Why Zynga Might be Worth $25 Billion in Five Weeks

By Conor Sen May 25, 2011 11:30 am

Houses and durable goods aren't the future of the US economy. Neither are commodities. It's the virtual world people are gravitating toward.

The point of this piece is to provide intellectual justification for how LinkedIn (LNKD) could be worth $25 billion in five years, and how Zynga might be worth $25 billion in five weeks. Yep, the maker of Farmville and Mafia Wars is looking to IPO, perhaps as soon as next month, and with roughly $1 billion in revenues and $500 million in profits over the past year, a $25 billion market cap is a possibility.

Kevin Depew wrote back in 2008 in Five Things You Need to Know: Social Mood Shift Brings Stark Changes about the re-pricing of financial and intangible assets that was likely to occur as a result of the socionomic shift of the last cycle:

But this mania has created the overvaluation of all financial assets. So what is left that is undervalued? Intangible assets; relationships, time, quietude, reflection -- objects/ideas that are difficult to define and whose value deflated in the mania of accumulation of all manner of consumables and financial assets.

But now social mood is shifting. As a consequence of that shift many intangible assets will be re-priced.

Little did we realize how right he was -- Facebook, LinkedIn, and Zynga were hard at work building multi-billion dollar businesses around the idea of virtual, or intangible, assets, and relationships.

This is the future, what Professor Pinch and I are calling the data economy, and what I intend to keep writing about until it becomes widely accepted.

That brings us to this morning's durable goods print, which was weak, falling 3.6% vs a consensus drop of 3.0%. This comes on the heels of yesterday's new home sales report, which shows the housing market continuing to bounce along the bottom. Who cares? Houses and durable goods aren't the future of the US economy. Neither are commodities. Rick Bookstaber put it better than I, noting:

People who are staring at a tsunami of demand for commodities from the developing world and predicting a doomsday of $400 oil and $4000 gold are missing the longer-term retreating tide of demand as citizens of the developed world actually demand decreasing amounts of energy, large goods, and heavy infrastructure. We won't be packing up and moving to Mars, as the science fiction solutions to resource depletion propose. We will pack up and move into the virtual world.

That brings us to a final point, on credit and interest rates. Rising economic themes are capital-light. Food trucks and CSA (community-supported agriculture) programs instead restaurant chains and global agrobusiness. Cloud computing and tablets/smartphones instead of a large IT footprint. Renting instead of owning. Why are people worried about a spike in interest rates and the damage it will have on the economy when our lives will increasingly demand less and less credit? Why can't the government run large deficits for a few more years in this environment?

Sounds crazy, I know. Sort of like saying the US could have the biggest boom it ever had without a corresponding increase in per-capita oil consumption.

The Groupon IPO!

Groupon is Effectively Insolvent
By Conor Sen

Investors beware -- the company owes $230 million more than it has, appears to be burning through $100 million or more a quarter, and is using money raised from later investors to pay back early investors.


I'll start by tipping my hat to Andrew Mason. He caught social mood just right, creating a coupon/local/flashmob hybrid business model at the perfect time, and has created the fastest-growing company on a revenue basis in American history. That being said, it's operating like a Ponzi scheme that needs constant infusions of cash to stay afloat as it's hemorrhaging money.

We'll start by looking at the balance sheet, which is typically a waste of time for hypergrowth companies. However, for Groupon there are all kinds of red flags. They have $290 million in current assets ($208 million in cash) and $520 million in current liabilities -- current assets minus current liabilities puts them $230 million in the hole. This wouldn't be a problem except for the fact that they're wildly unprofitable, which we'll get to in a moment. Another concerning part of their current liabilities is that $290 million of it is "accrued merchant payables" -- in the US they take up to 60 days to repay merchants. So that $290 million is merchants who have rendered services waiting to get repaid by Groupon. Not exactly the best merchant experience. Oh, and by comparison, LinkedIn (LNKD) has current assets well in excess of current liabilities, and isn't losing money.

The income statement is even worse. In Q1 of last year they had net income of $8.5 million on $44.2 million in revenue, for a profit margin of nearly 20%. Not bad! At some point around that time, they decided to abandon a profitable growth strategy and went for the hypergrowth revenue strategy. For the remainder of the year they had $669 million in revenue (simply staggering), but had a net loss attributable to Groupon of $398 million. This year, Q1 results showed revenue growth continuing to soar, with revenues of $644 million, but a net loss attributable to Groupon of $102 million.

They lost $49 million in Q3, $313 million in Q4, and $102 million in Q1, with revenue leaping from $185 million to $396 million to $644 million, so it's incredibly difficult to have any idea what Q2 will look like let alone what the business will look like 6-12 months from now. That being said, the most likely reason why they're going public now is because they desperately need the cash, plain and simple.

There are all kinds of questions about the business. How can they possibly sustain this kind of revenue growth? Can they get costs under control? What about merchant and customer fatigue? How about deep-pocketed and savvy competition, either doing exactly what they're doing (LivingSocial) or coming to the table with a ton of customer data, i.e., Facebook and Google (GOOG)? The Daily Deal I got offered today was for a restaurant 30 miles away: how does that make sense either for the customer or merchant? How can you possible build a sustainable business by going from 0 to 8,000 employees in two years? Why did the COO and CTO both leave the company in late March, barely two months ago? How do you value a business that could do $3 billion in revenue this year but might not be able to keep the lights on in 12 months?

Follow Conor Sen on Twitter @conorsen
Most concerning of all, however, might be how their most recent capital raises have been handled. Their Series F and G capital raises, which occurred in April and December of 2010, raised a combined $1.08 billion. Of that $1.08 billion, $150 million went to the company for working capital purposes. The other $930 million? Paid back to founders and early backers by buying their shares from them.

So a company that owes $230 million more than it has, and appears to be burning through $100 million or more a quarter, is using money raised from later investors to pay back early investors? Sounds vaguely familiar. I'm not accusing Groupon of doing anything illegal or unethical. Ponzi, Enron, and Madoff all swindled their investors by misleading them about the financial health of their enterprises. As Minyanville's Todd Harrison likes to say, "The only difference between intervention and manipulation is communication." Groupon is telling you exactly what they are in their filing forms and by their actions. Invest at your own risk.

When Managing Complexity, Less is More

When Managing Complexity, Less is More-- Justin Fox

The answer is to make things simple, says Bill Allen, head of Group Human Resources at Copenhagen-based A.P. Moller-Maersk. He contends that activities at the group level — beyond public company requirements like reporting numbers to investors — should be restricted to a core set of five that enable and enhance business performance.

Those five group-level activities are
(1) portfolio management (deciding which businesses should be part of the group);
(2) performance management (setting ambitious goals and holding business managers accountable for achieving them);
(3) capital allocation (making investments in the businesses where they can produce the greatest returns);
(4) executive talent management (making sure that the best people are working the mission-critical jobs); and
(5) synergy capture (for very large opportunities that cross the businesses).

Other than that, individual businesses are in charge of delivering their results as they see fit. Because of this simple operating system, Maersk was able to bounce back quickly from the effects of the global recession so that 2010 results were the best in company history.

Even if you aren't managing a conglomerate like Maersk, sometimes the best way to address the most complex management challenge is to do less, not more. Select the handful of critical leverage points that will have the biggest impact on success and relentlessly focus on doing them better — without getting distracted by anything else. By following this principle, Maersk reduced headcount at its corporate headquarters by 40% in two years and did a better job of enabling the businesses to produce results. The Group HR function alone went from 87 to 23 people, and according to Allen is much more effective.

The reality is that without ruthless prioritization, smart workers will always identify new opportunities, therefore perpetuating a cycle of increasing activity that is difficult to break. And this is where much of the complexity comes from in organizations, both at the corporate level and within business units. This doesn't mean that these activities are not useful, value-added, or worthwhile — but unless they are absolutely critical for achieving strategic goals, they need to be questioned or eliminated.

