Zynga IPO Tests CEO's 'Fearsome' Negotiating Style

When Zynga Inc. reached an impasse while negotiating a five-year partnership with Facebook Inc. in August 2010, Chief Executive Officer Mark Pincus demanded a one-on-one meeting with Mark Zuckerberg.

The two CEOs ate dinner at the Facebook cafeteria and held a freewheeling discussion until 2 a.m. Over the course of the meeting and two other marathon sessions that followed, Pincus convinced Zuckerberg that Zynga’s games would help Facebook add users and revenue. They forged a deal that threw Facebook’s support behind Zynga, in exchange for a cut of sales.

Pincus’s negotiating prowess—Google Inc. Chairman Eric Schmidt calls it “fearsome”—helped put his company on course for a $1 billion initial public offering this month. The challenge now is keeping up that intensity at a publicly held company, where Pincus will contend with more scrutiny and less control over the business he started more than four years ago.

“One of the big questions for anybody going public is, ‘Can they maintain their long-term focus?’” Zuckerberg, whose own company is slated to hold its IPO next year, said in an interview. “I just don’t think that’s a big issue with Mark because he can deal with the pain of any short-term hit to power through and get to where he wants to go. I hope I’m the same way. That’s definitely something I’ve learned from him.”

Persuading investors to bet long-term on Zynga is the next hurdle for Pincus, a veteran entrepreneur and former investment-banking analyst who is attempting to pull off the biggest IPO for an Internet company since Google’s debut in 2004.

Elder Statesman

At 45, Pincus is 18 years older than Zuckerberg and twice the age of some startup founders in Silicon Valley. He has started five companies and invested in many more over the past two decades, helping him hone his negotiating skills and attention to analytical detail.

Zynga, founded in 2007, is the culmination of a career’s worth of lessons learned, said Marc Andreessen, a venture capitalist and co-founder of Netscape Communications Corp., who has invested in the startup.

“He has built a machine,” Andreessen said. “Google is a tightly wired business machine. Microsoft is a tightly wired business machine. Apple is too. Zynga is very much in the mold of those other companies.”

Bloomberg LP, the owner of Bloomberg News, is an investor in Andreessen Horowitz.

Virtual Goods

Zynga makes money by offering games for free and then charging for virtual items, such as a puppy in “FarmVille” or an assault rifle in “Mafia Wars.” About 6.7 million of Zynga users were paying customers in the first nine months of the year, up from 5.1 million a year earlier. Revenue more than doubled to $828.9 million in the period. Unlike Groupon Inc. and some other recent IPOs, Zynga is profitable, though its net income has decreased this year as Pincus steps up spending on overhead, marketing and product development.

Pincus also has clashed with board members and employees over his career. He has alienated some Zynga staffers by pushing them to work long hours. A few employees were asked to return unvested equity because their potential rewards didn’t match what they were contributing to the business, said Roger Dickey, one of the first 30 workers at Zynga and the creator of “Mafia Wars.”

“Mark didn’t get where he is by being a softie,” said Dickey, who left the company earlier this year and now works as a startup investor.

‘Every Horrible Thing’

Pincus has said himself that he went too far at times, especially in Zynga’s early days.

“I did every horrible thing in the book just to get revenues,” including giving users virtual credits in exchange for downloading software that was later difficult to delete, he said during a talk in 2009 in Berkeley, California.

“He has a reputation for being an a- -hole,” said Alex St. John, president and chief technology officer at Hi5 Networks, a social-gaming site. St. John adds that he hasn’t met Pincus and doesn’t share this view.

Dani Dudeck, a spokeswoman for San Francisco-based Zynga, declined to make Pincus available for comment on this story, citing the pre-IPO quiet period mandated by the U.S. Securities and Exchange Commission.

Pincus grew up in Chicago’s affluent Lincoln Park neighborhood, the son of an architect mother and a father who worked as a public-relations adviser to CEOs and politicians. After studying economics at the University of Pennsylvania, he took jobs in banking, working at Lazard Freres & Co. and Asian Capital Partners, an investment bank based in Hong Kong. He then went on to get an MBA at Harvard University with the idea of going back into the business world on his own.

