What I think is not so obvious to many commentators is that this sort of juggling of outsized investments is an ego / megalomania play on the part of New Russian oligarch backers & small-time industrialists and financiers. The $180m figure has little to no imaginable correlation to any measurable marketability potential, generalised ROI, or anything else that would be deemed a competent valuation process institutionally in the West on something like Farmville. What matters is that the amount be sensational. I think we can all agree $180m is certainly sensational.
This is not news to anyone who remembers the Yeltsin era and understands how wealth was concentrated^H^H^H^H^H^H^H^H^H^H^H^Hdistributed in Russia after privatisation and how it is intertwined with state interests. But despite the numerous outlandish personally flavoured investments Russian wealth barons have made in things UK football clubs, lavish yachts, full-service private jets, summer homes on the French Riviera and in southern Spain, etc. this point still eludes most Western observers.
Among numerous others, a key difference between Russia and the US is that in the US, an Anglo-American capitalistic country by heritage, contemporary super-wealth comes from many sources of varying degrees of legitimacy, depending on one's perspective. Certainly among them includes honest entrepreneurial ambition, innovation and professionalism in the transaction of commerce. In Russia there is only one kind of mega-wealth - politically-connected 90s wealth. It is all one big "family," though the term is more meant to emphasise the narrow exclusivity and extreme statistical lopsidedness of the club than to insinuate congenital relation among the actors.
This sort of "investment" is not very different from the sort of tribalistic "make it rain" spectacle you saw blowhard masters of local fiefdoms in Dubai pull, or continue to see in other Gulf Arab states, just to point to one widely-recognised example. The constellation of facts inherent in these examples is one of the inescapable cultural idiosyncrasies of the "backward" East from the perspective of free-market development and/or the capitalistically-themed conception of modernity.
The all-around point of this seemingly disorganised rant is that all talk of what Zynga did "right" or attempts to "learn" from its "strategy" in relation to the particular size of this investment is pointless sophistry. Yes, FarmVille - what do the kids say these days, "went viral?" - but rational speculation about how this merits a $180m capital infusion will turn you prematurely grey and bald on account of its futility.
If you are laying awake wondering how enough value and potential was created to legitimately absorb $180m, you're missing the point entirely -- your thinking is too West Coast, and not enough Near and Middle East. Check these projects out and it will help you get the picture, although my picking on Dubai is purely out of desire to make an analogy with something recently in the news and discussed here:
The symbolic significance of investing a headline-worthy sum of sovereign wealth in a "key" American "new economy" property as a geopolitical move for domestic consumption cannot be overstated either. It is likely, in fact, to be the far more substantial theme here, as there are more efficient ways to flagrantly and gratuitously display opulence and excess, usually involving something tangible, like a personal resort flotilla mounted on a military destroyer frame. You know, Deliverables 1.0 - bricks and mortar, not clicks and mortar. Now, I know Digital Sky did not put up the $180m by itself; what does that matter? They "led the round" -- you see, they showed "leadership" here, they "took the lead" while Tiger Global, Institutional Venture Partners and Andreessen Horowitz "participated." I acknowledge that the enormous importance of this may be difficult to appreciate if you're not a semi-feudal politician, but work with me.
The bottom line here is that Zynga is the unwitting beneficiary of bread and circus games in faraway places that otherwise have no substantive relevance to them intrinsically. There are no valuable business lessons to be learned here and there is no reason for them to be featured in the next Startup School or anything like that, unless the lesson is "get on the radar of Turkmenbashi and see what falls on your lap next time he goes to exercise his golden systems of elimination in his golden commode." [http://en.wikipedia.org/wiki/T%C3%BCrkmenba%C5%9Fy]
I don't comment here very often but when I see something so off the mark I have to speak up. This is a short investment for Zynga. They were probably on the cusp of raising more than this amount before the whole "Scamville" story gave them such a headache. They are taking in millions in revenue every day; who knows what the bottom line is, but the investors must have seen it. It really doesn't matter much where the money is from. Trust me, their lawyers ensured this money is clean.
I'm really frustrated that the OP has so many upvotes. All you have to do here anymore is sound intelligent? This is a story about Zynga, not geopolitics. Russian, American, Middle Eastern, European, whatever -- Zynga is on fire.
They were probably on the cusp of raising more than this amount before the whole "Scamville" story gave them such a headache.
What is your basis for this assumption? I do not necessarily disagree, by the way - the glut of dull-witted prize bulls in command of large funds jumping at the first sight of anything "viral" is a pretty open secret. Still, I wonder.
They are taking in millions in revenue every day; who knows what the bottom line is, but the investors must have seen it.