Here's a quick example: In one large consumer products company, the CEO insisted on having detailed operational reports rolled up every month to the corporate level, which she then used for a monthly review meeting with business heads and corporate staff. Creating these reports required a small army of corporate financial analysts while also creating a cascade of work within all of the business units. And since the financial analysts were not always busy with the monthly reports, they also generated additional activities for the businesses that they thought were value-added. When the CEO retired, her successor decided that these detailed operational reports were unnecessary since each business unit already reported its key numbers — and the big review meetings never resulted in substantial decisions anyway. In other words, he quickly determined that this form of operational roll-up was not critical to the company's success and it was eliminated (along with the small army of financial analysts and the additional work they spawned).

All of us have a tendency to take on additional work, lose focus, and feel overloaded — whether we work in the C-suite, at a desk, or on a shop floor. The key is not to repeat that pattern by adding more work. Instead, take an inventory of everything you're trying to do, pick out the few things that will make the most difference (to your job, your career, or your life), and put everything else at the bottom of the pile or eliminate it altogether. Prioritize, prioritize, prioritize — and you may find that you'll get more done by doing less. If a highly complex company like Maersk can do it, why can't you?

Why Bankers Need to Be Put Into Little Boxes

Why Bankers Need to Be Put Into Little Boxes
Justin Fox


There's a beguiling little moment in the financial-crisis documentary Inside Job where hedge fund billionaire George Soros describes the principles of oil tanker design. If a tanker consisted of one big tank of oil, the sloshing liquid would soon capsize the vessel, Soros explains. So tankers are comprised of lots of smaller, separate tanks, which keeps the sloshing in check and the ships afloat.

Financial markets are like that, Soros goes on. If they're compartmentalized, the risk of crisis is much lower than if all sorts of financial products and institutions are allowed to mix together in a giant sloshfest.

It's a nice analogy. That doesn't mean it perfectly describes the workings of financial markets (it's an analogy), but it certainly gets at some aspects not hinted at in the general equilibrium model that long dominated financial economics — in which more "complete" and intertwined financial markets are supposed to lead to better economic outcomes. To mainstream economists the Glass-Steagall Act that separated the banking and securities industries looked like a competition-restricting, innovation-damping anachronism. To those knowledgeable about oil tankers, its repeal in 1999 must have been far more disturbing.

The tanker analogy kept coming back to me as I read this week through the collected works of Robert G. Wilmers, also known as his annual messages to the shareholders of Buffalo-based M&T Bank Corp., where he is CEO. Wilmers' most recent letter includes a long discourse on regulatory reform that has already been recommended by Warren Buffett at Berkshire Hathaway's annual meeting and lauded in Joe Nocera's New York Times column. It is good, and it piqued my interest in what Wilmers had been writing over the course of the financial crisis.

Clearly, the man has come to see the good side of being compartmentalized. Here he is in early 2009, explaining the bad parts of M&T's staggeringly good (for a bank in the middle of a global financial crisis) 2008 earnings report:
[T]he specific drags on our 2008 earnings ... largely represented departures from our traditional community banking model, a model based on lending in the markets where we live and work to people and enterprises whom we know. In contrast, the investments which proved problematic shared the following characteristics: they were transactional in nature, outside our market footprint, far from our branches and not associated with deposits.

Why did M&T make such out-of-character investments? From the same letter:
[N]o company operates in a vacuum. The once outsized profits of those financial services firms taking what turned out to be foolish levels of risk led to pressure on their competitors, including us. That we resisted the temptation to the extent that we did is a source of at least some consolation for me.
Wilmer hoped that lawmakers and regulators would see this, and take action to fence in the border-blurring, regulation-avoiding "shadow banking system" of derivatives and securitizations and special purpose vehicles that was at the heart of the financial crisis, restoring the primacy of actual banks that took deposits and made loans. His frustration, as expressed in his latest letter, is that something more like the opposite has happened.

