Reading Brad Feld’s dad’s post about Brad’s grandfather made me get around to writing this one.
My Dad was born in 1947. He passed away just four weeks ago after a prolonged bout with lung cancer. It was sad, but he passed peacefully surrounded by family. It was time – the illness had taken a really tough toll.
I owe my Dad a lot (don’t we all?). As I wrote his eulogy, I realized how much I learned from him. He was never the “come sit on my lap and let me teach you some life lessons” kind of guy. But by watching him and being around him through the second half of his life, I learned many of the big things that really matter.
1. Be Bold: My Dad grew up in the Philippines and was an entrepreneur. His first real job was as the manager of a bowling alley that my grandfather owned in Hong Kong. He later worked for our family’s business in Manila before things started to fall apart in the late 80′s. He moved our family back to Hong Kong where he owned a Burger King Franchise, a Chuck-E-Cheese franchise, and a number of other businesses. None were all that successful. But he noticed something from running the Chuck-E-Cheese – he was making all of his money from carnival games. It made sense in Hong Kong, because it was an dense city with pretty bad weather and not that much for kids to do. Letting them play some fun carnival games for plush toys was a nice outlet, and better than frequenting video game arcades which were smoke filled spots usually restricted to kids over 18. Plus, Chinese people don’t like pizza too much.
Anyway, my Dad took the bold step to start his own indoor entertainment center, taking some of the things he learned from Chuck-e-Cheese and modifying it to the local market. His first store was a big success, and he eventually expanded the company to several stores in Hong Kong before he was acquired by Yaohan, a Japanese department store chain which then blew the company out across Asia. At its peak, Whimsey had over 25 locations and was a household name for anyone with young kids in Hong Kong and some other cities as well.
My Dad was always proud that a man from the Philippines who couldn’t even speak proper cantonese could start a successful consumer business in Hong Kong that was a first of its kind. It was a bold move. He was always very calculated about his risks, but he did take a lot of risks in the effort to build something significant. There was something about watching him start his businesses that rubbed off on me and made it natural for me to quit jobs to move across the country to pursue love (that’s another story) or leave Spark to start my own firm without too much concern. It meant a lot to me to have his example to give me the confidence to make unconventional choices.
2. Be Loyal: My Dad married my Mom when he was 21. Like every marriage, theirs wasn’t always perfect, but it was strong, and he was loyal throughout their life together. He also hired and kept the same assistant for the past 30 years, and she literally has never had another job her entire career. One of my Dad’s first investors is also one of the first investors in my fund. One of my Dad’s closest friends through the years was a man in Taiwan that he met when he travelled there for an international basketball meet when he was in middle school. My Dad was always very generous and very loyal. Building lasting relationships and making proper choices with people was incredibly important to him. I’ll never really have my Dad’s gift with people – he just had a way about him that made people gravitate towards him. But I hope to be as loyal to my friends and business partners as he was. Business relationships are a multi-turn game, and he really taught me that.
3. Be Open: In some ways, my Dad was incredibly old school. I was always frustrated by how unwilling he was to learn new things or learn how to use a computer properly. But I think that’s because in other ways, he was always so open to new things and looking for new opportunities as globalization was taking hold during his lifetime. He had a remarkable ease in moving through different cultures. Funny enough, he told me once that because of his upbringing, he never really felt fluent in any language (imagine that!). He grew up speaking his native chinese dialect, learned tagalog from living in the philippines, learned english in school, picked up mandarin somewhere along the way, and picked up cantonese to survive in Hong Kong. He was a bit of a unique creature when he started his businesses in Hong Kong because he was one of relatively few Chinese people who could feel at ease with Americans and Europeans, which allowed him to attract American franchise partners and work with western suppliers. He even blended in nicely within Yaohan, the Japanese company that acquired him and retained him for several years. A few years after he left Yaohan, he started another business selling hand-decorated candies and lollipops. He had to pull together licenses mainly from America, and had distribution partners for his business in the UK, Australia, the Netherlands, and other countries throughout Europe and Asia. A big part of his professional success came from his willingness to look outside his own world and dive into uncomfortable situations because he knew that few others were comfortable doing so.
