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Social game maker Zynga is reportedly talking to investors about raising a new $250 million round of funding that values the company at $7 – $9 billion, according to the Wall Street Journal.
That valuation is much higher than the $5 billion value Zynga had on the secondary market( where employees sell shares to private investors). And it shows investors are still going gaga about social games and anything related to fast-growing social media platforms such Facebook.
Zynga has 275.8 million monthly active users on Facebook, including 96 million who are playing the company’s hot CityVille game. CityVille is the fastest-growing game ever, as it hit 100 million players in just 43 days before sinking down again more recently.
The funding shows that investors consider Zynga to be in the hot class of social media companies that includes Facebook, Twitter, Groupon, and LinkedIn. Both LinkedIn and Pandora have filed to go public, but Zynga has postponed its IPO by raising large rounds from investors such as SoftBank and DST.
Citing unnamed sources, the newspaper said the decision to raise a round could be weeks away and may not happen. Zynga is valued so high because it has figured out how to make money online through the free-to-play business model. Pioneered in Asia, that model lets users play games for free. But to progress faster in a game, they can pay real money for virtual goods such as tractor fuel in FarmVille. Zynga has also made a lot of deals to market its games and virtual goods via 7-Eleven stores and American Express cards. The company has made itself more attractive to investors by expanding into new territories and moving into mobile games.
The $7 – $9 billion figure is astounding, since Zynga’s revenues in 2010 were estimated to be $850 million. Investors are valuing Zynga at 10 times revenue. Compare that to a successful mainstream game company like Electronic Arts, which has a market value of $6 billion and is valued at less than two times revenue.
Zynga had an estimated $400 million in profits in 2010, the Wall Street Journal said. Zynga declined to comment to the WSJ. Zynga’s value is closing in on the biggest video game maker, Activision Blizzard, valued at $13 billion.
Zynga doesn’t need a lot of money for operations, but it has been buying about one company a month to acquire new developer talent so that it can keep making better and better games. To date, Zynga has raised $360 million from investors, not counting a rumored Google investment that was never announced.
The WSJ said that Zynga will likely avoid the “special-purpose vehicle” that Goldman Sachs created for wealthy foreign clients to invest in Facebook. That deal raised concerns among regulators in the U.S.