First Mason, now Pincus: So much for all those protections from shareholders

By Sarah Lacy , written on July 1, 2013

From The News Desk

If you were to read the last two years of press on Mark Pincus you might think there were several Mark Pincuses roaming around Silicon Valley.

One who was a has-been from the first generation of social networks, where his entry Tribe failed like so many others. One who was a scammer. One who saw the future of online gaming as serious business before anyone else. One who pioneered virtual goods and micro payments for the first time -- FINALLY! -- in the US. One who was a poster child that older entrepreneurs could be successful in the Web era as well as 20-somethings. One that grabbed stock options away from employees.

The Mark Pincus in his letter to employees today, where he announces he's stepping down as CEO, is yet another one. He sounds downright gleeful to bring in a more experienced CEO to help take his company to the next level.

It's a stark contrast to Andrew Mason's "I was fired" statement when he left as CEO of Groupon. Pincus wrote: "I’ve always said to Bing and our Board that if I could find someone who could do a better job as our CEO I’d do all I could to recruit and bring that person in."

That's hardly what he's always said to everyone else.

The Mark Pincus that I know is different from almost all of those archetypes. He was very much the man who came across in our detailed two hour PandoMonthly sit down one year ago. He was someone who wanted to build a company he could run for the rest of his career. In a Valley that rewards serial entrepreneurship he's one of the rare few who views it as a sign of failure. He's someone who valued legacy and staying power more than many people in the Valley. Legacy was staying CEO of one company for the rest of his career and building a company that could endure -- an Apple, an Oracle. This was success for Pincus. Anything short would be another disappointment for a guy who'd raised money from all the greats, had exits and made some cash, but never been a huge Valley player.

If I view this news as somewhat sadder than this new latest Mark Pincus does, that's why. The man who told us a year ago he aimed to run Zynga until he retired or died is no longer the CEO of the company, although he's remaining chief product officer and staying on the board. He told us he wanted to build both a company that could last 100 years and a company that he could run forever. When both looked unlikely, he apparently picked aiming for the former over the later. Every quote from the company has emphasized that Pincus lead the charge on hiring a new CEO. Maybe he did. But if so, something big has changed in him over the last year.

For a brief moment it looked like he could pull off both ambitions. In the early days of social gaming there were all kinds of efforts to do just what Zynga was doing. Most were thinly funded, highly-profitable gambits with forced virality that goosed the numbers but little shelf life. Pincus built Zynga very differently. He had a building before he had a company. He had chefs. He had trainers. He invested in things like a payments infrastructure. He was going big at a time no one thought this would be a big business. When it turned into one, he looked like a genius.

He had the respect of the Valley too. Zynga was the comeback company for Kleiner Perkins, the mega firm that had missed so many of the others. It was trumpeted at every occasion by Valley kingmaker John Doerr, and it was a major success story for uber-East Coast kingmaker Fred Wilson. Indeed, Wilson told us that Zynga represented a greater than 70x return for his fund. Zynga also got a $100 million Google investment and was inexorably tied with the fortunes of what was thought to be the Valley's next Google-like IPO, Facebook. Other VCs were buying late stage and secondary shares in Zynga at high prices just for the honor of slapping the logo on their site. For a moment, Pincus had everything he'd wanted so badly; everything he'd worked for decades in the Valley to achieve.

It lasted just long enough to go public. And then it started to unravel.

We all know what's happened since: Zynga didn't attack mobile quickly enough and has struggled to continue a string of Farmville-like hits. Meanwhile, the stress fractures of its rapid growth have been obvious to the world with lawsuits, high profile departures, and arguably overvalued acquisitions.

The fate of Zynga is illustrative of the knock on gaming in general: It's a hit driven business where you're hot one day and not the next. Wall Street these days wants predictability and the gaming business is the opposite of that. So it's easy to see why, in any other era, shareholders and the board would have shoved Pincus toward the door.

But this was supposed to be the era when founder CEOs were next to godliness. The era when we could look back at the career arc of Jobs and Ellison and Bezos and realized that the ups and downs in the middle of their journeys -- the times they were or should have been ousted were or would have been gargantuan mistakes. Most of the consumer Web companies going public in the recent class, including LinkedIn, Groupon, Yelp, Zynga, and Facebook, all had multiple classes of shares that gave executives more voting power. Zynga's was particularly extreme, with its own extra class of stock just for Pincus.

