What they were bad at was making money…

Things are not going well over at Zynga.

While I always root for companies to succeed, it’s not all that surprising to hear that the company responsible for 1,400 invitations I’ve received to play pretend farming with lackluster visuals isn’t doing well, particularly when they pay nearly $200,000,000 for a company with a history of failures and a poor track record of making money.

A little over a year ago, another app was “on fire” called Draw Something by OMGPOP. It acquired almost 15 million daily active users in 6 weeks. That’s truly an unbelievable figure, particularly because it was a paid app. A bit of analysis by Tech Crunch poked more than a few holes in it’s monetization potential though: people paid a small fee upfront to download the app and in app purchases were “durable”, meaning people could retain their in app purchases (such as color packs) rather than virtual currency like other Zynga games that was “spent”.

But… like a lot of what happens in tech, there was a huge amount of hype with very little meat on the actual bone. FOMO, or Fear of Missing Out, ruled the day. Plus, with so much hype and people engaged, it’s a guaranteed success, right? Where has that not worked out before?

Andrew Carr wrote a great piece recently with some very enlightening insider interviews about the bungled acquisition which has caused Zynga to write down nearly $100 million on the OMGPOP acquisition. The most enlightening quote of all?

“I knew the OMGPOP guys–they were really talented, and really good at making games,” says a former Zynga general manager. “What they were bad at was making money, and they were struggling for a long time.”

The enormous war for talent in Silicon Valley – and the broader tech world – is no secret. Many companies are bought outright by larger ones just to bring in good engineers and developers, with the company purchased being not all that important to the new parent. This “acqui-hire” model is currently being debated in many circles, but it’s clearly not without its major flaws. The biggest flaw has been watching those “acqui-hired” depart as soon as their lockup period expires. Another insider was quoted saying “The cofounders who get hired in will stay for exactly how long it takes to vest in whatever exclusionary clause was in the acquisition. I think there are very few people who are still left who came through acqui-hires…” This has implications, on stock price and profitability, as others see things being run poorly along with hitting employee morale. Says a former designer, “I wish that they would focus in on their own employees a little bit more, because people in there have great ideas.”

When companies focus a bulk of their energy externally, chasing the next hot thing for fear it will overtake them, rather than focusing on creating value internally and building products and services that people are actually willing to spend money for, it catches up with them. Zynga’s market cap at the time of the OMGPOP acquisition was just over $10 billion. What’s a measly $200 million? Zynga’s market cap today hovers around $2-3 billion. One mistake or failed acquisition is understandable, and OMGPOP’s astronomical acquisition price and very real flameout bring a lot of attention; however, it’s clear this strategy has been more the rule than exception, and reality is beginning to set in. I wrote about this problem recently.

OMGPOP did not have a successful track record. The (overpriced) acquisition was mostly based on the skyrocketing (month long) growth of one app and apparently the talent of some of their developers. Some people may disagree with my (and other’s) analysis, saying that talented developers eventually create value, even if they aren’t successful at first. That is completely reasonable. Paying $200 million (for one popular, but fiscally lukewarm success) is not. A great deal of what Apple has built over the last decade has been predicated on acquisitions (touch screen technology, a good deal of the software). Acquisitions are a valuable tool for growth and innovation, when pursued rationally and successfully incorporating them into the company’s already proven innovative ecosystem.

What’s clear is the focus of Zynga has been more skewed towards chasing popularity than creating real value from the inside out.