If they are taking in millions in revenue daily at anything resembling a high margin, why would they need anyone's ~$180m? As you suggest, such a condition would afford them the dubious distinction of being "on fire"; do you think the lack of ~$180m is all that stood between the incipient, fledgling status quo of Zynga's ramen-profitable basement company and Facebook games "going supernova?"
Do you think $180m can be reasonably dimensioned, at a high return, in a late round, to a company grossing millions a day? Far it be from me to claim authority in this area; my latest capital-intensive, web-savvy proposal - Social VPN over Twitter using base64/uuencode - was a complete flop.
This is a story about Zynga, not geopolitics.
As far as Zynga and as far as Americans should be concerned, you are entirely correct. But it is simply naive to dismiss the enormous role played by considerations of "domestic consumption."
For example, do you think Putin is really a sworn enemy of the West, or do you think public sabre-rattling is an indispensable element of his popularity and interminable hold on power, despite private cooperation and appeasement on a variety of global objectives with the Bush administration and presumably its successor?
Trust me, their lawyers ensured this money is clean.
The pristine crispness of the tender - or the bits that represent it - is not in dispute.
This is complete conjecture, but one of the key reasons may be to cash-out the founders/employees. Companies don't usually cash out their own founders, but investors sure as hell have the right to buy the founder's shares if they want. If they're making so much money but don't have a sale in the near future, the founders might have decided to take a significant stake off the table...
Have you seen their revenue growth? I think you have some really interesting points, but at the end of the day, Marc Andeessen looked at the deal and presumably said, "This is an opportunity" (at that valuation). That holds a lot of water with me and he certainly doesn't have anything to prove.
If you truly think there is nothing to learn from Zynga other than "get on the radar of Turkmenbashi", I really think you should look again.
I am not at epistemic liberty to speculate as to the reasons for the other partners' involvement in the round.
However, my understanding is that this is the land of Paul Graham, who famously and correctly pointed out here [http://www.paulgraham.com/startupfunding.html] that VCs "are like high school girls: they're acutely aware of their position in the VC pecking order, and their interest in a company is a function of the interest other VCs show in it."
The intense, excruciating fear of not being "in" on some lucrative action involving other investors readily willing to put up $100m+ is a formidable motivating force for putting your chips in the game.
By the way, I am not arguing that Zynga did nothing right or is a wholly inappropriate direction for a VC round of some description. This is the Web Economy, of course; more preposterous things have happened than stupendous investments in something as legitimately "virus-like" as Mafia Wars or FarmVille. But it is $180m we are talking about here...
Social proof is a big thing for most buyers, and VCs are no exception. But social proof doesn't render them idiotic. And Andreessen isn't a giddy MBA herd animal, he's a guy who's built and exited with two massive startups.
But to dig into your assumption that $180m is ridiculous... The investment doesn't matter-- the valuation does. So let's guess that they sold a third of their company for that $180m-- that's a $540m valuation. Is that unreasonable? They reportedly have a run rate of $50m. I'll bet it's twice that in a year. What sort of revenue multiple do you think is appropriate for a high growth tech company? What kind of revenue/growth rate would be appropriate for a $540m valuation?
I'm all for poking fun at absurd valuations for companies that don't even have a glimmer of an idea for revenue, but these guys are looking at $50m/yr and growing like a weed. What's not to like?
[edit: another poster said a run rate of $200m - If that's true, wow.]
I'm Russian and have experience raising money both in Russia and UK, so hopefully can add a useful perspective.
Whilst the above is true in general, it's not fair to pick on Russia.
It's fairly natural that a vast concentration of wealth in the hands of few and inexperienced (by historial standards) business men leads to ego-driven risk-taking spending. It happens in every country, there are always folks who inherit a fortune and blow it on some business venture within 6 months. You just don't hear about them in the news cause the amounts are too small. Russian oligarchs inherited the fortune of USSR, Arabs inherited oil fields, etc, which make their examples more news-worthy. It's like a high stakes poker game.
There are American VCs that make outlandish investments. There are British banks that invest money in Dubai. And there are Russians that invest in American tech. These are all high-risk high-reward type gambles.
It's only natural that an inexperienced foreign investor pays a premium over a well-known Silicon Valley VC firm: you aren't getting advice or guidance or connections, just cash ("dumb-money"). Similarly a foreign investor often pays a premium when investing in Russia, or an inexperienced investor ends up paying a premium in the form of cash or bad terms.