4. Be Resilient: It’s easy to see my Dad’s career as a success story. But it was really a struggle in many ways. When he was in the Philippines, their family business had a strong rise, and pretty spectacular fall that led him to head to Hong Kong. He was lucky enough to sell Whimsey before the financial crisis in Asia took out many businesses and ultimately, the company that acquired him. The candy company had some good years, but also some really bad ones. In between were failed franchises, restaurants, and other less successful experiments. But my Dad worked hard and was persistent. He was a fighter and survivor. And that was true professionally, and personally too… even to the end of his life. He fought his illness courageously, and was able to give us all a few more good years with him than he probably needed to. He was able to meet my second daughter, and get to know my first better, even if most of their final visits and skype chats were in the hospital.
I love my Dad and learned so much from him. He has had a big imprint on who I am. I miss him.
We’re pleased to announced NextView’s investment in SkyVu Entertainment, along with Lightbank and angel investors. SkyVu is a mobile game company best known for their hit franchise BATTLE BEARS… a series of shooter type games that are action-oriented with an edgy theme, that still remain kid/teen friendly in terms of content.
There are countless mobile game studios out there, and we’ve looked at our fair share of gaming opportunities here at NextView. What made SkyVu stand out was that they already had significant traction before seeking institutional funding (18M+ downloads, seven figure revenue, etc). The company isn’t simply a game developer, but is pushing the artistic and technical boundaries of what a “mobile” game experience can be. For example Battle Bears Royale is a real-time, 3D, multiplayer shooter game than can be played on 3/4G cell networks. And SkyVu’s team is creating a truly cross-platform company… they built the first plug-in for in-app purchases on Android/Unity and made it available to other developers.
We also share SkyVu founder/CEO Ben Vu’s vision of the future of mobile gaming. As I blogged recently, to us “mobile” is in some ways a misnomer of a broader phenomenon of ubiquitous computing. Ubiquitous computing is creating more gamers overall, and increasing the amount of time, the types of devices, and the contexts in which we play games. As the adoption of these devices continues rapidly, and the computing power and network capability increases dramatically, mobile gaming (already a multibillion dollar industry) will catch up with the scale of other gaming platforms like consoles and PCs. It will also create unique, new opportunities for gaming companies by blurring the distinction of console vs mobile… imagine sitting on the couch with a few family members or friends where you can all be playing or spectating games across tablets or smartphones in your hand and the big TV on the wall. And “mobile” gaming won’t just be limited to simple 2D, turn-based casual games (e.g. Words With Friends) – SkyVu and others have been pioneering real-time, 3D, and new (for mobile) genres that appeal not just to casual but also core and mid-core gamers.
We’re excited to partner with Ben and the whole SkyVu team, as they continue to build the company and truly take multiplayer mobile games to new heights.
A few weeks ago, I was able to spend a little time with my 12-year old niece who lives in Singapore.
For those of you who know Singapore, you know that it is an incredibly competitive place academically. Standards are the highest in the world, but it’s very difficult to test into the top schools, and many families spend huge amounts of time and money to get their kids tutors for every subject that will show up on their various placement exams. Every time one kid does something new to get an edge, everyone else will quickly follow suit. It’s like an incredibly demanding race, and everyone is running on one giant treadmill where you need to keep increasing your speed just to stay in the same place.
It’s a grind, and my niece is falling into line. She tests well, studies hard, and thankfully, maintains a really healthy perspective throughout. But I gave her a homework assignment for the next year (Singaporean parents love homework). I wanted her to make 2 decisions that are completely contrary to what most other kids do to try to get ahead. These don’t have to be big, and they might not work out (and they might not be about work at all). But she has to give it a shot and see what happens.
I really think that asymmetric returns in any professional or personal endeavor come from making non-standard calls. Mike Maples frames it in 2×2 fashion with his “non-consensus right” framework. Peter Thiel calls them “secrets”, or put another way “an important truth that very few people agree with you on”.
Most of the time however, people don’t pursue unconventional truths. I notice this all the time with investors and entrepreneurs alike. We are all more like 12-year old girls in Singapore running hard, but standing still. It might look a little different different – at NextView, we often call it “chasing heat”. Chasing the hot company or sector. Being a fast follower when a certain business model or new innovation becomes apparent as a big and successful thing.
But chasing heat rarely works. Our time horizons are too long (sectors get hot because of successful companies that were started 5+ years before). Competition gets too fierce too quickly to be a fast follower (see my post on why fast followers are actually leaders in disguise). Instead, what usually wins is a combination of contrarian thinking AND the conviction to persist (sometimes for years) in the face of naysayers. It’s hard to do. It’s scary to get off the treadmill when it seems like you are going to be left behind by your peers.
