Why Rich Levandov Invested Early in Zynga, and Why It Took Off—Lessons Every Entrepreneur Should Consider
On the last day of September, San Diego-based Avalon Ventures announced a closing of $161 million for its new fund—Avalon IX—on its way toward an upper target of $200 million. Avalon is an 18-year-old firm—storied in San Diego but not fantastically well known nationally—still led by founder Kevin Kinsella. Avalon made its name in biotech. But increasingly it has diversified into digital media investments, largely thanks to the work of managing member Rich Levandov, who joined the firm in mid-2007 to lead its East Coast activities after some five years with Masthead Venture Partners.
Levandov, who still works out of his old Masthead office just blocks from Xconomy’s headquarters in Cambridge, MA, has led Avalon’s investments in a suite of Internet startups, among them Cloudant, Cloudkick, Pictela, and Simulmedia. But it was his November 2007 Series A investment in social game developer Zynga—which he co-led through Avalon VIII—that really put Avalon on the digital map.
Kinsella told Xconomy this spring that Zynga, which has recently been valued at a reported $5.5 billion, might be Avalon’s most successful play of all time. And even though Avalon is still known primarily in biotech circles, having Zynga in its portfolio gave the firm real momentum during the raise of its new fund. In fact, Avalon’s new focus on digital investments may be the leitmotif of Avalon IX.
As Levandov says, “To me, the thesis on which we raised the fund was on increasingly technology-enabled Web services—social media applied broadly, not just to games but to every facet of Internet life.” That means e-commerce, enterprise computing, publishing, and retail, he says.
Levandov is quite a character in a profession with some great characters: you can read about him in Extreme VC: Tale of the Tacoda Tattoo (he hasn’t gotten the tattoo yet, by the way, but that’s another story). A bit scruffy, completely casual (usually wearing jeans), and iconoclastic, he just isn’t what comes to mind when you think venture partner. For instance, we were set to meet one recent morning at Henrietta’s Table, the favorite Harvard Square breakfast hangout of VCs. But he buttonholed me in the waiting area and took me down a nearby alley to the funky, hippie-yuppie Hi-Rise Bread Company, where we had the upstairs pretty much to ourselves—absolutely no suits. While we ordered, Levandov gave me a quick gourmet coffee tutorial: It turns out he is a coffee connoisseur the way most VCs are wine-ophiles.
But that’s another story, too. The point of this story is Zynga. Levandov co-led the Series A with Brad Feld of the Foundry Group and Fred Wilson of Union Square Ventures. But while you hear a lot about the other two, who have become VC superstars, you don’t hear that much about Levandov. I wanted to ask him how that investment came about, with an eye toward gleaning some insights about the direction in which the Internet and social media might be heading—and for entrepreneurs trying to come up with the Next Big Thing. Below is a summary of what we talked about—organized around what seemed to be the key areas or themes Levandov identified.
The Hunt for the Next New Platform—In Levandov’s view, there have been a couple of really significant platforms in the modern history of IT—namely, the PC and the Internet. “All sorts of companies,” he says, were built around each platform. With the PC they ranged from Lotus to Electronic Arts—not to mention Microsoft, which provided the operating system. With the Internet, Levandov says, “The real jewels that were built on that platform were companies like eBay and Amazon and Salesforce.com.”
Enter Mark Pincus and Zynga. “It was an interesting coincidence,” Levandov says of how the deal came together in mid-to-late 2007. Even though Facebook could be considered part of the Internet group above, Levandov saw it emerging as a huge platform all by itself—and he was actively “looking at the Facebook platform as a place to build [other] businesses.”
The other part of the coincidence is that Pincus and Levandov were actually old friends. They had met back in the mid-1990s, when Levandov worked at AOL along with Sunil Paul, who’s now a cleantech investor at Spring Ventures in San Francisco. Paul and Pincus teamed up in 1995 to form FreeLoader, an early Web content downloading service that was acquired less than a year later by Individual for $38 million. Levandov says he was asked to co-found FreeLoader, but instead decided to go into the venture business at Softbank Technology Ventures (where he worked before joining Masthead). But he and Pincus stayed in touch. “I liked him a lot—great character, really smart, one of the best entrepreneurs I’ve ever met,” says Levandov.
The Zynga Idea—The Avalon partner says his old friend told him in mid-2007—shortly after Facebook announced it was opening its API to third-party developers—that he wanted to start a social gaming company on the Facebook platform. As Levandov relates the core insight: a couple hundred million people were playing casual games online—and they were NOT hard core gamers, they were ordinary folks. That meant a vast, and potentially limitless market. “But the problem with those was people either played alone or played with strangers, which was kind of weird. The history of games was that was something you do with friends,” he says.
That’s where his view of Facebook as a platform for building companies meshed completely with Pincus’s idea. After all, Facebook is all about gathering friends. And blending that with social gaming was the magic of Pincus’s idea. In Levandov’s words, “Here’s friends, here’s the connective tissue between friends, and there’s nothing really to do on Facebook after you’ve done your messages and posted your pictures—so the big insight was, ‘Let’s do a social gaming company, and then people can play games with their friends.’ And boom, it just took off.”
Seed Investing Philosophy—Of seed investing, Levandov says, “It’s important to do it quick.” The old venture model of thinking about a deal for several months just won’t work in this day and age, he says. That’s because “you can form companies quicker, and they build faster—so a lot of times the entrepreneurs need to keep going,” he says. “The process of three to six months of getting through big partnership meetings is just not market appropriate anymore.” Or, put another way, he says, “Due diligence is information you studiously gather if you want to kill a deal—or information you avoid if you want to do a deal.”
He chose avoidance. “When I saw Zynga, from the time I saw Mark to the time I decided to invest, was probably like an hour. You don’t see that level of passion that often.” It helped that he, Feld, and Wilson also knew each other well from days in venture together in the mid-1990s. “That was like the band getting back together, because I was with those two guys at Softbank in ’96,” Levandov says. (Levandov and Feld were at Softbank, and Softbank was an investor at the time in Wilson’s Flatiron Partners fund, according to Levandov.)
Beyond Gaming, a Marketing and Promotion Insight—While the core insight behind Zynga—marrying social gaming to Facebook friends—was brilliant, what struck me from talking with Levandov was that there was another layer to Zynga that was critical to its success. That was Pincus’s deep understanding of how to gain customers using social media tactics and theories. Says Levandov, “I think it was the first scientific social media company that understood viral marketing.”
Zynga’s first product was Texas HoldEm Poker. Levandov says if you downloaded the app, it prompted you to invite others to play with you. “So if your friends were on Facebook, which they were, you could start up a table in, like seconds. And there you were, playing poker with your friends.”
All the game designs were such that people were constantly incented to invite their friends to join them—or they might just post on their wall that they were playing this game. “Friends inviting friends is what led to the massive viral growth,” says Levandov.
On top of that, says Levandov, “Every game was constantly tested and measured.” Was it too hard, or too easy to play? Could you move up to more advanced levels as you mastered the level you were on? What about the color schemes? It turned out, he says, that traffic goes way up with a certain cloudy blue color scheme.
Then there are the virtual goods. Having a bunch of friends at the poker table with you facilitated chatting. So Zynga began experimenting with virtual goods—you could buy a friend a drink, for instance. Or, Zynga might give you 2,500 chips for showing up, but you could buy more if you lost those. In FarmVille, you might want to make your virtual farming more productive and make your friends envious. “And that’ll happen faster if you feel like buying a tractor,” says Levandov. “And, of course, if you buy a tractor, you’ll have to buy gas for your tractor.”
Now, Zynga has a big branding and revenue-generating presence in the real world. Go into a variety of retail stores and you can buy pre-paid Zynga game cards. And in May, Zynga announced a major deal with one of those stores, 7-Eleven, to create FarmVille, YoVille, and Mafia Wars-branded items on a variety of items from Big Gulp cups to bottles of water to fruits and vegetables.
The bottom line is that Zynga has been seeking to master three core principles: reach, engagement, and monetization. Reach means to get a lot of people playing. Engagement is about making the games really fun and challenging (but not too hard), and social. Then, he says, “If they’re loving it, they’ll monetize. They’ll spend money on things that are important to them.”