May 25, 2019 (1376 words)
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Chronicling the real estate adventures of Zynga, a billion-dollar gaming startup in SF whose most lucrative product is its office.
Tags: startups, housing
This post is day 145 of a personal challenge to write every day in 2019. See the other fragments, or sign up for my weekly newsletter.
Remember when social gaming was all the rage? Social gaming startup Zynga, founded in 2007, was the poster child of this era. Everybody wanted to invest in the company that created FarmVille and Words With Friends, and the company milked that attention for all it was worth. It raised a billion dollars during a highly publicised IPO in 2011, and the stock continued to climb for a few months afterwards.
But then it crashed. Call it irrational exuberance, call it a social gaming bubble, call it an unfortunate side effect of Facebook’s disastrous IPO, whatever. The stock peaked in March 2012, and although it’s actually been climbing slowly but somewhat steadily since its troughs in 2016, it’s still less than 2/3 of its IPO price. Which, well, isn’t what’s supposed to happen for a growing tech company.
ZNGA’s stock performance since its IPO, courtesy of Google Finance.
So what went wrong? You could argue that the stock tanked because Zynga made strategic mistakes which the public markets rightfully punished them for: maybe Zynga hired too many people (it’s been slowly laying off employees over the last 6+ years, and its global workforce is now around 60% of its peak back in 2012); maybe Zynga saturated its target market too quickly; maybe investors were worried about Zynga’s reliance on Facebook (a valid concern, as Facebook terminated their special relationship in November of 2012). Personally, I’m not interested in analysing the stock price through the lens of the company’s fundamentals - there is already a whole cottage industry for that sort of analysis, and I don’t think it sheds much light on anything beyond itself.
I’ve written previously about financial valuations being weird and arbitrary in general, but tech startups are my favourite illustration of this. There are some rules of thumb, like multipliers based on revenue or number of engineers, but they’re all just heuristics, which is to say, guesses. Investors pretty much just make up valuations for companies based on how much risk they’re willing to take, how heated the bidding war is, what other investors think it’s worth, etc. The numbers may have some ex post rationalisations, but at the end of the day they’re basically all made up. The numbers refer to each other (run rates, growth numbers, comparable startups’ valuations), not to anything real. It’s a bit like astrology, but instead of a personalised interpretation of the workings of the cosmos, it’s a collective delusion where everyone’s trying to guess everyone else’s horoscopes.
Okay, so the numbers are all made up, we all know that. But just because they’re not rooted in anything real doesn’t mean they don’t have real-world effects. With the money it raised through its IPO, Zynga was able to buy a building in SoMa for $228 million in March 2012 (at the peak of its IPO bubble, back when tech still seemed like the good guy).
And just like that, a company that really only existed in the digital domain - on the corners of your Facebook feed, turning your desire to steward your virtual farm into a financialised asset - was able to extend its reach into the physical domain, simply because it was able to convince enough investors that it would make enough money to be worth that much. Zynga was now the proud owner of a 670k sqft warehouse-style office on 8th and Townsend, surrounded by the Design District’s overpriced furniture stores. Here are some photos of the building:
The front of the Zynga building, viewed from across the roundabout.
The side of the Zynga building, with a giant “PLAY” sign right above the doors. On the right of the photo is half the logo for a nearby overpriced furniture store.
An interior shot showcasing some neon words emblazoned on a cafeteria wall: “WHAT WILL OUR PLAYERS THANK US FOR?”
Zynga never ended up using the entire office: soon after, the stock price dropped, the layoffs began, and owning a mostly unused office in the centre of San Francisco started to seem like a really dumb decision. Zynga started leasing out the space to other startups (nearly half went to Airbnb, which also has a bunch of other offices in the area), which, honestly, is probably a more lucrative business model than the company’s actual business.
It seems like Zynga management agreed. In February of this year, the company put the building up for sale, and just last month it was reported that it could fetch around $700m in a sale to a real estate investment firm. (Zynga would still presumably lease office space from the new owner.) That’s some damn good appreciation: Zynga would be getting its original money back and 2x more. For a company that had a net income of $15m last year, that’s not bad at all.
To be clear, this appreciation is thanks to nothing that Zynga has done with the building, and entirely due to real estate trends in the San Francisco area, mostly as a result of venture capital money flooding into the tech sector. But because Zynga was able to raise $1b back in 2012 (thanks to a reasonable amount of success in making addictive games, combined with a good sales pitch), they were able to get a piece of the growing real estate market. They’re still around, still making addictive games, still making money. You don’t even need any actually useful innovation to make money in this economy: just get enough investors to believe in your social gaming play that you can buy SF real estate that you can flip in a few years’ time, and bam, you’ve made several hundred million in profit.
I don’t really know what the point of this fragment is. I don’t like Zynga, but I also don’t think it’s that much worse than many other tech companies. I guess my perspective could be described as a lamentation of how digital technology has become so tightly ensnared within the financial system.
If we lived in a different world, Zynga could be a small games studio (funded by grants!) making games with the purpose of delighting players and connecting them with each other. There would be no microtransactions, no social network spamming, no effort expended into getting people hooked on the games so that they might spend more money. Games motivated solely by joy and artistry, not by profit. Zynga wouldn’t have as many employees, but those who did work for it would be unionised and might even cooperatively own the company. It certainly wouldn’t be another means for Wall Street to extract wealth (Zynga’s IPO was underwritten by Morgan Stanley), and it wouldn’t have made the studio’s founder an billionaire.
Imagine if, instead, Zynga’s 670k sqft office building had been bought up for the purpose of building public housing, or even just like somewhat affordable housing that’s not owned by the government, I’m not that picky. It could house several hundred units of affordable housing, with below-market-rate or maybe even free housing offered to people who need it - the people who have borne the brunt of SF’s predatory tech-fuelled economic growth.
It’s kind of hard to imagine, because it feels so far off from reality in a city where it seems every imaginable historical building is being swallowed up by tech. Why fund public housing initiatives when you could instead fund tech startups that create little social value but might eventually give you a return on your investment? The former might help hundreds of people live slightly less stressful lives, but it’s not beneficial to capital, and we all know who really runs things around here.
It’s a bit of a silly thought experiment, but for me, it illuminates the problems with the current market-driven system. We don’t have to allocate resources according to what’s valued by capital; we could, instead, prioritise social value, with the aim of reducing suffering and promoting actual freedom rather than helping some rich people stay rich.
Fewer oversized tech company headquarters, please. More public housing.