Zynga’s Decline Creates Red-Dog Network Founding Game Startups

Mike Verdu is joining the growing ranks of Zynga Inc. alumni who are founding startups poised to compete with the social-gaming leader.

Verdu today is taking the wraps off TapZen Inc., which combines the free online-gaming model pioneered by Zynga with games tailored for tablet devices. Zynga invested $10 million in TapZen, which has six employees in offices in San Francisco and Los Angeles, and will promote the startup’s games.

While Zynga Chief Executive Officer Mark Pincus stands to benefit from the investment, he may also find himself competing for customers with companies started by managers he helped mentor. An exodus of talent that coincided with shrinking sales and a 67 percent decline in Zynga’s share price has fostered a network of former employees shunning the bureaucracy of a publicly traded company in favor of working in smaller startups.

“There’s a lot of people who left Zynga who are still hungry,” said Amitt Mahajan, a Zynga executive who departed in 2011 to start San Francisco-based mobile-game studio Red Hot Labs. “You have a lot of people who say, ‘Hey, I can go do something for myself, and I have all this knowledge to do it.’”

Along with TapZen and Red Hot Labs, at least four other mobile-game startups have been created by former Zynga employees. Bee Cave Games Inc., headed by Erik Bethke, has released “Blackjack Casino.” JuiceBox Games Inc., founded by five Zynga alums, plans to introduce “Honorbound,” a role-playing game for smartphones and tablets, later this year.

Zynga fell 2.4 percent to $3.27 at the close yesterday in New York. It has lost two-thirds of its value since its initial public offering in December 2011.

Tablet Focus

TapZen is concentrating on games made specifically for tablets. Zynga, which amassed a wide following amid users of more traditional computers, such as laptops and desktops, has struggled to adapt to a surge in popularity of handheld devices.

“One of the greatest measures of the success of our company is the progression of our people as leaders,” Colleen McCreary, Zynga’s chief people officer, said in an e-mailed statement. “We encourage people to pursue their passions, regardless of where it takes them.”

Bret Terrill, a former Zynga mergers-and-acquisitions manager, founded 12 Gigs Inc., maker of mobile-casino titles such as “Slots Heaven.” Paul Bettner, who sold his previous startup, Newtoy Inc., to Zynga in 2010, plans to develop titles for Ouya, a $99 game machine based on the Android operating system.

Startup Culture

Zynga’s revenue has slid as players shun games played on websites. The company’s tally of monthly users fell 13 percent to 253 million in the first quarter, Zynga said last week, and revenue in the current period will be $225 million to $235 million, less than the $260.1 million predicted by analysts on average, according to data compiled by Bloomberg.

The shift to mobile and social games has reshaped the $67 billion video-game industry. Revenue from free mobile games and those downloaded to computers surpassed annual sales of packaged titles in 2012, according to a December survey of U.S. gamers’ playing trends by Frank Magid Associates Inc.

For Verdu, a video-game veteran who joined Zynga in 2009, the decision to leave was prompted by an urge to return to the small startup environment he missed as the game maker grew into a large company.

“To be reminded what it’s like to create something as fast as you can and work with a small team of people you adore and trust -- there’s nothing like that,” Verdu said in an interview. “It would have been hard to figure out what they could have done to keep me.”

Still, the two companies will remain close. In return for the investment, TapZen will let Zynga “take advantage of any breakthrough we make,” Verdu said.

Share Drop

Zynga has grown to more than 3,000 employees in six years. Still, Pincus has sought to build an organization that’s like a collection of startups, empowering young executives to act as if they are a CEO of a new venture or running a game studio.

“I think we’ve kept that startup feeling for people,” Pincus said in an interview on Dec. 16, 2011, hours after the company’s shares began trading on the Nasdaq Stock Market.

Since then, Zynga’s share decline has sliced the value of equity used to compensate staff, triggering a wave of high-profile departures. Under the glare of Wall Street, the pressure to meet revenue projections became a priority over making innovative games, according to Brian Reynolds, Zynga’s former chief game designer, who left earlier this year.

“It has all sorts of publicly traded company pressure,” Reynolds said in an interview. “It’s hard to go experiment and not have somebody always ask you when will you be done.”

PayPal Diaspora

And as the promise of a financial windfall faded after the initial public offering, many executives were left with unfulfilled dreams, said Mahajan, who helped build one of Zynga’s first big hits, “FarmVille.”

“A lot of people haven’t achieved what they were looking for in terms of financial worth and job security,” said Mahajan, whose Red Hot Labs has attracted $1.5 million from venture-capital firms including Andreessen Horowitz LLC. Bloomberg LP, the parent of Bloomberg News, is an investor in Andreessen Horowitz.

He compares the diaspora of talent from Zynga to that of PayPal, the mobile-payments startup, which was sold to EBay Inc. in 2001. After the acquisition, PayPal’s founders became some of the most influential players in the formation of the Internet, helping to fund and support LinkedIn Corp., Facebook Inc. and Yelp Inc. in their early days.

Seeking to bring together his fellow Zynga alums, Mahajan helped start the Red Dog Group, a collection of former executives of the game maker who hold Skype chats and meet about once a month to discuss the companies they are building.

Startup Roots

The group, whose name is a nod to Zynga’s logo of a white dog on a red background, shares tips on how to raise money from investors and how to create the best experiences for mobile games.

“We’ve all come out of this really strong with the ability to run some companies,” said Roger Dickey, the creator of Zynga hit “Mafia Wars,” who left the company in 2011 to invest in startups.

The training Zynga managers received around how to build games that use data analysis to add more users and get them to spend more money on virtual goods is now being employed at startups run by members of the Red Dog Group, Dickey said.

For other Zynga alumni, the goal is getting back to game making. Reynolds, who led the development of titles including “CityVille 2” and founded the company’s Baltimore studio, is in the process of raising money for his next gaming startup.

“I want to get back to my roots of making a game with my own two hands,” Reynolds said. “I’m less interested in figuring out how to rule the gaming universe.”

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