Zynga Lets Bing Gordon Turn $35M Into $650M

By Ari Levy - Dec 5, 2011 12:01 PM GMT+0700

It’s a good thing for Kleiner Perkins Caufield & Byers that Bing Gordon really likes online video games. That made the venture firm into the biggest winner in Zynga Inc.’s initial public offering, poised to turn a $35 million investment into about $650 million.

Gordon worked at Electronic Arts Inc. (ERTS) for 26 years, serving as chief creative director for a decade. Electronic Arts was a major force in early computer games, the kind on floppy disks, with a hot stock and popular titles such as the “Madden” football series. Its fortunes sagged in 2008, however, as gamers began to switch to social networks such as Facebook Inc.’s site.

The rise of Zynga, whose IPO values the company at as much as $7 billion, and the struggles of Electronic Arts show how quickly today’s leading-edge companies can become yesterday’s news unless they quickly embrace the latest technologies.

“When you’re inside a big company like Electronic Arts and you’ve got momentum in a direction, it’s sometimes very difficult to break away from that direction,” said Neil Young, co-founder of the mobile-gaming startup Ngmoco Inc. He worked as a vice president at Electronic Arts until 2008. “Bing was always challenging the company to try to think outside of its norms and also to think very big.”

Gordon, 61, graduated from Yale University in 1972 and spent a year as an actor in New York, a skill that still makes its way into board meetings, where Gordon is known to break into a song or poem. He attended business school at Stanford University in 1976 and then joined Electronic Arts in 1982, just as the company was getting established.

Early Gains

One of the company’s original investors was Kleiner Perkins, which was willing to bet on the relatively novel idea of playing games on computers. As the market boomed, Electronic Arts held its own IPO in 1989 and saw its stock gain more than 12,000 percent over the next 18 years.

Then came the shift to social networks -- something Zynga capitalized on by rolling out a series of Facebook games, including “Mafia Wars” and “FarmVille.”

Electronic Arts was getting about three-quarters of its revenue from consoles and personal-computer games in 2007. As the economic slump deepened and more consumers switched to free games online, the company racked up losses. Electronic Arts lost almost $2.5 billion over a four-year period. The stock fell by about three-quarters between October 2007 and the end of 2008.

Who Knew?

Zynga’s ascent was hard to predict in 2007, said Jeff Brown, a spokesman for Redwood City, California-based Electronic Arts.

“All of the metrics, all of the analytics at the time may not have pointed to Zynga’s success,” Brown said. Zynga “really created lightning and did an extraordinary job, in jump-starting not just the company but the genre.”

Electronic Arts is now putting more resources into social games, helped by its acquisitions of Internet-gaming startups PopCap Games Inc. and Playfish Inc., Electronic Arts Chief Executive Officer John Riccitiello has said this year.

Online gaming took a leap forward in 2007 when Facebook started letting outside developers build applications for the site. Dave Morin, who was Facebook’s senior platform manager, met Gordon in June of that year at Apple Inc.’s developer conference in San Francisco. Gordon had been on stage with Steve Jobs discussing plans to bring Electronic Arts games to Macintosh computers.

Brainstorming Sessions

The next week, Gordon visited Morin at Facebook’s headquarters in Palo Alto, California. They had two or three lengthy brainstorming sessions in the following weeks, during which Gordon showed him some preliminary projects he was building at Electronic Arts, Morin said.

“They did a bunch of experimenting on Facebook and built some simple games,” said Morin, who last year co-founded Path, a San Francisco-based social-networking company backed by Kleiner Perkins. “He knew there was this opportunity.”

Mark Pincus founded Zynga in 2007 as a way to let Facebook friends play games together. Gordon later met Pincus, who had built a poker app for Facebook that was gaining popularity. Pincus talked with a group of Electronic Arts executives, including Gordon, about investing in his venture, according to Paul Martino, who had started a previous company with Pincus and provided some seed funding for Zynga.

