My Imajinashin

Pocket Gamer biz reports that Zynga – maker of Mafia Wars and Farmville social games for Facebook and myspace – has just raised $180 MM in venture capital from the same Russian investment consortium that invested in Facebook. The deal puts Zynga’s valua

tion at somewhere between $1.5 and $3 BILLION.  My first reaction was that this was extremely aggressive. When I looked at the numbers a little bit clos

er though, I realized its not extremely aggressive, its actually somewhere between absolutely, ridiculously insane and catastrophically irresponsible.

Farmville and Mafia Wars are very popular games that make money by selling both advertising and virtual currency. I don’t know how many players are actually willing to lay down real money for the fake money that they sell but the fact that anyone is willing to do so is a testament to the fact that players are genuinely engaged in them.

But…to be valued at $3 BILLION? VC’s typically invest in companies they feel offer a 10x return. THIS WOULD IMPLY A FUTURE VALUATION OF $30 BILLION. staggering? YES

Lets put this in perspective by comparing Zynga’s valuation to a couple other companies in the space:

Electronic Arts – You know that little company that has long term licensing agreements with some minor brands like the NFL,

NBA, NHL, Major League Baseball, Warner Bros, Hasbro and others with revenues of $4 Billion per year, $2 Billion in cash on hand and $0 in debt is currently (as of 12/16/2009) valued at ~$5.4 Billion. Value to Revenue ratio of 1.35

Activision Blizzard – Another little company that has produced a few titles like Guitar Hero, Spider Man, Tony Hawk, Transformers and more with revenues of $4.4 Billion per year, EBITDA of $800 MM, $2.7 Billion in cash on hand and $0 in debt is currently (as of 12/16/2009) valued at ~$14 Billion. Value to Revenue ratio of 3.2

Now, of course Zynga’s financials won’t look anything like these two mature behemoths in the space today. But will they ever?

Lets just say that Zynga’s second most popular title Mafia Wars is actually neck and neck with Farmville in the number of users and that it has 65 MM users too. And lets say that Zynga manages to produce 8 more similar hits in the next five years. That would give them 10 titles with 65 MM users each.

Lets be aggressive and say that 10% of players are actually willing to buy virtual currency and lets be even more aggressive and say that there is no cannibilization amongst the titles.

Under these assumptions, you get 650 million players, 65 MM of them who purchase virtual currency from Zynga. Assuming a valuation of $1.5 Billion, to achieve Activision Blizzards’ more aggressive value/revenue ration of 3.2, Zynga would need to drive just over $70 per paying user to achieve a valuation of $15 Billion required for a 10x return. Assuming a more aggressive valuation of $3 Billion, to achieve Electronic Arts’ more aggressive value/revenue ration of 1.35, Zynga would need to drive just over $340 per paying user to achieve the $30 Billion valuation required for that same 10x return.

Expecting $70 to $340 per paying user? that sure seems insane to me!

After you consider how aggressive the assumptions I used are about the future success of Zynga’s titles as well as some even more aggressives assumptions about the willingness of their customers to fork over there hard earned cash for virtual goods and personally, I’d say it leans towards catastrophically irresponsible.