Financing Considerations in Esports — Part 1: So You Want Some Cash?
Everyone wants to get paid. The guy who is building your website is a freelancer and wants to be paid upon completion of his work. Your lawyer is a little better; you have previously negotiated 30-day terms with her, and so you know that despite the fact she is wrapping up some contract work for you at the moment, you still have some wiggle room before needing to cut her a cheque. No such leeway exists when it comes to your staff though. They get paid every other Thursday, no questions asked. You only have two employees, but they are good at what they do and they are 90% of the reason your business is still running. You would not dream of missing one of their paycheques, unless that dream was in fact a nightmare. When all of that is said and done, you still need to put food on your own table. So who is paying you?
The scenario above is a dream scenario for many of the individuals currently operating within esports. Two employees? Damn, we’re dreaming big! The reality is that one of the biggest obstacles that is faced right now by new esports businesses is the question of financing. How do you afford to grow? Perhaps more important, how do you even afford to start? Over the course of my next few articles, I am going to try and tackle those questions. I want to look at options for financing, what financiers want to know, and common mistakes that are made when seeking financing. I also want to consider what alternatives exist, and what avenues can be pursued when financing is not available. I hope that for at least one organization, my ideas will be helpful.
All of this said, every single organization will have different financing needs, and an option for cash infusion that might seem spectacular for Organization #1 could be disastrous for Organization #2. Financing terms will vary on a case-by-case basis as well. Ultimately, there is no rule or guaranteed set of guidelines that will tell you how to finance your new esports business. I am only trying to provide some insight and ideas that should be considered when facing this problem.
First, Determine What You’ve Got…
Before investing any money in a business, be it your money or someone else’s, it is important to do some personal review. As a business owner, you need to audit yourself and your operations. You need to have some idea of what you are worth, and what you are willing to give up. You need to know what the money will be used for, and how you expect your operations will grow because of it. You need to have some strategy for where future money will come from, and how invested money will be recouped.
First things first; are you thinking about your business properly? If you have something that is worth investing in, sponsoring, financing, or purchasing, then make sure that you are giving that something the respect that it deserves. It is not an idea any more. It is not a side job, nor is it a hobby. It is a business. As an example, many people seek Twitch donations and sponsorships, but do not consider themselves a product nor do they consider their stream anything more than a hobby. This will be a massive turn-off for serious investors or potential sponsors. Acknowledge and embrace your business, even if it is small.
With that out of the way, one of the most important things that you can do in preparation for talks about financing is determine a valuation for your operation. This is not simple to do, and in some cases it might be worth working with a professional to ensure that your business is valued properly. Outside help will not have the emotional attachment that might lead to valuations that are higher than they reasonably should be. Additionally, a proper valuation will be great for better understanding what any work you have done so far has been worth. This allows you to put your business into perspective, and will improve you knowledge when talking to potential partners.
…But Make Sure You’ve Got SOMETHING
The discussion of valuations does well to lead to another key point that many entrepreneurs might struggle with: your idea is worthless. Bold statement, I know. I said it that way in an attempt to evoke a bit of a reaction, so let me expand. Your idea may actually be awesome. It probably is. However, no one is going to pay you for it. There might be money available because of the online following that you have generated with your idea, or due to the resources that you have purchased in order to execute your idea, or even because of the work you have done to begin building your idea, but none of those things are the idea itself.
I would like to provide a relatable example that I see frequently pop up on Reddit, Twitter, forums and elsewhere. It is a simple yet important story; the story of the new esports team. For this story, I am going to create a fictional businessman who we will call Marco. Now Marco is passionate about esports, and while he has never been the best player, he has always been involved with his favourite game. He decided that he wants to create and manage a competitive team within his favourite game. He wants his team to rise to the top, and eventually move out of amateur competitions and into the highest level of competitive play. He also wants to expand into other games, effectively making his team a multi-platform brand. With enough growth, Marco knows that the sky is the limit, and he has other ideas as to how to expand after he establishes himself across a variety of titles.
It is here that mistakes are made by people who may not have a traditional business background. Marco’s team currently is completely and utterly valueless. Don’t get me wrong, the idea is fantastic and should be pursued, but it should be pursued by Marco and parties interested in building the organization with him. At this stage, a common mistake is for the entrepreneur to search for funding. The logic makes sense; in order to create hype and pay staff and interest professional players, Marco needs startup cash.
Unfortunately, the approach is wrong. Marco is trying to value an idea, and an idea that is unproven at that. Sure, there are plenty of examples of successful esports organizations spanning multiple gaming titles, but there are no examples of successful organizations spanning multiple gaming titles that have been established and managed by Marco. There are no Twitch viewership statistics, Twitter followers, or t-shirt sales figures which Marco can draw upon to demonstrate the popularity of his team. Nor can Marco utilize past tournament winnings to demonstrate success. Marco doesn’t even have the ability to point to players and talk about their popularity, because he does not yet have a firm commitment from any players to play under his brand. Unless Marco finds an investor or sponsor or financier who is looking to quickly dispose of some cash with no real measure of how that cash will be recouped, chances are the pursuit of financing will end abruptly at this stage.
Even more concerning though might be long-term damage done to the future brand before even getting it started. For anyone who has been approached about Marco’s idea, there may be an opinion already developed about Marco’s seriousness and ability to properly run an organization. After all, his understanding of what is valuable has already been called into question, and this could reflect his skills when managing business operations where similar judgement calls are going to constantly need to be made. If Marco’s team does gain in popularity and exposure, than Marco is going to be a business owner and manager, not an esports fan. If these same financial backers are approached again, Marco’s ability to continue to manage his business and grow his brand may already be in question even if his organization has begun to demonstrate some success.
Think Outside the Bank
Every entrepreneur will work for free at some point during the life of their organization. This is a reality that many individuals considering a start-up do not want to accept. After all, working for free is not glamorous. Sometimes though, it is exactly what your business needs, especially when you are trying to establish something that is worth investing in and growing.
In my previous article I talk about how time is the greatest resource available to entrepreneurs, and I cannot stress the concept enough. It is something that is given to you, that you don’t need to earn or work for, and can only be lost if you choose not to use it. To anyone who comes to me asking about starting a business,the most common advice I will provide is that if you have the choice, you should spend time as opposed to money. It is absolutely the preferred resource to invest.
Leverage relationships as well. Perhaps you have a family member or friend who has skills you do not. It might be easy to offer them a night out to dinner in exchange for help with a website, and at least then you get to have a good time with friends in exchange. Look online for other startups with whom you might be able to trade services with. There are plenty of resources that can help you find others in similar situations (check out the new Esports Professionals Network, which has really taken off). As an example, I have had offers for consulting work in exchange for sponsorship. This is a win/win as far as I am concerned. I have ample time, and can happily work with people to solve business problems that I enjoy solving anyway. I am using my time to help someone, but also to build a relationship with a potential client. In exchange I am getting some coverage through sponsorship, which is not something I have money in my budget for. The value of that sponsorship is mine in exchange for time, not cash. Who loses out in this situation?
Are We Ready?
So, at this point we should be ready to advance. Hopefully if we are going to take our financing to the next level, the above advice has been heeded; our business is running smoothly and professionally, and we have sunk boatloads of time and energy into building our brand and leveraging whatever relationships we can. We have truly prepared, and we are ready to pursue the next levels of financing.
My next article, which you can expect in the coming weeks, will dive into preparing for sponsorship. Who are sponsors and what do they want in return? What information should you be prepared to talk about? What is not relevant? What differentiates sponsors from other types of financiers. Following the discussion on sponsorship, I will follow up with an article on Financing versus Seeking Investors, and wrap up with some closing thoughts.
For now, I encourage the budding esports entrepreneurs that have read this to start changing your mindset, leveraging your relationships, and spending every bit of time that you have available. Use your dollars only when you have to, because time is the better currency. In the long term, you will be richer if you heed this advice.
About the Author
Brandon Copeland founded and operates No Jokes Partnerships, an esports focused professional services firm aimed at helping esports Organizations and players professionalize their operations and improve their business practices.