The six biggest "banks" (Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley — although Wells looks more like a traditional bank than the others), Wilmers writes, make most of their money trading securities and derivatives, and are now able to do so with close-to-explicit government backing as too-big-to-fail institutions. Meanwhile, the rest of the country's banks, which make most of their money from banking, have a load of new consumer-protection rules to contend with, plus continued competition from the surviving parts of the shadow banking system. So basically (and I'm still paraphrasing Wilmers here), we've taken the part of the financial system that caused the crisis and put it back on its feet so it can go back to paying people staggering amounts of money for work of possibly negative economic value, while adding more burdens to the part of the financial system that didn't cause the crisis.
The inability to differentiate between Wall Street and Main Street by Washington, as well as by the public at large, has hurt the image of Main Street banks and increased their cost of operations. One has to question whether we haven't created the makings of the next financial crisis or, indeed, disrupted the balance in our society between rich and poor.
The funny thing is, in any other business, such talk would come across as whiny special pleading. Aggressive businesspeople who break down barriers between sectors are praised and their big financial rewards seen as just, while incumbents who lose out to the barrier busters are believed to have gotten what's coming to them. But M&T is actually doing really well — taking advantage of its relative health to make big acquisitions. And as the Panic of 2008 showed, the financial sector is different. It is at this point inextricably entwined with government, for one thing, so lawmakers and regulators are helping decide its winners and losers whether they mean to or not. And in an era when innovation is (rightly) celebrated, it is a sector where traditions — and compartments — serve a clear purpose.

http://blogs.hbr.org/fox/2011/06/why-bankers-need-to-be-put-int.html

Nine Things Successful People Do Differently

Nine Things Successful People Do Differently
8:58 AM Friday February 25, 2011
by Heidi Grant Halvorson

Why have you been so successful in reaching some of your goals, but not others? If you aren't sure, you are far from alone in your confusion. It turns out that even brilliant, highly accomplished people are pretty lousy when it comes to understanding why they succeed or fail. The intuitive answer — that you are born predisposed to certain talents and lacking in others — is really just one small piece of the puzzle. In fact, decades of research on achievement suggests that successful people reach their goals not simply because of who they are, but more often because of what they do.

1. Get specific. When you set yourself a goal, try to be as specific as possible. "Lose 5 pounds" is a better goal than "lose some weight," because it gives you a clear idea of what success looks like. Knowing exactly what you want to achieve keeps you motivated until you get there. Also, think about the specific actions that need to be taken to reach your goal. Just promising you'll "eat less" or "sleep more" is too vague — be clear and precise. "I'll be in bed by 10pm on weeknights" leaves no room for doubt about what you need to do, and whether or not you've actually done it.

2. Seize the moment to act on your goals. Given how busy most of us are, and how many goals we are juggling at once, it's not surprising that we routinely miss opportunities to act on a goal because we simply fail to notice them. Did you really have no time to work out today? No chance at any point to return that phone call? Achieving your goal means grabbing hold of these opportunities before they slip through your fingers.

To seize the moment, decide when and where you will take each action you want to take, in advance. Again, be as specific as possible (e.g., "If it's Monday, Wednesday, or Friday, I'll work out for 30 minutes before work.") Studies show that this kind of planning will help your brain to detect and seize the opportunity when it arises, increasing your chances of success by roughly 300%.

3. Know exactly how far you have left to go. Achieving any goal also requires honest and regular monitoring of your progress — if not by others, then by you yourself. If you don't know how well you are doing, you can't adjust your behavior or your strategies accordingly. Check your progress frequently — weekly, or even daily, depending on the goal.

4. Be a realistic optimist. When you are setting a goal, by all means engage in lots of positive thinking about how likely you are to achieve it. Believing in your ability to succeed is enormously helpful for creating and sustaining your motivation. But whatever you do, don't underestimate how difficult it will be to reach your goal. Most goals worth achieving require time, planning, effort, and persistence. Studies show that thinking things will come to you easily and effortlessly leaves you ill-prepared for the journey ahead, and significantly increases the odds of failure.

