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Mark Pincus and the role of Game Mechanics in Startups

I was talking with a friend over the weekend about Zynga's filing for IPO. We were discussing Zynga's impressive business model but the conversation quickly shifted to Mark Pincus and the impact that he has had on the startup world. Pincus is an idol to many startup entrepreneurs and for good reason. He has likely been the single biggest source of inspiration behind the role of game mechanics in software.

Game mechanics in startups, also known as gamification, is the notion that game elements such as points or levels can be used in software to increase engagement and elicit a desired response from a user. These game elements make applications much more engaging and addicting. (The best recent example I can think of is Turntable.fm's successful social engagement loop.) Every entrepreneur should think long and hard about game mechanics and feedback loops if they want to make software that people keep coming back to over and over again.

Here are three must-reads for entrepreneurs wanting to learn more about the role of game mechanics in startups: 

 

So feedback loops work. Why? Why does putting our own data in front of us somehow compel us to act? ... Feedback loops are how we learn, whether we call it trial and error or course correction. In so many areas of life, we succeed when we have some sense of where we stand and some evaluation of our progress. Indeed, we tend to crave this sort of information; it’s something we viscerally want to know, good or bad. As Stanford’s Bandura put it, “People are proactive, aspiring organisms.” Feedback taps into those aspirations.

  • And last but not least, Stanford Entrepreneurship Corner's video from 2009 with both Mark Pincus and Bing Gordon. It's an oldie but is still one of the most insightful lectures I have seen.

 

Filed under  //  game mechanics   gamification   startups   zynga  
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Zynga's IPO Filing: Analyzing the S-1

Zynga_ipo

In the year of Internet IPOs, social gaming juggernaut Zynga finally filed for its IPO today. So we finally get to get a good look at its financials. And they are strong ... to quite strong. 

Here's a quick snapshot:

  • Total 2010 Revenues: $597mm
  • First Quarter 2011 Revenues: $235mm 
  • Cash and Cash Equivalents: $996mm
  • Operating cash flow: $103mm

Zynga_ipo_financials

Revenues have grown at an incredible pace, up 392% last year alone. Nearly 95% of the company's revenue comes from selling virtual goods, which has increased 127% between Q1 2010 and Q1 2011. The profit margins on these virtual goods is good at 28% but not as high as some were forcasting (~40-50%). Turns out that there is still a lot of R&D, sales and overhead costs that go into making highly addicting, successful games. 

All this adds up to good things for the most important numbers for investors, profits: 

  • Total 2010 Net Income: $90mm
  • First Quarter 2011 Net Income: $12mm

They also have a TON of cash stockpiled up, to the tune of almost $1 billion. As Dustin Curtis noted, if Zynga's revenue dropped to zero right now and their costs remained constant, the company would not go bankrupt until June, 2012. In short, they have enough cash on hand that they don't really need to go public right now. I think they are absolutely right to take advantage of the hot IPO market though. 

Certainly there are risks. Zynga is quick to acknowledge the importance of Facebook to its business model, saying that it generates "substantially all of our revenue and players through the Facebook platform." Indeed, Facebook is mentioned over 204 times through Zynga's S-1. 

Here are some other numbers that stood out to me:

  • 62 million - Daily Active Users
  • 236 million - Monthly Active Users
  • 38,000 - virtual item are created every second
  • 2 billion - minutes a day spent on Zynga games

My favorite part of the S-1 though was when Zynga founder and CEO Mark Pincus leads the prospectus off with a personal letter, which I think is a great touch:

At Zynga, we feel a personal connection to our games through our friends and family. I love that my brother in-law, who has five kids and no free time, religiously plays our game Words with Friends.... My kids decided a few months ago that peek-a-boo was their favorite game. While it's unlikely we can improve upon this classic, I look forward to playing Zynga games with them very soon. When they enter high school there's no doubt that they'll search on Google, they'll share with their friends on Facebook and they'll probably do a lot of shopping on Amazon. And I'm planning for Zynga to be there when they want to play.

via sec.gov

By the way, have I mentioned that I really love S-1s? You can talk all you want, but the GAAP numbers don't lie. Everything is laid out for all to see. Know of any other interesting analyses of their S-1? Feel free to email any I might be missing. Just shoot me a note or comment below.

 

Also: The Groupon, Angie's List and Yelp IPOs Proved One Thing: Local Is Really, Really Hard

Filed under  //  IPO   game mechanics   venture capital   zynga  
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