The roots of this trend were inexorably tied into two of the monoliths of an earlier dot com era: Google and Yahoo. Google was the precedent, and Yahoo was the cautionary tale. Google was one of the first to introduce the protections in 2004, with Wall Street balking before it got over it and continue to buy up Google shares. Meanwhile, Yahoo has spent recent years locked in ugly shareholder proxy battles and a revolving CEO door just as many of these companies were readying their S-1s. No one was saying Yahoo had some great ousted visionary. Still, it was a valuable asset and many people watched it's ongoing struggles as a cautionary tale on why not to be public.

These structures, considered anti-shareholder by many, used to be mostly for family-owned business or mission-oriented companies. Indeed, the East Coast media was balking at them just before Facebook's IPO, citing studies that dual class companies had underperformed the market by a significant margin. Meanwhile, in the Valley, the conventional wisdom was that you'd be insane to go public without a structure like this. Marc Andreessen was one of the first to weigh in on this back in May 2008 with a blog post praising dual class structures that appears to be no longer on his site, although I wrote about it here and others did as well. Many other Valley luminaries have echoed his sentiments since. (Disclosure: Andreessen is an investor in PandoDaily.)

The fact that the most anticipated and biggest Web IPOs in more than a decade went public with these structures wasn't a sign that Wall Street had somehow gotten cult-of-the-founder religion. It was simply that the Valley was giving Wall Street little choice. Wall Street was salivating over some high growth large cap stocks and hadn't had many for a while. These were the terms. Take 'em or leave 'em.

And then many of these companies had either disappointing market debuts or have suffered since. As both Mason and Pincus stepping down from the top jobs have shown, there are a lot of ways angry shareholders can punish a CEO without outright firing him. Sagging stocks and little faith were weighing on the companies so heavily that it was disastrous for the morale inside the company as well. At some point, something has to give. As Mason said when he was ousted, "If you're wondering why ... you haven't been paying attention. … As CEO I am accountable."

Pincus either doesn't feel that way or his statement is disingenuous. I have no way of knowing. Maybe he's changed his mind about wanting to run Zynga forever in the year since I interviewed him. But no matter if this was his decision or it was forced upon him, it's a similar reality that founder CEOs should heed. A dual class share system isn't the same as, say, tenure for professors. The reality of Wall Street is that there's a second to second vote on how you are doing. And no one can withstand a continual vote of little confidence coming in second after second, day after day, quarter after quarter. Sadly (or happily, given your view on the corrosive short-term nature of Wall Street) the only proven shareholder protection is performance.

What does this mean for the Valley? Well, it means everything unsavory about going public will continue to weigh on founders. Dual classes of shares weren't the silver bullet so many had hoped that could make founders feel like they wouldn't have to worry about short term performance in order to keep their jobs.

To me, Pincus stepping down feels like a far bigger deal than Mason being forced out. There doesn't seem to be a financial reason. Both companies were pioneering a new category where growth was rapid but staying power was uncertain and have watched billions in market value evaporate over their short tenures as public companies. As lavish as press was on both on the way up, it's been equally punishing on the way down.

A cynic might say it's because Valley insiders -- like me -- care about a Valley company more than a Chicago-based company, but that's not it.

I think it comes back to this idea of who the real Mark Pincus is. Andrew Mason is young and brash and early in his career. I don't know him as well, but I've always gotten the sense that Groupon was a first act for him, a lark almost. His style was always flippant. If he considered Groupon his legacy he had a funny way of telegraphing that.

Pincus on the other hand was all-in. Admirably, he's still all in. He's staying at the company as chief product officer and remaining on the board. Mason left altogether.

Perhaps dreams linger in Pincus's head of pulling a Steve Jobs and taking the company back over in the future. There is a scene in Walter Isaacson's biography of Jobs where after his ouster he listened to Bob Dylan's "Times they are a changin'" over and over again ruminating on the lyrics, "The loser now will be later to win." Perhaps Pincus is doing something similar. The future will tell more than any of my speculation on which Mark Pincus is the real Mark Pincus. Zynga has always been a company that can spin news well and the best spin today is that this is a move everyone at the company is excited about.

But no matter what you thought of Farmville or Pincus, it's hard for founders to watch another founder try to build something he wants to run forever only to see those ambitions unravel so publicly. I've never played Farmville, but I've never gleefully rooted against Zynga either. Let's hope for the sake of the people still employed by Zynga that this is one of those eBay like cases where a new CEO helps, rather than an Apple-like case where it only hurts more.