How They Started Page 14

  Seeing encouraging initial results, the team took an office at the Chip Factory, an office building Mark owned in San Francisco’s Potrero Hill neighborhood. The staff grew quickly to 27, as Zynga hired more game developers and introduced socialized versions of other games, including blackjack, and its own versions of popular tabletop games Risk, Boggle, and Battleship.

  “For me it wasn’t the initial numbers that convinced me [to move to San Francisco],” Justin later wrote, “but the feeling that what we had created was fundamentally different than what gaming had been, and would therefore be completely disruptive. It felt like the first time you used Facebook or any other product that you now can’t imagine living without.”

  Going to the dog

  As Mark sought investors for the growing business, there was a problem: the startup had yet to be incorporated and was operating informally as Presidio Media. It was time to solidify the business structure and pick a name to brand the business.

  Mark looked no farther than his beloved pet American bulldog, Zinga, who accompanied Mark nearly everywhere. The name comes from an African word for a beautiful female warrior. The domain name Zinga.com was already taken, so with a spelling change, the name became Zynga in February 2008. Zinga’s profile would also become the company logo.

  Zynga’s logo features the profile of Mark’s beloved pet American bulldog, Zinga.

  Ka-ching + a light bulb

  The combination of Mark’s previous start-up track record and the poker game’s early success made pitching investors easy. In February 2008, Zynga raised $10 million in Series A financing, with the round led by Union Square Ventures. Participants included Paul Martino, LinkedIn’s Hoffman, MTV founder Bob Pittman, Facebook investor Peter Thiel, and Foundry Group.

  One possible funder that didn’t get on board was gaming industry leader Electronic Arts. Paul says Mark was nearly laughed out of the building. The games were all free?

  “A lot of people didn’t believe it—that you could build a company with that as a revenue model,” recalls Steve, who’s now founder of education startup Junyo. “But we knew we were on to something.”

  There was an upside to the EA meeting—Mark met EA executive William “Bing” Gordon, who immediately grasped how social gaming would shake up the industry. Gordon told Mark his goal should be to create an Internet treasure—the sort of company that provides something so useful, customers can hardly remember life without it. A Google. A Blackberry. A Facebook. Mark realized that was exactly what he wanted to do with Zynga.

  Doubling down on revenue

  In these early days, Steve recalls, “We weren’t concerned with revenue. We were still working on trying to reach more users and find out ways to make the game fun, so they’d stay and keep playing.”

  One possible funder that didn’t get on board was gaming industry leader Electronic Arts. … The games were all free?

  To bring in some income during this initial ramp-up, Mark essentially sold Texas HoldEm’s traffic to other developers, who placed ads on the pages where Zynga’s Facebook games ran.

  If players clicked on the ads, Zynga received a commission. The company collected just under $700,000 in revenue in 2007 this way. As Zynga’s traffic grew, this income stream became a rushing river.

  By early 2008, Zynga reported its audience was clicking the ads 50,000 times a day, with Zynga pocketing 50 cents each time. Then, in March 2008, Zynga introduced the ability to buy virtual poker chips. To Mark’s surprise, some players spent $20 at a time.

  Though fewer than 5 percent of players would spend real dollars to purchase virtual goods, the small purchases added up. Sales in 2008 leapt to $19.4 million. The company lost more than $22 million for the year, though, as it invested in more staff and Facebook ads to lure new players.

  In July 2008, Zynga would raise $29 million more in venture capital and add $15.8 million more in November. The funding would help Zynga make a key purchase: YoVille, a game studio whose eponymous game would prove a major franchise for Zynga.

  From the mafia to a farm

  That fall, Zynga had its first big success with an original game. In Mafia Wars, players fought others as they built a mafia crew. Mafia Wars spawned a sequel, grew to eight million monthly users, and helped Zynga become the top Facebook app developer in April 2009. The company also moved onto other platforms with its first iPhone release, Live Poker. With business booming, Zynga moved to larger quarters a few blocks away from the Chip Factory.

  Though fewer than 5 percent of players would spend real dollars to purchase virtual goods, the small purchases added up.