But it’s also the only way to run a different sort of race, and actually get anywhere.
Personal note: Although the Singaporean girls might be running hard but standing still relative to one another, it’s still clear that they are not standing still relative to students in the rest of the world. Even though I’m being a bit critical of the system in this post, I think the country’s commitment to excellence in education is very, very admirable. Most countries and families could learn a thing or two from the Singaporean education system and would be blown away by what my niece and her peers are able to handle.
I’ve always wondered why funding begins with fun. Those three letters. F. U. N. Fun. For entrepreneurs, seeking seed capital means meeting with numerous VC firms and sometimes dozens of angels… fun? Telling the same pitch over and over again… taking time away from more immediately impactful endeavors like recruiting and customer development… the endless follow-ups and inevitable radio silence… fun? And then there’s hearing “no” constantly – perhaps that’s why funding ends in “ding,” as it’s the repetitious sound of hearing reasons for why not, instead of why.
Maybe fundraising isn’t supposed to be fun, after all. But that doesn’t mean it can’t be productive beyond obtaining the capital itself:
- Running a great fundraising process involves crafting real story and not just a pitch. This end-result can take additional time to develop, but having completed it, it can be beneficial in more than dealing with just potential investors. Having a crisp story about the vision behind a business can be leveraged multiple times with other constituents to effectively reach customers, partners, press, and even potential acquirers with the right communications message.
- Fundraising encompasses trial-by-fire circumstances which almost always necessitates professional development. Unless Sales just runs in the blood, running a fundraising process will naturally hone those skills. These soft-skills of persuasiveness undoubtedly make one a better leader.
- A process which is inherently about meeting people… provides an excuse to meet people. Fundraising is about evangelizing a vision. Along the way there will be encounters where the story resonates in conjunction with a real personal connection. Sometimes these people don’t become investors, but rather than quickly moving on, these people can be co-opted into useful allies to help in other ways. Introductions to customers, long-term advisors, business development partners can result from the fundraising process, as those early conversations turn into real relationships.
Yes, often the best part of fundraising is the end of it. That’s the fun part – getting back to spending 100% the time building a company. But there can real benefits that come out of a fundraising process if you’re proactively seeking them as a by-product beyond just adding cash to the bank account.
Zynga’s faced a lot of pressure in the public markets recently. The company’s lost nearly 80% of its value from the peak earlier this year, in the run up to Facebook’s IPO, and currently trades below $3/share… a fraction of it’s IPO price of $10.
That much we all know. We also know lots of valid reasons why the company could be valued at far less than it once was including:
- Stalled Growth – revenue essentially flat over the last 4 quarters
- Governance/Control – Founder/CEO Mark Pincus has sold a good amount of his stock and owns <20% of shares outstanding, but now essentially has unilateral voting control of the company
- Mobile Monetization – as consumer usage shifts from browser/desktop casual games to mobile devices, opportunities for both virtual goods and ad revenue may decrease
- Significant CapEx – Zynga expects to have $380M in CapEx in 2012, though it’s worth noting that the vast majority of that is related to its new corporate headquarters which Zynga (e.g. one-time purchase offsetting future leasing expenses)
- IP Litigation – EA is suing Zynga for copyright infringement, and regardless of the merits this is a headache Zynga will have to deal with and pay to defend itself
- Management Shake-ups – most notably the sudden departure of COO John Schappert and shuffling of Marc Pincus’s direct reports
You can read about all of this stuff in Zynga’s own SEC filings or the popular press. So I can appreciate why public stock investors would be leery of Zynga and why the stock price has been punished recently. It’s hard to be bullish as a public market investor about a closely held company (in terms of control not ownership) that’s barely growing and faces strategic risks.
But at what point does Zynga become a value play? Given Marc Pincus’s voting control, being acquired is presumably not in the cards for Zynga and a take private or LBO would be nearly unthinkable in the near term so there’s little chance of an M&A situation to arbitrage. But at some point the valuation of the company puts it squarely into “value” stock territory rather than the heady “momentum” stock multiples Zynga once enjoyed, not that long ago.
The “value” case goes like this:
A) Valuation Net of Cash – Zynga’s market cap sits at around $2.2-2.3B as of this post. But the company is sitting on a cash pile of over $1.6B. Strictly speaking Zynga’s cash pile is split into three chunks according to GAAP rules… a bit over $400M is in cash & equivalents (e.g. money market funds, bank deposits, etc that can be converted into cash essentially instantly), about $800M is in short-term investments, and another $400M and change is in long-term investments. All of these investments are held in high quality, highly liquid bonds issued or backed by the US Treasury and big corporations (see Zynga’s latest 10-Q). The GAAP distinction is short-term investments are those bonds or instruments that mature more than 90 days but less than 1 year from now, long-term is anything over 1 yr maturity.