“Mark has a very enlightened view of partnering with people who can really help,” said Martino, who’s now a partner at investment firm Bullpen Capital in Menlo Park, California. “While EA didn’t like what they heard at the time, Bing sure liked what he heard.”

Frequent Visits

Gordon started making regular visits to Pincus’s incubator space in San Francisco’s Potrero Hill district. After their initial meeting, every time Martino stopped by to see what Pincus was working on, Gordon was there.

“It was clear that this was going to be a special mentoring relationship,” Martino said. “He and Mark had absolutely the same vision of where games were going.”

Gordon already sat on Amazon.com Inc.’s board alongside John Doerr, a lead partner at Kleiner Perkins. In 2008, after more than a quarter-century at Electronic Arts, Gordon jumped to the venture firm. The move gave him a freer hand to act on his vision for the industry.

Gordon is still held in high esteem at Electronic Arts, said Brown, the company spokesman.

Still Beloved

“He is one of the most respected and revered people in the 30-year history of this company,” said Brown, who helped organize Gordon’s going-away party in 2008. “He’s created so many careers and so many opportunities for so many people. He’s a true visionary.”

Gordon’s arrival sparked a return to Web investing for Kleiner Perkins. While the firm had profited from Internet companies during the dot-com boom, it had shifted its focus to alternative energy in the past decade. Accel Partners, Greylock Partners and Union Square Ventures, meanwhile, were financing the next generation of Internet companies, such as Facebook, Twitter Inc. and LinkedIn Corp.

Gordon soon made his first investment: Zynga. The company had already received financing from investors such as Avalon Ventures and Foundry Group. Gordon also joined Zynga’s board. His second bet: mobile-game company Ngmoco, which was acquired for $400 million by Japan’s DeNA Co.

The year after Gordon left his old company, Electronic Arts tried to catch up in social gaming by spending $400 million to acquire Zynga’s biggest rival, Playfish. Yet Zynga owns five of the 12 most popular applications on Facebook, while Electronic Arts has one, according to research firm AppData.com.

Shares Rebound

Still, Electronic Arts’ efforts to adapt, along with its narrowing losses, have reassured investors. The shares have increased more than 40 percent this year. Analysts expect the company to post its first profit in six years in fiscal 2012, which ends in March.

Electronic Arts’ Riccitiello says Zynga will have a hard time maintaining its dominance in the market, especially as his company puts more of its influence behind Playfish.

“Zynga probably has something on the order of 80 percent of the social platform for gaming, which hats off, they’ve done a great job,” Riccitiello said in March at an investment conference. “I am unaware of any sustained 80 percent market share on any entertainment platform at any time, ever. It just takes time to compete.”

In addition to investing in Zynga, Ngmoco and Path, Gordon has backed Klout Inc., which tracks influence on social networks; Callaway Digital Arts Inc., a maker of applications for kids; and Lockerz Inc., a members-only website that caters to fans of fashion, electronics and music.

Sales Jump

Gordon’s biggest bet to date remains Zynga, where revenue in the third quarter jumped 80 percent from the previous year, surpassing $306.8 million.

Kleiner Perkins owns 65.2 million Class B shares of Zynga. Assuming a $10 share price, that would be worth more than $650 million. Gordon still spends at least one day a week in Zynga’s office, and is an avid player of the company’s top titles: “FarmVille,” “CityVille” and “CastleVille.”

For Kleiner to secure its returns on Zynga, the company’s stock price needs to hold up for at least six months -- the so-called lock-up period during which insiders are barred from selling. Groupon Inc., Pandora Media Inc. and HomeAway Inc. have all dropped since their IPOs this year.

In the meantime, Gordon is hunting for the next big idea. During visits to Lockerz’s offices in Seattle, he holds three- or four-hour brainstorming sessions where he sketches out features on a whiteboard, said Kathy Savitt, the startup’s founder.

“One of the things about Bing that’s so disruptive is not just his ideas but his presence,” Savitt said. “He might start singing, he might recite a poem, but he’s definitely someone who is full of life in everything he does.”

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net