  As the venture capital flowed in, Mark took careful steps to avoid diluting his ownership. He created private stock shares with stronger voting power than the common shares, ultimately retaining nearly 40 percent ownership of the company.

  The next two years would see mind-boggling revenue growth. Sales shot up more than sixfold in 2009 to over $121 million, and would similarly skyrocket to nearly $600 million in 2010. But it would take until 2010 to achieve Mark’s second big goal: profits.

  Mafia Wars was Zynga’s first original game hit.

  Zynga values

  Zynga had a clear approach in running the business: measure and analyze everything. Interviewed for an online Wharton journal, Andrew recalled: “I believe the differentiator between Zynga and a lot of our competitors [was] the ability to test, analyze, optimize [and] repeat that cycle. Everybody at Zynga—developers, product managers, business people, executives, CEO, everybody—had that focus on metrics and transparency, which really did allow us to innovate quickly, test things really, really aggressively, and ultimately, kind of dominate this space … ”

  In shaping Zynga’s corporate culture, Mark wanted to avoid creating the stifling environment he’d hated at his jobs. He empowered employees with an “everyone is a CEO” philosophy.

  Wanting to pamper his hard-working staff, Mark hired a trainee chef from a nearby culinary school to serve up healthy lunches and dinners. The company offered on-site massage, acupuncture, paid gym memberships and other wellness perks.

  Taking their lead from Mark, many employees brought their dogs to work. The company also had no traditional vacation rules. Instead, employees were encouraged to take time off as needed to rejuvenate and avoid burnout.

  Doing “every horrible thing”

  The next major game would be a game-changer. In summer 2009, FarmVille was an instant smash, becoming the first Facebook game to reach 10 million daily users. (The ensuing outpouring of status updates from FarmVille players pleading for game items proved so annoying to nonplayers that Facebook would later change its policy to limit the notices.)

  But all was not well. Also in 2009, the pay-per-click advertising revenue model that allowed Zynga to log early revenue became notorious for scammy ads. Some automatically signed up visitors for monthly charges, for instance, while others had dubious product offers. At one point, the poker game gave users chips if they downloaded an advertiser’s toolbar, which then proved difficult to remove.

  The scandal was dubbed “Scamville.” Some players filed a class-action lawsuit that would drag on for two years before finally being settled in Zynga’s favor.

  In a talk given to entrepreneurs at the University of California, Berkeley, that year, Mark said, “I knew that I wanted to control my destiny … I did every horrible thing in the book to just get revenues right away.”

  FarmVille was another instant smash for Zynga.

  Coming as it did around the time the Scamville scandal broke, the remark was widely interpreted to mean Zynga knew and didn’t care that some advertisers were shady. But Mark later denied this, saying he simply meant entrepreneurs should keep their independence and focus on generating revenue quickly. Whatever he meant, the timing of the comment—filmed and widely circulated on YouTube—couldn’t have been worse.

  Zynga responded by removing all ads from its platform in November 2009. Ads returned in January 2010, under
a more stringent screening process. With the help of a media blitz similar to the one Mark pulled off at FreeLoader, the company rebuilt its reputation. Mark was a willing promoter, posing variously dressed up as a farmer to plug FarmVille and playing poker with Zinga.

  The company also faced a steady drumbeat of criticism that its games ripped off those of other developers. Disney’s Playdom and the independent maker of Mob Wars were among many who sued and settled out of court. For its part, Zynga sued Playdom when seven of its employees defected to the company. Zynga alleged the ex-workers supplied Playdom with the “Zynga Playbook,” which outlined the company’s strategies and plans. This, too, would be quietly settled a year later.

  Investors were unconcerned by the legal issues. At the end of 2009, Zynga raised $180 million from a new set of funders including Andreessen Horowitz and Russian mogul Yuri Milner’s Digital Sky Technologies. Another investor round from Google and Softbank Capital would pour in $300 million more in June 2010.

