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Zynga buys Cambridge-based Conduit Labs: Here's the backstory

Posted by Scott Kirsner  August 17, 2010 01:00 PM

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Zynga, the San Francisco purveyor of addictive online games like FarmVille and Mafia Wars, is buying Conduit Labs, a game developer in Cambridge founded by Nabeel Hyatt, and funded by local venture capital firms Prism VentureWorks and Charles River Ventures. The purchase price isn't being disclosed, but one source close to the company tells me it is an all-stock transaction, so Conduit's founders and investors will now be hoping that Zynga turns into a huge success; news reports earlier this year pegged Zynga's valuation at $5 billion.

The Conduit office in Central Square will now become Zynga Boston, and Hyatt will continue to run it, according to today's press release. (The company already operates satellite offices in places like Baltimore, Austin, Los Angeles, Beijing, and Bangalore.)

Hyatt and Zynga executives weren't available for comment this morning, but in the press release, Zynga senior vice president Mike Verdu is quoted saying, "Boston is an epicenter for technology and has a strong talent market, making it an ideal location for us to expand operations." Zynga claims to have 215 million active monthly users.

Conduit, founded in 2007 to develop music-oriented games for the Web, never quite achieved critical mass. Its first game, Loudcrowd, was released last spring. Zynga seems to be acquiring the company less for that property or its user base, but more for the development team and its game industry expertise. (Conduit never revealed how many people played Loudcrowd...though Governor Deval Patrick gave it a spin last year).

Conduit discontinued Loudcrowd last month, and following the Zynga acquisition will kill the two Facebook games it developed, Music Pets and Super Dance, according to a blog post by Hyatt today. "Despite the countless hours we’ve spent working on them, and last month being our best revenue yet, we failed to make these products commercially successful enough," he wrote. "We had to make the decision to focus on what was working, and we think once you see what we’ve got next, you’ll agree it was the right choice.

Conduit raised $8.5 million in venture capital funding, most recently a $3 million round last November. Conduit's two investors were Woody Benson at Prism VentureWorks and Izhar Armony at Charles River Ventures. (As an aside, one of Zynga's board members and investors, Rich Levandov of Avalon Ventures, works out of Boston.)

The $3 million round, I'm told, was intended to help the company transition its strategy from building a stand-alone, Flash-based Web destination to gearing its games to the Facebook audience. In the midst of that transition, Conduit's board hired the Boston investment bank America's Growth Capital to look for prospective buyers. The thinking was that it was becoming hard to sustain a stand-alone games developer — especially one that hadn't yet cranked out a hit game or figured out, like Zynga and Playdom had, how to attract millions of users through Facebook. (ACG's Jon Guido handled the transaction.) The bankers talked to companies like CBS, Sony, Activision, and Playdom (which itself was acquired by Disney last month.) But Zynga was the most interested party.

Conduit's founder and investors aren't yet crowing about their winnings from the acquisition, but instead will now be rooting for Zynga — rumored to be wildly profitable — to go public in a year or two. Zynga CEO Mark Pincus "doesn't want a double or a triple," said one source close to today's deal. "He's looking for a home run or a grand slam."

Earlier this month, I was tipped off (while standing in line for a soft-serve ice cream at Fenway, would you believe it) to the impending acquisition. But when I called Hyatt, Conduit's investors, and a source connected to Zynga, everyone either gave me a "no comment" or didn't return my calls. (I shared that with you on Twitter...)

Occasionally, I guess, the rumors are right.

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Scott Kirsner was part of the team that launched Boston.com in 1995, and has been writing a column for the Globe since 2000. His work has also appeared in Wired, Fast Company, The New York Times, BusinessWeek, Newsweek, and Variety. Scott is also the author of the books "Fans, Friends & Followers" and "Inventing the Movies," was the editor of "The Convergence Guide: Life Sciences in New England," and was a contributor to "The Good City: Writers Explore 21st Century Boston." Scott also helps organize several local events on entrepreneurship, including the Nantucket Conference and Future Forward. Here's some background on how Scott decides what to cover, and how to pitch him a story idea.

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