Zynga filed IPO documents with the Securities and Exchange Commission Friday stating its intention to raise $1 billion in an initial public offering. But the company faces risks going forward, including its heavy dependence on Facebook and the fact that it derives revenue from only a tiny fraction of its users.
Zynga’s IPO is the latest in a series of hot internet public offerings so far this year. Demand Media (NYSE: DMD), LinkedIn (NYSE: LNKD), and Pandora (NYSE: P) have all gone public. Daily deal service Groupon has filed documents indicating its intention to do so, and rival LivingSocial is expected to as well. Facebook is expected to go public next year at a valuation north of $100 billion.
Zynga is expected to offer about 10 percent of its shares to the public at a valuation of $20 billion, according to The New York Times. Morgan Stanley and Goldman Sachs will be the lead bankers. J.P. Morgan Chase, Bank of America and Barclays Capital will also participate.
From 2009 to 2010, Zynga’s revenue increased 392 percent. In 2010, Zynga made $27.9 million profit on revenue of $597.5 million. In the first quarter of 2011, the company had revenue of $235.4 million, a 133 percent increase from the previous year, putting it on track for well over $1 billion in sales this year.
Although Zynga’s popular online video games such as FarmVille and MafiaWars are free to play, the company makes money by selling virtual goods used in the games. Users pay for the goods using online payments service PayPal or Facebook credits. Zynga receives 70 percent of the face value of the Facebook credits purchased by players, while Facebook keeps the rest, an arrangement that expires in 2015. The company generates additional revenue through advertising.
At the end of March, Zynga had 62 million daily active users (users who play once per day), and 236 million monthly active users (users who play at least one game per month).
Zynga is heavily dependent on social networking giant Facebook, and states in its IPO risk factors that, “If we are unable to maintain a good relationship with Facebook, our business will suffer.”
“Facebook is the primary distribution, marketing, promotion and payment platform for our game,” the company said in its filling. “We generate substantially all of our revenue and players through the Facebook platform and expect to continue to do so for the foreseeable future.”
Another risk factor cited by the company is that it generates revenue from only a small percentage of its users, estimated at three percent, according to The Wall Street Journal. In its filling, the company says it must “attract new paying players or increase the amount our players pay,” as well as “continue to launch and enhance games that attract and retain a significant number of paying players.”
The company is planning on a three-class share structure, which will allow existing shareholders, including CEO Mark Pincus, to maintain control over the company, even as it goes public. As a result, the company wrote, Pincus and the existing shareholders “will have significant influence over the management and affairs of the company and over matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, for the foreseeable future.”
Zynga is currently valued at about $14 billion on private secondary market SharesPost. Zynga has already raised over $500 million from the likes of Union Square Ventures, Kleiner Perkins Caufield & Byers, Andreessen Horowitz and Google.