Zynga COO Departure Is Red Flag

NEW YORK ( TheStreet) -- Mark Pincus has been around for a long time. He was working on Wall Street in the late 90s. He saw the dot-com bubble grow and then burst.

He's also been a Silicon Valley insider for over a decade. He has been growing Zynga ( ZNGA) as its founder for five years now and was an early investor in Facebook ( FB).

So what happened to cause Zynga COO John Schappert, a former top executive from Electronic Arts ( EA), to quit the company after less than 18 months?

Observers heralded his arrival as a sign that Zynga was the hot new company in gaming and that it had figured out to successfully mix social networking with gaming. Electronic Arts was portrayed as yesterday's news.

It was obvious obvious that something was going on last week when news emerged that Zynga had stripped product reporting duties from Schappert.

When Zynga released financial results to analysts a couple of weeks ago, along with news that it was cutting its guidance for the remainder of 2012, its shares plummeted 40%.

Clearly, Pincus blamed Schappert in part for the results, and it appears that Schappert decided he'd had enough of the new-fangled way of doing gaming at Zynga.

If this was an isolated incident at Zynga, you could brush it aside and say that perhaps Pincus just did a bad job of hiring Schappert. It must have been a "bad fit" between Schappert and the Zynga culture. No harm, no foul.

However, other high-profile executives have left Zynga not long after being hired. The most notable one prior to Schappert was Owen Van Natta, who had worked under Jeff Bezos at Amazon.com ( AMZN) before joining Facebook in its early days and rising to become Zuckerberg's No. 2 executive before he left.

After leaving Facebook, Van Natta was courted agressively for several plum jobs, including a position at Microsoft ( MSFT). However, he chose to wait and eventually landed at Zynga as the company was gearing up for its IPO.

Yet Van Natta resigned last November, just a few weeks before the company's December IPO. At the time, Zynga insiders said that Van Natta had always planned to leave the company after a year or two. However, to leave just weeks before an IPO looks suspicious. With all the drama surrounding the company since its IPO, it now looks even more suspicious.

This is the second high-profile COO departure from a troubled Internet company in the last year. Former Groupon ( GRPN) COO Margo Georgiadis resigned only five months after joining the online coupon company. She immediately returned to Google.

Why is it that Pincus at Zynga and Andrew Mason and Eric Lefkofsky at Groupon have had such a hard time keeping people?

There's always a bit of a cultural struggle between those at young entrepreneurial start-ups and those from more-established businesses.

Early-stage companies crave credibility, and it helps burnish their images if they can lure executives from secure jobs at established and successful companies. It sends the message to the media that the start-up is a more desirable place to be than the more established places.

Yet people coming from bigger companies are used to structure, processes and more resources. For them, coming to a start-up can be a little frightening when it seems like decisions are made willy-nilly and the founder CEO is flying by the seat of his or her pants half the time.

It can be equally frustrating for the folks at the start-up when they see an "established" executive come in and start talking down to them. These executives can also be seen as too bureaucratic and too slow in making decisions.

With Zynga, it's clear that Pincus didn't do his homework and make sure that Van Natta and Schappert would fit in at the company.

There also probably was something about the executive culture at Zynga that rubbed Van Natta and Schappert the wrong way. Mark Pincus certainly must have been instrumental in the development of that culture.

For Zynga investors, the stock's performance this year obviously has been disappointing. It appears that this company will be run autocratically by Pincus for the foreseeable future.

And, as Rich Greenfield of BTIG has been asking for the past week, why is it that Zynga demoted Schappert on July 2 but made no mention of it publicly, not even during its second-quarter earnings call -- in which Schappert participated -- only to reveal it later? Shouldn't the company have mentioned it earlier?

It's decisions like that which leave you scratching your head and wondering what the future of Zynga is going to be.

At the time of publication, Jackson had no positions in stocks mentioned.
Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at eric.jackson@thestreet.com.

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