Mercenaries in the midst: The lesson from Facebook and Zynga's IPOs

By Sarah Lacy , written on November 19, 2012

From The News Desk

Zynga, Groupon and Facebook: We know that Wall Street doesn't particularly believe in you. But do you believe in yourselves?

This is the question bankers are asking when talking to companies who still have a stomach to go public in the aftermath of the Zynga, Groupon, and Facebook flops. Less than a year ago, the markets were at a fever-pitch wanting anything big, new, fast-growing, and social. Now everything consumer is met with a certain wariness.

With an overall sector on the rocks, investors are looking deeper to suss out which of these lame horses are stocked with missionaries and which are stocked with mercenaries. And would-be IPO candidates are being warned to look inside their teams and think about this before they file, according to several sources.

There are two reasons why: If things go bad, mercenaries will rush the exits. And if things go too well, they might too. A company's employees are never more valuable in the market than right after a surging IPO, and after they vest, the company has little incentive to keep them if they don't believe in the mission.

That's always been the case to a degree, but it's particularly top of mind in this cycle, because Wall Street is stuck with the founder CEOs of each of these companies -- Mark Pincus, Andrew Mason, and Mark Zuckerberg respectively -- thanks to aggressive protections to being ousted put in place pre-IPO.

At least Pincus and Zuckerberg are deeply committed to their visions and companies. That much is clear when you hear them talk. Mason is harder to read, given the beer-drinking all hands meetings, the flippant attitude and general disappearance from public view over the last few months.

But I've heard in the last week that bankers are looking beneath the CEOs to their management teams to suss out a team's ability to make it through Wall Street's hazing. One thing has stood out to Wall Street. Few of Groupon's executives have left. Some of Facebook's have. A torrent of Zynga's have. That's been obvious to anyone watching the headlines. But less obvious has been where each came from and where each are going.

Many of Facebook's executive additions in recent years and recent departures followed the usual path of ambitious career builders in the Valley. They left Google -- the previous hottest company in the consumer Web -- and several of those who left went next to Pinterest, the presumed next social/consumer Web up-and-comer. According to bankers, that's not a worrying sign. It shows passion about the space, even if the job may change. After all, no company keeps its talent forever.

Further, reports are circulating that Zuckerberg has turned the doubt into a galvanizing force inside the company, holding regular all-hands meetings with the theme of "we'll show them just how much we get mobile." He's shaped the narrative inside the company from victim, to underdog -- that's a powerful if subtle distinction. We saw that spirit when Instagram founder Kevin Systrom spoke at PandoMonthly last month. He bristled visibly at the idea that Facebook had "failed" at mobile. “It’s hard to say that they screwed up when you go to MUNI and look over someone’s shoulder, and they’re all on Facebook,” he said. Monetization, he indicated, was a mere afterthought to that level of adoption.

Zynga's defections, meanwhile, have shown a more worrying pattern: Aside from working at Zynga for a short period when it was riding high, they don't seem particularly invested in the gaming space. Many of its departing executives didn't come from gaming, and they aren't going to other gaming companies. Most of those who did come from or stay in the industry were brought in through acquisitions, not traditional hiring channels.

This may seem a subtle distinction, but some feel it speaks volumes about what's culturally been wrong with Zynga. It was full of too many mercenaries, there because it was about to go public, not because they believed in social gaming or had any passion around gaming at all.

This analysis may not be totally fair. For one thing, Groupon should be graded on a completely different curve. It's based in Chicago, which has far fewer options if you want to work at a high-growth startup -- even one the growth of which is rapidly slowing. There are less opportunities to pass up while executives wait to see if Groupon can right the ship. Besides, if you know the history of Groupon's chairman Eric Lefkofsky, it's hard to believe Groupon is the least mercenary management team of the three.

Meanwhile, we dug into 16 of Zynga's recent executive departures. When we took out the acqui-hired ones, only half of the rest seemed to fall into this camp. Considering how new the social gaming category is, I'm not sure how fair it is to fault Pincus -- a man who didn't come from gaming himself -- for hiring people from outside the industry. Would an all EA DNA have been that much better for the company? But certainly the flood of executive departures hasn't spoken well of a deep, abiding commitment on the part of his top team. And if it's been the case, it's ultimately good for Zynga that they're gone.

Another thing bankers don't want to hear is more CEOs mouthing off about how much IPOs suck. I was told in two different off-the-record conversations this past week that comments like the ones made by Evernote's Phil Libin aren't exactly wise in this climate.

Libin said something you hear nearly everyday in Valley cocktail chatter: “It is terrible. Everyone I know who is running a public company is not having a good time. We just want to delay.”  But in times like these, that sends a message to Wall Street: We don't respect you or particularly want you to own our shares. You are a necessary evil.

I hate to even type these words. As a journalist, I don't want to say anything to make an entrepreneur less honest and outspoken, and as I wrote last week, you can clearly get where Libin was coming from. He's hardly alone. But while you can debate how little it should matter, it's in the same camp as whether Mark Zuckerberg wore a hoody or shunned parts of his IPO road show.

As we wrote during Facebook's road show, these are completely idiotic signs to watch when deciding to invest in a company that shouldn't matter at all. But that's what Wall Street does. Remember the Beiber-like Alan Greenspan watch? Buying and selling shares based on the width of his briefcase and his demeanor walking into the Fed? Zuckerberg has since switched into sell-mode, and you have to wonder, if he had to do it all over again, whether he might have shown a bit more deference.

[Image courtesy cdrummbks]