Dot-Com Era

Pincus moved to San Francisco in 1995 to capitalize on the beginnings of the dot-com boom. He persuaded venture capitalist Fred Wilson to invest $250,000 in FreeLoader Inc., an Internet service for personalized news that Pincus founded with his friend, Sunil Paul. Wilson gave Pincus a few months to make back his money. After seven months, FreeLoader was sold for $38 million to Individual Inc., a company that delivered news online.

Pincus’s next startup was Support.com Inc., which helped businesses diagnose and fix problems with computers from remote locations. Founded in 1997, it went public in 2000.

Pincus left his CEO post—and, eventually, the company—amid tension with the board, according to two people with knowledge of the situation. Zynga’s Dudeck declined to comment on the matter.

Unauthorized Projects

When the Support.com board brought in former Hewlett-Packard Co. executive Radha Basu as the new CEO, Pincus asked engineers to work on weekends so he could give them projects not authorized by Basu, said one of the people familiar with the matter, who asked not to be named.

After Support.com, Pincus focused on investing in new startups, including Brightmail Inc., Napster Inc. and Friendster Inc. In 2000, he bought Eric Schmidt’s airplane, a single-engine Beechcraft Bonanza, and devoted more time to his hobby of flying. He also invested in a movie, 2001′s Kissing Jessica Stein, which grossed more than $7 million on a $1 million budget, according to the Internet Movie Database.

Pincus made an early bet on the social-networking craze when he started Tribe Networks Inc. in 2003. Though the company was sold to Cisco Systems Inc. in 2007 before gaining wide popularity, it helped established Pincus as a predictor of technology trends, said Marc Benioff, founder and CEO of Salesforce.com Inc.

Social Experience

“He has been doing social for almost a decade,” said Benioff, whose company now provides software to Zynga. “He was doing social when Mark Zuckerberg was still in high school.”

Pincus first met Zuckerberg in 2004, after Peter Thiel put out a call asking if any of his friends wanted to invest in Facebook. Aside from Reid Hoffman, the founder and chairman of LinkedIn Corp., the only person to go along with Thiel was Pincus.

“He had a pretty good intuition early on that this would grow into something,” Zuckerberg said.

After investing in Facebook, Pincus used Zynga to double-down on that bet. Facebook had just opened its site to outside developers, letting Zynga offer its “Texas HoldEm Poker” game to the social network’s burgeoning ranks of users.

Pincus staffed his company with managers skilled at analyzing data. Unlike traditional game developers, which spend millions of dollars producing a game and then ship it out, Pincus continually tinkers. The idea is to get users to play for longer periods and spend more money on virtual items.

Voting Power

This year, in a move that might help Pincus avoid a reprise of the board tension at Support.com, Zynga revamped its stock structure to give him 70 times more voting power than shares sold in the IPO. The change grants him more influence than other Silicon Valley founders, including Google’s Larry Page and Sergey Brin, who hold 10 times the voting power of investors.

Pincus often gets his way outside the boardroom as well, said Google’s Schmidt. In the summer of 2009, Pincus was seeking a partnership that led to Google buying a 3 percent stake in Zynga. When Pincus came to the negotiating table, he personally knew more about the proposed deal than everyone on the Google side of the table combined, according to Schmidt.

“He is a we’re-going-to-make-this-happen-or-else type of person,” Schmidt, who was Google’s CEO at the time, said in an interview. “He is a fearsome, strong negotiator.”

‘What About Us?’

In January of this year, when Twitter Inc. was negotiating with San Francisco to get a tax exception, Pincus sought the same terms.

“He said, ‘That’s good for Twitter, but what about us?’” Ed Lee, mayor of San Francisco, said in an interview.

Pincus helped organize a meeting at city hall with other technology executives, including Yelp Inc. CEO Jeremy Stoppelman, Riverbed Technology Inc. CEO Jerry Kennelly and prominent angel investor Ron Conway, along with representatives from about 30 other companies based in the city. Pincus led the group in pushing Mayor Lee to repeal the citywide tax, all but threatening to move Zynga out of the city if the tax remained, according to Lee.

“He said he would make it really hard for us to continue with the plans we would like to have here about expansion and about permanency,” Lee said. “I understood what he meant.”

With assistance from Ari Levy, Adam Satariano, Jon Erlichman and Diane Anderson in San Francisco.

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