And I don't agree that there's nothing to learn from Zynga in all this. There's a key lesson: that best valuations don't live in Silicon Valley. Raising money is often a lot easier and cheaper in Russia or the Middle East. I can only congratulate Zynga on getting a great valuation and not being afraid to take the road less traveled, and having $180M to spend on either their business or themselves. After all FarmVille isn't exactly out to change the world now is it? :)
Entrepreneus often forget that fund-raising is a really important skill in building a business (if not the most). I confess - it's something I didn't get when I started out. This is not what US investors want you to think (so they can focus on great deals) - the Silicon Valley hype is all about great tech and ideas. But ideas aren't worth much. And great technical people can be taken on board if there's sufficient capital available. Cash can make or break a business unlike anything else. With $180M you can dream up quite a few interesting ventures, you don't need to invest it into your current idea (eg FarmVille). Maybe Zynga will use the money to build the next Facebook or Google (yeah right).
Having said that, I am aware that Putin has an agenda to promote Russia as the leader in technology. Perhaps investments by DST are a part of that agenda. But it's only natural that globalization brings with it new sources of capital, and that's only good news for startups.
PS It's not money laundering (as some have suggested) cause Russian banks offer that service for 15% (you can wire cash to any offshore account from central Moscow).
"get on the radar of Turkmenbashi and see what falls on your lap next time he goes to exercise his golden systems of elimination in his golden commode."
(Bias disclaimer - speaking as a native Turkmen.)
Wait, wait.. Do you have any specific example of Turkmenistan investing huge amount of money in foreign business just for bragging rights? I'd like to hear one.
In Turkmenistan, money coming from gas export is totally under control of the government and it is being spent wisely, inside the country as much as possible. And there's no single person who can waste millions of gas money on personal entertainment.
>>money coming from gas export is totally under control of the government and it is being spent wisely, inside the country as much as possible. And there's no single person who can waste millions of gas money on personal entertainment.
That comment made me Google. Turkmenistan makes e.g. Iran and Egypt look democratic.
Yep, that was among the first things that occurred to me when I read his reply; nobody in the former USSR, most certainly not Central Asia, let alone Turkmenistan, earnestly describes their government's spending as "wise."
But on the off-chance that the guy is an actual Turkmen in Turkmenistan, I figured it would be impolite to take up the issue here.
Well, Turkmenistan is black box when looked from outside, I wouldn't jump to conclusions based on couple minutes of Google search :-)
Our government is paranoid about money leaving the country. And I think, rightly so.
We spend quite a lot inside on infrastructure, build some shiny new schools/hospitals/residence buildings, invest on some factories, etc. It may not be "wisest" way possible, but I wouldn't call that stupid either. At least, better than distributing the wealth among "family" like in Russia 90s.
My original point was "No, you can't make millions by getting on radar here in Turkmenistan. It is not as easy as you think."
I think the parent's point was that blanket statements of this sort gloss over all sorts of significant nuances that render the issue in non-B&W terms, especially as it relates to his specific experience of that country's political environment.
The "joke" here is: I wonder what would happen the poster if he wrote anything different?
Nothing! Seriously.. I keep a blog (in Turkmen) for more than 3 years and people actually living in the country write all kinds of criticism (in blog posts/comments), and guess what? We are all alive and well, have more than 1 million+ pageviews/year.
I don't know much about the insides of Russian economy, but I'm absolutely sure that it's possible to become a successful entrepreneur in your country. Of course, probably one won't become an owner of Nornikel or GazProm, but what can stop him creating a successful startup in Russia, especially when you have favourable tax laws? The only thing that comes to my mind, is lack of VC infrastructure. Well, perhaps, I am too much in love with Russia and don't see some obvious things. Cheers.
I suppose I should qualify my ascription of "native Russian" unto myself by saying I am in the US nowadays and for some time.
It is quite possible to become a successful entrepreneur in Russia, to be sure, although neither tax laws nor bureaucratic requirements make it as fluid and simple as in America, and the most efficient path taken de facto is to avoid following them to some measure.
My point was more that when you see really exciting figures like hundreds of millions to billions of dollars from Russians, there is something else at work than the fledgling capital markets for the hoi polloi.
Precisely. But with the minor complicating detail that the drawing is less done by little balls bouncing around inside a plastic casing and more - as 'mahmud' very elegantly put it to me in an offline exchange - a bunch of poseurs "throwing money like they earned it. 100% ghetto-fab fat-chain posturing."
Sophisticated execution, absolutely. Zynga are extremely smart and dedicated about honing every single aspect of their games to enhance their addictiveness and virality. They didn't beat everyone else who wants their spot by being lucky.
Zynga did have some scammy offers but they only accounted for a minority of their revenue. As of right now they've removed all of their CPA offers and the VCs are surely aware of the ruckus they caused. So while "crime" may have helped Zynga get to where they are now, I don't think it will be a large factor in determining their success going forward.