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The IPO market is alive! From Yandex to LinkedIn, some of the most prominent consumer internet companies in recent memory have gone public recently, and more are on the way.

One of the most intriguing filed to go public late last week. Zynga, the social gaming juggernaut which is responsible for modern-day hits like Farmville, plans to raise $1bn.

Why is Zynga intriguing? Beyond the fact that it's arguably one of the most successful internet startups in the past decade, the company will be the first U.S.-based business that profits primarily from the sale of virtual goods to hit Wall Street. In filing its S-1, Zynga is giving us our first solid glimpse into the financials behind a major virtual goods player.

The numbers, to say the least, are impressive. Revenue jumped from $121.5m in 2009 to $597.5m in 2010, and it's still rising rapidly. In the first quarter of 2011, Zynga has pulled in more than $235m in revenue. And unlike Groupon, which also recently filed to go public, Zynga's financials don't just look solid on the surface, they're pretty decent under the hood too.

But what's perhaps most interesting about Zynga is that it's thriving despite the fact that it has broken so many rules. In its S-1, it lists a number of business risks, which include:

  • "We generate substantially all of our revenue and players through the Facebook platform" and "if we are unable to maintain a good relationship with Facebook, our business will suffer."
  • "We rely on a small percentage of our players for nearly all of our revenue."
  • "A small number of games have generated a majority of our revenue, and we must continue to launch and enhance games that attract and retain a significant number of paying players in order to grow our revenue and sustain our competitive position."

The net-net:

  • Zynga's business is built on top of a single platform it doesn't own or control, run by a company it has already battled with.
  • It serves a lot of people for 'free' and only a tiny fraction of its audience subsidizes those who don't pay.
  • Zynga relies on 'hits', and must continually produce them (or acquire them) to be successful.

Generally, companies are warned against platform dependencies like the one Zynga has developed with Facebook for obvious reasons. Zynga's business model, under which a minority of paid customers support the service for those who don't, is one employed by many other online companies but usually not at the scale Zynga has or with the same level of success. And when it comes to hits, Zynga is, like record companies and VC firms, almost forced to take big risks. It spends a lot of money investing in new games because can't afford not to, but that doesn't mean that failures don't have the potential to be costly.

From this perspective, Zynga's accomplishments thus far are truly impressive. Despite doing things that typically aren't advisable, Zynga has thrived. The big question, of course, is whether it will last. Just because the risks Zynga faces haven't kept the business from succeeding doesn't mean they won't eventually come back to bite the company in the you-know-what.

But there's an important lesson here for entrepreneurs and business owners: sometimes rules are meant to be broken.
Zynga wouldn't be what it is today if it didn't build a business exposed to certain risks, and it's important to remember that while potentially deadly risk is worth mitigating, great opportunities are often found lurking behind it.

Patricio Robles

Published 4 July, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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