  As 2010 rolled on, Zynga expanded with new games, new platforms, translations of games into foreign languages, and new geography. The company’s first foreign office opened in Bangalore. Zynga launched many new versions of its games, such as FrontierVille and CityVille. The latter, a permutation of the old YoVille game, would become Zynga’s most popular game ever.

  The company also brought games to Yahoo! and the iPhone. Zynga began allowing corporations to advertise within its games—for instance, 7-Eleven introduced branded items inside Farm Ville, Mafia Wars and YoVille. Branded versions of Zynga games were also unveiled, tied to celebrities such as Lady Gaga and popular movie releases Rango and Megamind.

  As Zynga became more successful, Facebook wanted a bigger cut of the take and wanted Zynga to switch from collecting cash payments to using Facebook Credits. The issue was resolved after a negotiation in May 2010 with the signing of a five-year agreement that saw Zynga switching to Facebook Credits and Facebook gaining a hefty 30 percent cut of the company’s Credits revenue.

  Fortunately, Zynga’s growth rate was so massive that the effect of the cost hit was almost imperceptible. Sales grew nearly sixfold in 2010 to close to $600 million, and Zynga saw its first annual profit of nearly $28 million.

  Where are they now?

  In February 2011, Zynga topped $1 billion in venture capital raised with a massive, $485 million investment round that included Morgan Stanley, T. Rowe Price, Fidelity Investments, and Kleiner Perkins Caufield & Byers. Five months later, Zynga filed to go public, seeking to raise $1 billion. The company’s total value was estimated at between $15 billion and $20 billion. Revenue in 2011 was close to double the 2010 annual figure.

  In late 2011, the company’s games had 232 million monthly users, and Zynga owned four of the top five games on Facebook. The company went on an acquisition spree in 2010 and 2011, spending nearly $27 million to snap up 14 other game producers including Wonderland Software and Newtoy. To accommodate its growth, the company moved into new quarters, expanding to more than 400,000 square feet of office space in San Francisco’s trendy SOMA (South of Market) neighborhood.

  The company also faced down criticism that its business model was too dependent on Facebook. Zynga announced Project Z, a planned stand-alone website where Zynga games could be played. New games were slated including Castle Ville, the company’s most lavish game yet, with Hollywood-movie-level graphics and a full orchestral score.

  Despite a late-2011 plunge in the US stock markets, Zynga went public in December 2011, raising a cool $1 billion in the biggest tech IPO since Google’s back in 2004.

  Chipotle Mexican Grill

  Fast food grows a conscience

  Founder: Steve Ells

  Age of founder: 28

  Background: Culinary Institute of America graduate and chef

  Founded in: 1993

  Headquarters: Denver, Colarado

  Business type: Fast-casual restaurant

  Steve Ells never dreamed of creating a fast-food chain with more than 1,000 units. He wanted to open a fine-dining restaurant like Stars, the famed San Francisco restaurant of celebrity chef Jeremiah Tower, where Steve worked as a cook in the early 1990s. Steve had always been interested in food and remembers watching cooking shows on TV with his mom as a kid, rather than cartoons.

  Instead, Steve ended up changing the face of fast food and helping to invent a new category in American dining: the fast-casual restaurant. He created Chipotle, one of the fastest-growing chains in America. Today, the company has more than 1,200 outlets in three countries and sales that top $2 billion.

  Doing the math

  This sort of chain-restaurant success was far from Steve’s mind when he started out. The Culinary Institute of America graduate didn’t have the cash up his sleeve to open the swank restaurant he envisioned, and he was looking for a venture that might generate the needed funds when he started noticing the long lines outside a cheap burrito eatery that he frequented in San Francisco’s Mission District. Steve read the menu and stood outside, counting heads.

  He did the math and concluded the business was a cash machine. Steve decided to open a burrito place of his own, but with a couple of twists: the ingredients would be fine-dining quality, and everything would be prepared in the restaurant using classic cooking techniques. He’d use freshly chopped tomatoes, cilantro, black beans and house-made salsa to create a better-tasting burrito.

  Steve returned to his hometown of Denver to investigate the idea of opening a burrito restaurant there.

