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Zynga’s backers sold shares at the perfect time

David Paul Morris/© 2011 Bloomberg Finance LP

The big venture capital firms who backed Zynga, as well as the company's insiders, must be crying after the stock nose dived 40 per cent in one day on dismal earnings.

But at least they can lean on a silver lining to cheer them up: their last stock sale was executed at just the right time.

Back in April, as Henry Blodget at Business Insider reminded us, Zynga announced a secondary stock offering that allowed its backers to cash in some profits. The selling shareholders included chief executive officer Marc Pincus ($200-million in stock sold), Institutional Venture Partners ($70-million) and Union Square Ventures ($62-million).

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Mr. Blodget makes a few references to how eerie it is that these firms sold right before the shares tanked, but no one can say for sure whether they knew anything about the coming problems. At this point, it looks more like the classic model of selling near the peak, assuming the stock price got too frothy for its own good.

Plus, if the backers really wanted to flee as fast at they could, they probably would have tried to unload more shares. Institutional Venture still holds 28.5 million shares, Union Square still owns 25 million shares and Foundry Venture Capital, which didn't sell during the last offering, still has 34.6 million shares.

For these firms to make any more big money off Zynga, the game maker must abruptly turn things around. Revenues and bookings are still growing, albeit much more slowly, but adjusted earnings before interest taxes, depreciation and amortization just hasn't rebounded. It peaked at $112-million in the first quarter of 2011, and hasn't come close to that mark since.

Just taking a quick glance at Zynga's financials, you see a glaring problem. Revenue isn't flying through the roof any more, yet research and development costs are. For the first six months of the year, they hit $358-million, more than double the $167-million during the same period in 2011.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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