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Summary:

Zynga is said to be looking for another cash injection that could put its valuation as high as $7 billion. But since the social games company is so reliant on Facebook, is there any way it could hit the stock market before its big brother?

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Another day, another report suggesting that a rapidly-growing web company could be about to strike it rich. This time it’s the Wall Street Journal, suggesting that Zynga is out to raise a new $250 million round of funding (one that comes on top of the $500m it already has). It would, the report suggests, value the company at $7 billion.

That could be big news: Zynga’s been on a tear recently, buying out social browser Flock and New York’s Area/Code. But this latest morsel is likely to raise all sorts of questions. Is the company worth that much? Does it have the legs to continue growing at the same pace? What would new investors want to see? And, inevitably, are we seeing a bubble inflate?

Those are all valid concerns, but I think the questions that potential investors should focus on are the ones around the company’s most pressing dilemma: its relationship with Facebook.

The two services have gone through their ups and downs — which we’ve documented in the past — but there is undoubtedly a symbiotic relationship between them. Zynga couldn’t exist without Facebook, which has given titles like Farmville and Mafia Wars a platform to succeed. And while Facebook might not like to admit it has been boosted by Zynga’s efforts, the levels of engagement that social games bring to it are financially important, both in terms of advertising and virtual currencies.

There’s little doubt that without each other, the two businesses would be smaller than they are today.

So then you start to wonder whether Zynga can — or should — float before Facebook does. How much of its value would be tied up in a private pseudo-parent? How much effort should it put into moving away from Facebook? This theoretical round of funding will no doubt generate speculation about a potential stock market flotation, not least because other outfits such as LinkedIn and Pandora are doing the same. But until the relationship between Zynga and Facebook is clearer, it’s difficult to know what dangers the company and its investors could expose themselves to on the public markets.

This is made even more complex because waiting for Facebook may be trouble in and of itself. Last week Mathew asked the question “What if Facebook never actually does an IPO?”. In it, he points out that Mark Zuckerberg and his chums are considering a private share issue and don’t seem in any rush to go public.

That leaves Mark Pincus and Zynga’s board of directors in a strange position. What if they leave it too long to make a decision? I’m not sure what the answer is, or what the outcome would be. Any ideas? Feel free to leave them in the comments.

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  1. I think they should go IPO before FB. Everybody else should too, whether they’re LinkedIn or Pandora etc… Otherwise they’ll all be overshadowed by the buzz around FB’s. The only one who maybe could afford doing it after is Twitter and I’m not even sure.

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  2. Why is it that a company that is allegedly massively profitable feels the need to raise $750M ?

    I’m skeptical of the self-reported rumors of profitability from a company led by a somewhat known sketchy salesman with a history of financially troubled startups and hostile litigation. It seems that the rumors of Zynga’s profits are positioned to pump up the inevitable IPO.

    Is this a non-issue, or is GigaOM and others simply unwilling to dig deeper into the topic?

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  3. [...] Zynga’s Big Gamble: Going Public Before Facebook Does: Tech News and Analysis «: Another day, another report suggesting that a rapidly-growing web company could be about to strike [...]

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  4. I wrote a post on this topic a couple weeks ago arguing why Zynga, LinkedIn, etc. SHOULD go public before Facebook (to ride the pent-up demand wave): http://bit.ly/i9KAbH

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