And thus always to giants

Bankruptcy in professional esports, & esports’ sustainability

On the tails of the creation of Astralis from Astralis CS:GO, Origen LoL, and Future FC FIFA, the Canadian giant Team Reciprocity has announced its immediate downsizing and effective bankruptcy. What happened, is this the fate of professional esports, and what is to be done?

What happened to Team Reciprocity?

Team Reciprocity logo
Team Reciprocity logo (credit to Team Reciprocity).

While Team Reciprocity has never topped any pro-level competitions in any of the games it has had teams in over its 3 year lifetime, the org was never not good and not well known, placing at least in the top 10 of the serious competitions it had teams compete in pretty much every season. So what went wrong? Isn’t having good teams the recipe for success in esports?

Well, yes and no. You see, in 2019, Reciprocity announced it had secured itself a franchise in the Asian Crossfire League by partnering with the Chinese super-giant LGD. This initial expansion since the org’s 2017 foundation was quickly followed up by moves into LATAM with the acquisition of Rainbow 7, a Mexican LoL team.

But international expansion and franchising certainly aren’t cheap, and following the lead of Astralis in financing rapid expansion, Reciprocity announced its intent to be taken over by a Canadian venture capitalist group called Rainy Hollow Ventures in the hopes of raising between $5 and 10 million Canadian (about $3.5 to 7 million US) by trading on the Toronto Stock Exchange for between $1 and 1.50 Canadian (70¢ to $1.04 US) per share.

Once international financial panic set in across North America from the spread of COVID-19, however, all venture capital quickly and drastically dried up, leaving Reciprocity broke. In response in order to salvage what remained of the brand with the intent to rebuild post-pandemic, Reciprocity has disbanded its teams and downscaled as much as possible while staying afloat only in a technical sense.

So, is financial ruin a trait of professional esports?

At this point in time, absolutely—overwhelmingly yes.

Reciprocity’s move to go public followed an earlier move by the British Fnatic in May 2019, where Fnatic managed to raise $19 million US from a bunch of investors for expansion into Asia and North America. As I’ve covered in an earlier post, Fnatic’s financial situation is precarious at best and borderline fraudulent at worst, so this investment round won’t likely be of significant financial benefit to the org, and they’ll probably need more money in the future to stay afloat and remain competitive.

Closer to home, in late 2019, FaZe Clan secured a $22.7 million US loan from a Canadian investment bank but not for expansion, like with Fnatic; they needed the money for “general corporate purposes”—they needed to not go bankrupt. The type of loan FaZe got, however, isn’t your average, hey Mr. Banker Man, can I please have some of your money? kind of loan—they got what’s called a convertible loan, where the bank can seize part of your company if you fail to pay them. And in FaZe’s case, the bank has already been given a seat on the board. While this type of situation isn’t necessarily bad, and it’s in fact sort of common for a company while it’s preparing to go public, knowing what we know about other org’s finances, FaZe Clan will be in need of money in a few months for expansion or some bollocks. (Unicorns of Love also just announced that it secured private investment).

Even Astralis, which did manage to go public in 2019 in Sweden while being a Danish org, hasn’t been able to meet its financial goals post-IPO. In fact, apart from doubling down on current revenue streams and securing a bunch of strategic partnerships, Astralis hasn’t been doing much to prove its financial viability as a publicly traded company, and its stock price has tanked to reflect that, falling from 8.94 to a low of 4.06 Danish (from $1.28 to 58¢ US) per share, following the release of their 2019 financials.

For the time being, it appears that professional esports will remain a sinkhole for investment money and a place for rich people to throw money at young people and get off on how rich they are.

Just what is to be done, then?

I’m no libertarian, but the free market rules supreme, and inefficient business models will be done away with by competitors that can find flaws in the current system, find opportunities for alternative ways of doing things, and can exploit both for huge financial gain.

What’s lacking in professional esports right now, and is found all throughout lower-level esports as well, is an almost religious devotion to the old way of doing things, with ultimate deference to the way things used to be when esport was truly just a bunch of sweaty kids in their parents’ basements. And additionally in professional esports, there’s now an emerging business-minded interest dominating how the industry will grow in the future, which is of course according to the way businesspeople have been doing business in the past. (I’ve even talked about this in a previous post, if interested). No matter where you go and who you are, people are obsessed with the past and the tried way of doing things.

Andrew Carnegie, three-quarter length portrait, seated, facing slightly left.
Andrew Carnegie, three-quarter length portrait, seated, facing slightly left.
Andrew Carnegie, one of America’s traditional businessmen (1913, cph.3c01767)

But we can very clearly see that traditional esports plus traditional business is a horrible idea that very, very obviously won’t work, especially because traditional esports and traditional business are so very much opposed to each other to the point of each community’s being unable to talk to the other. The esports community on LinkedIn is a fundamentally different community to the thousands found on Discord.

However, it isn’t clear that the problem is necessarily with geek hobbies meeting the world of business because Magic: the Gathering also started as a bunch of sweaty guys in their parents’ basements, and it’s doing swimmingly as a global TCG phenomenon. But MTG didn’t take the route of esports; it instead decided to keep gaming with gaming and business with business, only letting the two touch when absolutely necessary, with Wizards of the Coast acting as the intermediary between the two since they know how to best talk to both the players and companies (and because they own the game).

But comparing esports to MTG isn’t totally fair, since orgs don’t exist in professional MTG as they do in esports, with players instead being sponsored by TCG shops and other TCG-related businesses. MTG sponsors in esports would be like if Steam sponsored a bunch of players individually—a little bizarre, but not totally out of the question.

In order for esports to truly become a sustainable, professional sport out of a geek hobby, it must not only rectify its antiquated beliefs with those that work best in the here and now, but must further rectify its beliefs with those of business. And all this must be done in a style that’s fair to both the community and to businesses.

But what’s wrong with orgs today?

The outright failure of professional esports orgs today to be viable business interests is rooted in org’s obsession with the past and lack of business innovation in creating a well diversified company upon which the burden of managing a sports team may be placed. Sports are not inherently profitable, and it is only through business innovation that orgs will be able to overcome this limitation, rectify esports and business interests, and become sustainable. I’ve talked about specific financial problems facing esports in a previous post, and that is certainly something to check out to round out this discussion.

If esports is to become legitimate, org owners must be innovative in a style appropriate for both the community and interested businesses. Only then can financial viability be discussed and achieved though diversification.

~eliot, Managing Partner for Business and Strategy

NA esports org 🎮 | ⚠️ we’ve been known to be a little edgy ⚠️ | hit us up @azaragg or discord.gg/fVyPGtH

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