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Zynga Layoffs: What Happens When Startups Grow Too Fast

Zynga Layoffs: What Happens When Startups Grow Too Fast
Zynga, social game publisher
Image credit: Imore.com

It's a sad week in FarmVille: Social-gaming company Zynga announced yesterday that it is cutting 18 percent of its staff, or about 520 employees. The company will also close its offices in New York City, Los Angeles and Dallas.

These drastic measures are the latest in a string of cost-cutting efforts to keep the beleaguered company afloat. In February, the game developer closed its Baltimore office, and in January it shuttered its operations in Japan. Back in October, Zynga laid off more than 100 Austin, Texas-based employees and closed its office in Boston.

Zynga said it expects to lose between $29 million and $39 million in the second quarter of this year. The game developer's woes serve as a cautionary tale of what can happen when startups grow too quickly. "None of us ever expected to face a day like today, especially when so much of our culture has been about growth," founder and chief executive Mark Pincus wrote in a blog post. But, he said, the massive scale that once benefited Zynga is now holding it back.

Related: Zynga Continues to Cut Ties With Facebook

Zynga arrived here, in part, because it depended too heavily on Facebook's platform to support its games, only to begin painfully separating from the company later to avoid the social network's hefty fees. And in March of last year, Zynga made two huge expenditures that now seem reckless: $228 million for a San Francisco headquarters and $180 million for OMGPOP, maker of mobile app Draw Something, which has since fallen out of favor with gamers. Six months later, Zynga wrote down OMGPOP by $85 million to $95 million, and has now laid off most of its staff.

Zynga isn't the only company to find itself paring back after a period of hyper-growth. LivingSocial, the second-largest daily deals company after Groupon, laid off 400 employees, or about 10 percent of its workforce, late last year. The six-year-old daily-deal site had grown impressively since its founding, reaching 600 markets by October 2011. Flush with hundreds of millions of dollars in venture capital, LivingSocial began investing aggressively in online food delivery and other areas that didn't pan out. The company posted a $566 million loss in the third quarter of 2012.

Location-based game maker Booyah also started out strong, albeit smaller, raising $29.5 million in venture capital by May 2010. Its MyTown game franchise racked up more than three million users by August of that year. But it failed to generate sufficient interest in later games. Despite raising an additional $30 million in a Series C round in March 2013, Booyah replaced its CEO this week and reportedly dismissed at least 60 percent of its staff To recover, the company plans to focus more narrowly on tablet gaming as the appropriate niche for its products.

Companies that inflate expectations and don't follow through tend to pay a heavy price. Following Zynga's announcement, its stock value tumbled on Monday. At press time, Zynga's market capitalization stands at $2.39 billion, down to one-third of its sky-high IPO valuation of $7 billion, when it was priced at $10 a share.

Related: Groupon Founder Andrew Mason Out as CEO

Brian Patrick Eha is a freelance journalist and former assistant editor at Entrepreneur.com. He is writing a book about the global phenomenon of Bitcoin for Portfolio, an imprint of Penguin Random House. It will be published in 2015.

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