  “When I told my friends and family that I was leaving Stars to go open a burrito shop in Colorado, they thought I was crazy, but I had a very strong vision for the way Chipotle was going to look and taste and feel,” Steve says in a company video. “I knew it wasn’t going to be a typical fast-food restaurant—it was going to incorporate all the things I’d learned at the Culinary Institute and Stars.”

  Soon, Steve began testing out recipes on friends. College friend Monty Moran, a newly minted lawyer who would eventually become Chipotle’s co-CEO, tasted Steve’s first burrito.

  “Steve prepared it for me at his house,” Moran told ColoradoBiz magazine. “[He] had created the Chipotle burrito. He even had the mini basket with the basket liner. He prepared it wrapped in foil just like they are today. He was like ‘Here’s what I’m going to do.’ And by the way, you should have tasted that first burrito.”

  “When I told my friends and family that I was leaving Stars to go open a burrito shop in Colorado, they thought I was crazy, but I had a very strong vision for the way Chipotle was going to look and taste and feel.”

  For the name of his eatery, Steve looked no farther than one of the menu’s signature ingredients: the chipotle, a smoked, dried jalapeño pepper. It symbolized how Steve planned to elevate humble food items by using ingredients in uncommon ways, just as the jalapeño is transformed into a delicacy by being dried and smoked.

  Steve’s burrito concept impressed his father, a former pharmaceutical executive, who provided an initial investment of $85,000. Steve began scouting sites and noticed several national fast-food chains were checking out a small corner storefront near the University of Denver campus. The big players passed on the long-abandoned former Dolly Madison ice cream parlor because of its small size—just 880 square feet—and its rundown condition.

  But for Steve, it seemed the perfect spot to try out his concept with collegiate diners without committing to a big rent. After extensive work to upgrade and remodel the interior, he opened the first Chipotle Mexican Grill on the site in July 1993.

  Steve and his father had calculated that the store needed to sell 107 burritos per day to make a profit. In the first weeks, with no funds left for marketing, it was tough to lure customers to try a restaurant type they’d never seen before. Some people would wander in only to turn around again at the unfamiliar food, but Steve did everything in his power to entice them to stay.

  Some eventually did, and soon the restaurant was meet
ing its initial burrito-sales target just off of word of mouth from enthusiastic customers. A few months later, sales exploded after the Rocky Mountain News gave Chipotle a rave review. Chipotle soon far exceeded its sales target and began selling 1,000 burritos daily. The company was doing 10 times its projected business plan three months after opening.

  The initial menu was simple—just tacos and burritos. Steve knew he was strong on culinary knowledge but weak on business experience, so he wanted a simple business model. However, customers could make 65,000 different combinations of ingredients by calling out their requests as they walked down the restaurant’s meal assembly line. This ability to keep the menu simple while still offering customers many choices proved a key factor in Chipotle’s success: the concept was easy to operate, yet allowed each diner to have a unique meal.

  The company was doing 10 times its projected business plan three months after opening.

  Business was booming, and Steve soon added a second Denver unit in 1995. At this point, Steve was still thinking of Chipotle as a funding machine for his highbrow restaurant.

  The third unit opened that same year, funded by a bank loan backed by the US Small Business Administration. Five more Denver restaurants followed in 1996, growing the chain to eight units.

  Chipotle quickly became a trendsetter in a national shift by many American diners toward better-quality fast food. This restaurant format came to be known as “fast-casual,” signifying a fast-food method of serving, but food quality more on the order of a casual, family sit-down restaurant.

  The origins of the Chipotle “look”

  The choice of a former ice cream shop for the first restaurant ended up influencing the entire chain’s design. The interior of the store was bare-bones with an industrial, factory feel, including exposed ductwork in the ceiling. Steve kept this rustic-industrial feel (which he’s described as “raw” and “funky”), with many stores sporting corrugated metal walls, halogen lighting, exposed ducts, steel posts, and concrete floors. A legendary perfectionist, Steve worried over every detail that went into the restaurant’s ambiance.