Why Professional Sports Leagues Should Launch Venture Capital Arms
Lessons Learned From Corporate Venture Capital
Corporate venture capital (CVC) is a subset of venture capital (VC) where established corporations make systematic investments in startups related to the company’s own industry. According to CB Insights, companies like General Electric (GE), DuPont, General Dynamics, and 3M were among the first to create corporate venture programs in the 1960s. Their motivations were clear: diversify, find new markets and put capital to good use. (3M actually produced Post-it notes from its CVC program.) In recent years, CVC investing has been steadily increasing.
Today, CVCs have become commonplace, spanning across industries, focus, and size. Large corporations such as JetBlue, Campbell Soup and Walmart are investing in startups through venture capital arms. 107 new CVCs made their first investment in 2016. With impressive growth in other industries such as sports tech and interests from professional sports teams, taking equity positions in startups should be considered by professional sports leagues.
A sports league is a professional body that governs the competition of its teams. Governance and ownership vary by league. There are four major professional sports leagues in North America: Major League Baseball (MLB), the National Basketball Association (NBA), the National Football League (NFL), and the National Hockey League (NHL). Other prominent leagues include Ultimate Fighting Championship (UFC), Major League Soccer (MLS), National Lacrosse League (NLL) and the Canadian Football League (CFL). Internationally, 34 sports are represented in professional sports leagues like the notorious English Premier League. Individual teams and local sports business ecosystems are absorbing innovative technologies like the LA Dodgers and Philadelphia Sixers.
With lessons learned from CVC, it’s only a matter of time before the professional leagues, themselves, launch venture arms to augment league products and strategies, present and future. Below are five reasons why CVC should be applied to professional sports leagues especially the NBA:
Huge Market Opportunity
The sports industry in North America is projected to reach $73.5 billion by 2019. It’s a gigantic market with even faster-growing segments. For instance, the global eSports market is expected to climb to $1.2 billion in 2019 and NBA team owners have taken a particular interest in this growing segment. In fact, more people watched the eSports world championship than the 2016 NBA Finals. 31 million people watched LeBron’s Cavs dazzling performance against the Warriors ranking it as the highest viewership in 18 years. While a record for the NBA, it still trails the 36 million that watched League of Legends, a multiplayer online battle arena video game. Alex Walker, Kotaku writer, explains:
“It helps highlight why more and more players and executives affiliated with sports are aligning themselves with esports. They can see the writing on the wall: the viewership numbers are huge, rivalling and even surpassing some of the largest sports in the world.”
As gaming garners mainstream credibility, executives are acquiring and investing in eSports teams. They see the added viewership as advertising and sponsorship opportunities to generate more revenue. NBA arenas, equipped with cable and fiber, are suitable for gaming tournaments that can be live streamed to regions like China and Europe like never before. Amplified by investments of corporate funds directly in platform providers and IP, the NBA could advance financial objectives and gain an even greater competitive advantage.
Innovative Technology
The consumption of sports is changing and more stakeholders including investors have taken notice of the vast applications of new technology. Investors spent over $1 billion in venture deals for sports-related startups in 2015. According to a TechCrunch Tableau study, venture funding for sports tech startups is growing nearly 30% year over year since 2012. Sports Geek founder, Sean Callanan, lists some of the areas where technology is the focus in sports:
- Stadium technology — displays, wi-fi, DAS, ticketing, mobile
- CRM — fan data, loyalty, email, sales
- Digital — content, podcasting, video, mobile, gaming, VR/AR
- On-Field — player tracking, health tech, scouting, video
While sports executives are largely focused on technology, CVC can be “an easy way … to effect a technological transfer.” CVCs take equity stakes in startups for access into new technology, filling gaps in their respective businesses and attaining a foothold in new markets. By leveraging resources, marketing, and services, professional sports leagues can ensure the success of their portfolio companies post-investment while continuing to be at the leading edge of technology.
Emerging Tech Startup Hubs
According to Axios, almost half (48%) of new startup growth is happening outside of the 35 largest metro areas. The top 10 emerging startup hubs are Washington, D.C., Atlanta, Denver, Salt Lake City, Portland, Dallas, Raleigh-Durham, Worcester, and Philadelphia. The NBA has a presence in all of these regions.
“Startup activity has burst out of the tech hubs and is really spreading across the entire economy,” says Progressive Policy Institute’s Michael Mandel, who conducted the study. “You’re starting to see the new green shoots come up in a lot of areas.” Although startup activity is increasing in nontraditional hotbeds, they’re still relatively untapped and underinvested. 77.6% of venture capital goes to three states — California, New York, and Massachusetts. With the right amount of investment, the flyover states have the greatest potential to become high collision environments. By already having a presence in these emerging tech hubs, an NBA venture arm could have access to local tech talent, R&D and innovative technology that are often overlooked by the coastal elites.
Thriving Ecosystem
The buyer composition is one of the leading characteristics a VC finds attractive when investing in sports tech startups. When targeting professional sports leagues there’s a lot of money, but more of a limit to the market and who you’re able to sell to because there are only four major professional sports leagues in North America. On the amateur side, there are over 300,000 organizations which make it more attractive from an investment perspective because there are so many more people to sell to. However, this isn’t exactly the case when you own the market and influence the ecosystem.
A good example of fostering a healthy business environment and ecosystem around their own products is Intel Capital in the 1990s. Intel Capital would be investing in “companies building technologies that supported, were sold alongside, or improved the value of Intel’s products in the marketplace,” according to a Harvard Business Review case study. Regardless of the success of individual startups, Intel was committed to encouraging the development of new technologies. Intel is to the computer industry as the NBA is to the sports industry. This an approach the NBA and other professional sports leagues can appreciate.
Long Term Strategy
In large part due to the widespread adoption of the internet and mobile, CVCs are becoming increasingly more active quarter by quarter. CVCs are also able to be patient and pay particular attention to their return on investment (ROI).
“Corporations are sitting on record levels of cash in a historically low interest rate environment — meaning that they can afford to focus on longer-term goals and let the companies they’ve invested in mature over time.” — CB Insights, History of CVC
Being a CVC has its advantages. Microsoft Ventures, for example, “has no set investment budget, no limiting fund size, and no minimum or maximum required investments per year.” (The NBA’s revenue this season is expected to hit $8 billion.) CVCs balance sheets are stronger than their counterparts, independent VCs, and can allow their investments to mature. CVCs concern themselves less with short term goals and more on long term systems.
From an entrepreneurs perspective, there could be some cons to receiving investment from a CVC. Union Square Ventures Partner, Fred Wilson, once stated, “Startups who take investments from corporations are doing business with the devil.” Some downsides might include turning off potential partners, blocked acquisition offers or being overvalued.
The fast-changing sports market is in the midst of an unprecedented time in history. New innovative technologies are transforming the way fans consume content and owners are considering new methods to monetize data. If professional sports leagues want to gain a specific competitive advantage, then it’s important to invest in startups and technology that augment their core abilities to do something successfully. Ultimately, having clear strategic reasons for investing and hedging against previous missed opportunities will enable a professional sports league venture arm to succeed.
