, and when it finally did, the company overcompensated in the other direction. The influence of EA made the company too bureaucratic relative to its size.

Now, just one and a half years into its life as a public company, Zynga needs to pull a Yahoo. That is, it needs to change its perception as a place for creative people to build cool things. With her string of acquisitions, culminating in the big flashy deal for Tumblr, Marissa Mayer has managed to get people exciting about working for Yahoo, or at least excited about selling their companies to Yahoo, a place where not long ago great startups went and died.

All Zynga needs is another hit game to change its reputation as a dog of a company. For that to happen, it needs one team to gel in the right way and build something great. The company has the audience — 232 million monthly active users,
 60 million of which are daily active users – and the cash — $1.6 billion on hand. And, despite the layoffs, it has a 2,300 person-strong pool of talent. But given the bad press the company’s gotten around the way the layoffs were handled, the remaining employees might be thinking about sending their resumes back to EA. Betabeat notes that in New York, the office turned into a raging party where employees destroyed Zynga gear. Other employees tweeted that they found out on Facebook.

As Richard reported from the company’s annual shareholder meeting today, Zynga is trying to change the narrative around its business from virtual cows to real money gaming. Perhaps it should work on changing the narrative among its remaining employees.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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