5. Focus on getting better, rather than being good. Believing you have the ability to reach your goals is important, but so is believing you can get the ability. Many of us believe that our intelligence, our personality, and our physical aptitudes are fixed — that no matter what we do, we won't improve. As a result, we focus on goals that are all about proving ourselves, rather than developing and acquiring new skills.

Fortunately, decades of research suggest that the belief in fixed ability is completely wrong — abilities of all kinds are profoundly malleable. Embracing the fact that you can change will allow you to make better choices, and reach your fullest potential. People whose goals are about getting better, rather than being good, take difficulty in stride, and appreciate the journey as much as the destination.

6. Have grit. Grit is a willingness to commit to long-term goals, and to persist in the face of difficulty. Studies show that gritty people obtain more education in their lifetime, and earn higher college GPAs. Grit predicts which cadets will stick out their first grueling year at West Point. In fact, grit even predicts which round contestants will make it to at the Scripps National Spelling Bee.

The good news is, if you aren't particularly gritty now, there is something you can do about it. People who lack grit more often than not believe that they just don't have the innate abilities successful people have. If that describes your own thinking .... well, there's no way to put this nicely: you are wrong. As I mentioned earlier, effort, planning, persistence, and good strategies are what it really takes to succeed. Embracing this knowledge will not only help you see yourself and your goals more accurately, but also do wonders for your grit.

7. Build your willpower muscle. Your self-control "muscle" is just like the other muscles in your body — when it doesn't get much exercise, it becomes weaker over time. But when you give it regular workouts by putting it to good use, it will grow stronger and stronger, and better able to help you successfully reach your goals.

To build willpower, take on a challenge that requires you to do something you'd honestly rather not do. Give up high-fat snacks, do 100 sit-ups a day, stand up straight when you catch yourself slouching, try to learn a new skill. When you find yourself wanting to give in, give up, or just not bother — don't. Start with just one activity, and make a plan for how you will deal with troubles when they occur ("If I have a craving for a snack, I will eat one piece of fresh or three pieces of dried fruit.") It will be hard in the beginning, but it will get easier, and that's the whole point. As your strength grows, you can take on more challenges and step-up your self-control workout.

8. Don't tempt fate. No matter how strong your willpower muscle becomes, it's important to always respect the fact that it is limited, and if you overtax it you will temporarily run out of steam. Don't try to take on two challenging tasks at once, if you can help it (like quitting smoking and dieting at the same time). And don't put yourself in harm's way — many people are overly-confident in their ability to resist temptation, and as a result they put themselves in situations where temptations abound. Successful people know not to make reaching a goal harder than it already is.

9. Focus on what you will do, not what you won't do. Do you want to successfully lose weight, quit smoking, or put a lid on your bad temper? Then plan how you will replace bad habits with good ones, rather than focusing only on the bad habits themselves. Research on thought suppression (e.g., "Don't think about white bears!") has shown that trying to avoid a thought makes it even more active in your mind. The same holds true when it comes to behavior — by trying not to engage in a bad habit, our habits get strengthened rather than broken.
If you want change your ways, ask yourself, What will I do instead? For example, if you are trying to gain control of your temper and stop flying off the handle, you might make a plan like "If I am starting to feel angry, then I will take three deep breaths to calm down." By using deep breathing as a replacement for giving in to your anger, your bad habit will get worn away over time until it disappears completely.

It is my hope that, after reading about the nine things successful people do differently, you have gained some insight into all the things you have been doing right all along. Even more important, I hope are able to identify the mistakes that have derailed you, and use that knowledge to your advantage from now on. Remember, you don't need to become a different person to become a more successful one. It's never what you are, but what you do.

Heidi Grant Halvorson, Ph.D. is a motivational psychologist, and author of the new book Succeed: How We Can Reach Our Goals (Hudson Street Press, 2011). She is also an expert blogger on motivation and leadership for Fast Company and Psychology Today. Her personal blog, The Science of Success, can be found at www.heidigranthalvorson.com. Follow her on Twitter @hghalvorson