Why Venture Capital is flooding into Esports teams

Alejandro Guerrero
Oct 23, 2018 · 8 min read

A significant wave of venture capital is flowing into esports, particularly esports teams. Why? Esports teams are disrupting traditional sports, like the NFL whose teams collectively are valued at over $79 billion! This blog post will breakdown the reasons for the excitement while also reviewing their business model and highlighting some of the larger esports teams in LA. The summary below is largely a result of conversations that I had with Dan Fiden at Cloud9, Dan Dinh at Team SoloMid, and Jason Ton at 100 Thieves. Many thanks to all of you for sharing your wisdom and insights.

Understanding the Esports Hype

Esports is an industry benefiting from being at the intersection of three fascinating macro trends.

  1. Traditional sports has an age problem.

The average of age of a traditional sports fan is old: for baseball its 57, for the NFL its 50, and for the NBA its 42 (SportsBusiness Journal). The article goes on to say, “The trends show the challenges facing leagues as they try to attract a younger audience and ensure long-term viability, and they reflect the changes in consumption patterns as young people shift their attention to digital platforms.”

Millennials split between esports and traditional sports

And the situation is only going to get worse and here’s why…millennials are on the cusp of becoming the largest portion of the U.S. population (U.S. Census Bureau) and they are watching less sports than previous generations (Social Underground). In fact, millennials are split in terms of their preference between esports and traditional sports which is drastically different than non-millennials who favor traditional sports by more than 2x (LEK report). The article goes on to say, “So young Americans are growing in importance as they begin to earn and spend more. That makes sense, so what’s stopping NFL commissioner Roger Goodell from using some of its savings to go after the next generation of fans? Well, millennials and Gen Z might have viewing habits that are incompatible with the current business model for traditional sports.”

Lastly, traditional sports, particularly baseball and football, are largely domestic sports while esports is clearly a global sport. Overwatch’s recent announcement that 6 of the 8 expansion franchises are going to international teams is a perfect example of esports’ global reach.

2. Live-streaming continues to grow

Twitch, one of the dominant live-streaming platforms now, has about 15 million daily active users (DAUs) who, on average, spend 95 minutes on the platform. The growth and figures are insane! And there are other competing platforms like YouTube, Microsoft’s Mixer and Valve’s Steam.TV that are at various degrees of scale. Live-streaming enables fans to watch and engage with their favorite players and teams while they practice their craft on a daily basis. This is unthinkable in traditional sports.

3. The video game market is large and still growing!

The market is around $108 billion and the industry is getting an additional boost by the successes of battle royale games, defined as a game genre where a maximum of 100 players join a match and fight to the death until the last person or squad is left standing. The best example of a battle royale game is Fortnite made by Epic Games.

SuperData states, “Battle royale titles now top Twitch charts, but they are more likely to bring in new viewers instead of stealing them from other games. In May 2018, the total viewers for several key games on Twitch stood at 54 million. This figure is roughly even with May 2017, even though Fortnite Battle Royale and PUBG grew to a combined 42 million viewers during this time.”

Fortnite has capitalized on this growth to generate over $300 million in monthly sales in a little over a year and is expected to continue to grow sales strongly.

Publishers have increasingly leveraged esports as a form of marketing its games. The players, professional or otherwise, live stream their game play generating fresh content daily that keeps its audience engaged. Because of this benefit, we have seen many of the publishers invest in developing esports infrastructure and leagues to support their games. Even though the underlying macro trends are all positive, the market is still nascent as seen by the average revenue per fan for esports vs traditional leagues. NewZoo estimates that as of 2017, the average revenue per fan for esports was $3.40 which is 4x less than basketball and 12x less than football. Investors are betting that this gap will close over time.

Understanding the Esports Team’s Business Model

First, let’s clarify what esports and esports teams are — “Competitive gaming at a professional level in an organized format (tournament or league) with a specific goal (e.g. — winning a championship title or prize money) and a clear distinction between players and teams that are competing against each other.” (NewZoo 2018) For some games, publishers have franchised the league whereby they receive a payment from a team in exchange for the team maintaining a position in the league and an ongoing share in the league’s revenues. While other game publishers support esports related events via tournaments and prize pools, many times working with third party tournament organizers, but have decided not to sell franchise rights.

And how do teams make money? Let’s break down the main components of their revenue and expenses:

Revenue

  1. Broadcast licensing fees from platforms like Twitch, Facebook and YouTube: Many of these platforms pay the teams so that the team and their respective players stream on their platform. It is my understanding that this currently is a large source of income. Teams can also generate Twitch related revenue from donations and subscriptions.
  2. Merchandise revenues: Many teams sell team and player branded merchandise directly to the consumer. As an example, 100 Thieves’ 2018 Fall Collection, which included a hoodie and tees, sold out in less than 3 minutes a few days ago.
  3. Sponsorship & advertising dollars: Brands are paying teams and their players for a variety of brand engagements like integrating their brand into their streaming content. Brands that are most active in esports include CPG, telco, financial, media & entertainment, quick service restaurants and auto related companies.
  4. League revenue share: For teams that own a franchise in a league, say Overwatch or League of Legends, they have the right to receive their share of league related revenue generated from ticket sales, broadcasting rights and merchandise sales.
  5. Prize pool related revenues: if and when a team wins a specific esports event that has a prize pool. As an example, Epic Games is going to provide $100 million in prize pool money for the first year of Fortnite esports.
  6. Transfer fees for players: Although it’s minimal now, imagine a team selling the contractual rights to a player just like what Real Madrid did when they received EUR 100 million from Juventus in the Cristiano Ronaldo related transfer.

Expenses — not including general and administrative nor marketing

  1. Player contracts: Teams sign players to their team and incur costs related to those contracts.
  2. Franchise Fees: Teams must pay the publishers (aka the league organizers) a franchise fee in order to maintain a permanent position in the league. Overwatch’s recent expansion slots are rumored to have cost between $30 and $60 million. Clearly this is a huge investment for the teams and a big windfall for the publishers.
  3. Facility fees: Teams typically house their players/teams and likely will build out larger training facilities and even their own home arenas in the near future.
  4. Merchandise related expenses: To the extent a team sells its own merchandise directly it will have corresponding inventory and logistics related expenses

Why is LA the Epicenter for Esports?

Both Riot and Activision Blizzard are here and driving two of the largest North American esports franchises, League of Legends and Overwatch, respectively, with both owning an arena in LA.

As you can see, esports team are content creators and where better for these types of companies to be created than the entertainment capital of the world? With infrastructure like film schools, production talent and equipment it is no surprise that founders frequently relocate their esports startup from NYC or the Bay Area to LA.

Who are some of the LA based Esports Teams you should know?

Cloud9 has just announced a $50m Series B and investors include Founders Fund and Valor Equity Partners. Cloud9 has teams in League of Legends, Overwatch, Rocket League, Super Smash Bros, Fortnite, Clash Royale, Counter Strike and PUBG to name a few.

Team SoloMid (aka TSM) has raised $37 million from Bessemer Ventures and others and has teams for League of Legends, Fortnite, PUBG and Super Smash Bros. to name a few.

100 Thieves just raised a Series A from Scooter Braun, Drake, Sequoia Capital and previous investors include Cleveland Cavaliers owner Dan Gilbert’s Courtside Ventures. 100 Thieves has teams in League of Legends, Fortnite, Call of Duty and Clash Royale.

Keep an eye on the market as it’s still early days and it will be interesting to see how teams and the broader ecosystem evolve. One thing is for certain, no matter what happens next — it’s going to happen in LA!

Author’s Note: Views are my own and do not necessarily represent those of my employer

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade