Zynga is a perfect case study for everything that is wrong with the modern VC funded, Wall Street bailed-out pyramid scheme known as a "startup".
The smart folks have realized that going public is where the money is at. And you don't need to produce value to go public, you just need to get Wall St. to be your evangelist and convince ignorant investors that your company's shares will be worth more than their IPO price at some uncertain point in the future. Does this sound familiar to anyone else? Yes indeed, its the same old "Penny Stock" scheme that common folk fall for (see: Wolf of Wall St.). This well oiled money printing machine evolved out of the Dot Com boom, wherein it existed in a functional but crude state. It has since been perfected.
So, what is a start-up? Is it a vehicle to solve a problem? Or a marketing-based ponzi scheme designed to pump and dump stock after stock in IPOs, making the "investors" unfathomably wealthy at the expense of common folk through zero-sum wealth transfers?
This is the real question Sam Altman and PG have to answer. Because it seems to me for every Elon Musk, there are hundreds of Mark Pincus clones, just itching to ride the next wave all the way to the bank.
I definitely think there is a lot of pump and dump action going on in the software startup world, but then again a huge amount of software engineers are guilty of riding this money wave by association. It might be an artificial economy, which is morally bankrupt, but I can't help but think at times that anything that keeps the blood pumping is good for the overall economy (could very well be wrong there).
Of course, once I go down that rabbit hole I have to start patting government contractors on the back for circulating money at the expense of taxpayers. I guess the overall question is: is an artificial economy better than a stagnant economy?
Some interesting thoughts on that by Steve Randy Waldman [1]. In this snippet, he's asking whether bubbles promote useful innovation:
He went so far as to suggest that agency problems in
the delegated investment process, specifically the inability
of career-minded fund managers to stay away from bubbles
regardless of any personal reservations, make an important
contribution to innovation. Steven Fazzari (whose work on
inequality this blog has featured before) described research
showing that R&D expenditures of young firms are constrained
by external finance and increase in bubblicious periods.
Ramana Nanda investigated whether investments made at the
top of bubbles were poor, and found that they were not. They
were just riskier. Firms funded by venture capitalists in
heat were unusually likely to crash and burn, sure, but they
were also unusually likely to succeed spectacularly.
There's maybe some truth to what you're claiming, but I think you're describing something overly-nefarious. Startups are inherently risky for their investors. They're going to try to market themselves well to cover up that risk. That seems like the entirety of it.
People played the heck out of Farmville, and I'm certain Zynga has had other successes. It's not like they don't produce some value.
EDIT: I guess to elaborate, what I need to hear from you is evidence of deception before I can accept your claim.
Zynga showed very little ability to reproduce their success in Farmville. Meanwhile Facebook had changed their policies making Zynga's viral growth more difficult to obtain for their next games, and they hadn't proven any success in mobile. So, for those that understood the market Zynga hadn't proven a sustainable business model. However, the Wall Street drumbeat was quite a different story.
In my opinion Zynga didn't need the cash that the IPO offered to re-invest in their business, it was simply a vehicle to cash out investors.
So, evidence of deception? All I can provide is that as a solid investment opportunity Zynga was anything but, as a well sold story that wall street spun, perhaps so.
> Meanwhile Facebook had changed their policies making Zynga's viral growth more difficult to obtain for their next games
Don't forget that this viral growth was achieved through unethical methods. [1] In the fall of 2009 a number of articles appeared calling out the unethical behavior which changed the climate and forced Facebook to alter its policy:
Scamville: The Social Gaming Ecosystem Of Hell [2]
Scamville: Zynga Says 1/3 Of Revenue Comes From Lead Gen And Other Offers [3]
Zynga CEO Mark Pincus: "I Did Every Horrible Thing In The Book Just To Get Revenues" [4]
That's a pretty fair view in my mind. Games companies are always troubled by sustainability, so I don't think Zynga's problems are unique - and that's a problem. Their stock would've only been worth buying if they had cracked sustainability, and their early success seemed a bit dressed up to act like they had.
Of all the problems the current system produces, a few bubbly start ups here and there is a drop in the bucket. Overpriced startups, at worst, consume a few billion. Megabanks like JPM and Goldman have received trillions in bailout cash.
I don't entirely disagree with your sentiment, but I think there is a fair distance between Zynga and its ilk and the unregulated penny stocks. Zynga has had trouble demonstrating much of a profitable plan, but every investment bears risk and I don't think investors should enter the market if they don't feel comfortable with the risk level. I avoided Zynga partially because I avoid tech debuts for the reasons you cite, but more importantly because I didn't trust the model. That said, I've been wrong on the market more than right.
The smart folks have realized that going public is where the money is at. And you don't need to produce value to go public, you just need to get Wall St. to be your evangelist and convince ignorant investors that your company's shares will be worth more than their IPO price at some uncertain point in the future. Does this sound familiar to anyone else? Yes indeed, its the same old "Penny Stock" scheme that common folk fall for (see: Wolf of Wall St.). This well oiled money printing machine evolved out of the Dot Com boom, wherein it existed in a functional but crude state. It has since been perfected.
So, what is a start-up? Is it a vehicle to solve a problem? Or a marketing-based ponzi scheme designed to pump and dump stock after stock in IPOs, making the "investors" unfathomably wealthy at the expense of common folk through zero-sum wealth transfers?
This is the real question Sam Altman and PG have to answer. Because it seems to me for every Elon Musk, there are hundreds of Mark Pincus clones, just itching to ride the next wave all the way to the bank.