So theoretically if interest rates go up (aka duration risk) or the creditworthiness (aka credit spreads) of the US or the corporations Zynga owns bonds of changes dramatically, they could lose a small amount particularly on their long-term securities. But practically speaking Zynga could turn all $1.6B+ of this into cash overnight if it really wanted to. Tech companies which often have little or no debt of their own allocate their cash holdings in similar manner in order to prudently balance investment yield on these holdings… the vast majority of Apple’s $100B+ cash pile is held in long-term securities for exactly the same reason.
So the “value” case for Zynga has to start with the assumption that the business itself is worth more than $700-800M excluding its cash pile (i.e. $2.2-2.3B market cap minus $1.6B cash/investments).
B) Zynga’s Solidly Profitable – Yes, on a net income basis Zynga has been unprofitable the last 3 quarters though they did post net profit before they went public. But if you dig deeper, Zynga looks to be a solidly profitable company by several measures. Excluding non-cash expenses like stock compensation as well as revenue recognition timing (consumers pay it cash up front, but GAAP rules require them to recognize the revenue over time as virtual goods get “consumed”), Zynga generated over $150M in adjusted EBITDA during the first half of 2012. Same is true when you look at actual cash in and out the door… Zynga’s operations generated $146M in positive cashflow in 1H 2012.
In other words, on an annualized basis the company is trading at something like 2.5-3.0x multiple (net of cash) of either adjusted EBITDA or operating cashflow. Zynga’s trailing revenue is nearly $1.2B so its business (again net of cash) is valued at something like a 0.6-0.7x trailing revenue multiple. That’s pretty darn cheap, no matter how you slice it.
C) Zynga Has Decent Margins – Strictly speaking, Zynga’s gross margins are about 71% in the most recent quarter. That’s their revenue minus cost of goods, and keep in mind Zynga’s top line already excludes the 30% take from Facebook (which still accounts for >90% of revenues). 71% gross margins are not exceptional for a software/internet company, but they’re not terrible either. That being said, unlike a company that has essentially zero user acquisition costs (e.g. Facebook, LinkedIn, Yelp, etc) Zynga has to spend substantially on sales & marketing to acquire players. But even if you back out customer acquisition spend in addition to COGS, Zynga’s profit margins are still over 50%.
D) Casual Gaming Pioneer – Zynga still generates the majority of its revenue from US based players. They pioneered free to play social games in the US 3-5 years ago, and have helped make mobile games a mass market phenomenon thanks to hits like Words With Friends and Draw Something (thru OMGPOP acquisition). They face tons of competition in both realms and the shift from in casual gaming space from desktop/browser games to mobile presents challenges to Zynga and others. But I personally still wouldn’t rule out Zynga’s potential to grow both parts of their business, as well as continued growth internationally.
E) Free/Cheap Option on Real-Money Gaming – There’s a growing belief that at some point in the next 5 years, restrictions on playing online games for real money in the US may be loosened, whether full out casino games or something just slightly beyond existing legal skill games (call it gambling “lite”). It’s difficult to handicap these chances and I certainly wouldn’t invest in a company like Zynga for this reason alone. But given Zynga’s first hit was in virtual poker, I feel a long investor in Zynga essentially gets a free option on the potential upside from more legalized forms of real-money gaming. It still retains both a huge user base and strong internal DNA and technology to optimize online games, which IMO puts it in a stronger position than either physical gambling companies (e.g. Harrah’s, MGM, etc) or traditional video game companies in the even online gambling in some form becomes legal.
FWIW I have never had a position (long or short) in Zynga, and don’t intend to take a position in Zynga in the future… I already have ample personal exposure to consumer internet companies both public and private. I also recognize the myriad of risks that a public investor might see in evaluating Zynga and structural reasons they might want to avoid being an investor (e.g. dual class governance w/ founder having majority voting control). And given earnings misses and limited future guidance, Zynga’s relationship with public market investors has been a rocky one. But at some point you have to say that there’s a valuation for Zynga’s profitable core business and cash pile which makes it a cheap value play on not just a comparative but an absolute basis.