Venture Moneyball
Sports Investing Can Survive as a Business of Singles & Doubles
For a sports fan, Fall is hands down the most exciting season of the year! The NBA and NHL tip-off their season, re-energizing fans with a new sense of hope. NFL and College Football seasons are marching down the field in peak mid-season form with new heroes and rivalry storylines emerging, while the MLB is rounding third and sliding home towards another fantastic World Series finish.
However, if you’re an investor in the sports media and entertainment technology ecosystem (which I’ll abbreviate as “sports VC” or “sports investor” below), the last few seasons haven’t seen a lot of home runs. In fact, the list of sports unicorns — private companies valued over $1Bn — is really limited to Fanatics, MLB’s spin-out BAM Tech, and if we expand the definition to fitness & wellness, Peloton. For years, most Silicon Valley generalist VC funds have steered clear of sports investing for fear that small addressable markets lead to small venture outcomes.
I’ve been fortunate enough to have ringside seats to the evolution of the sports investing ecosystem over the last half decade, first on the league side at the NFL and later as an adviser and investor at Houlihan Lokey and MSG respectively. Though it’s been an interesting, frothy time for sports investors, I must confess that I am still bullish on investing in the sports ecosystem today, counter intuitive though it may seem.
That’s because I believe the opportunity for the successful sports investor will not lie in chasing the same $1Bn+ businesses as everyone else but on identifying opportunities that can cost-effectively scale to ~$100M exits, and providing the most value-add at the early stages to help get them there.
Let’s take a look at a few reasons why the sports industry may be uniquely qualified for such a non-traditional investing approach:
Backing the Business of Fans and Communities
To understand why a more refined approach to sports investing could work, we need to define what makes sports special and what the business of sports is really about:
Bringing passionate communities and fandom together around a shared interest or experience.
Professional teams, leagues, traditional networks and brands alike are eager to reach communities of tech-savvy millennials and Gen-Zs. As this younger cohort has aged into prime spending years, their affinity level for traditional sports and susceptibility to TV advertising has declined in favor of other media. Average viewership age for the big four US sports now sits in low-40s or high-50s which is not the key demographic brands are hoping for.
No wonder that after decades of fighting sports gambling for fear of tarnishing “the integrity of the game”, leagues were first in line to stick out their hands for revenue-sharing following the state-level legalization of sports betting, while also hoping gaming and betting will be the next great way to re-engage younger fan communities around their sports.
On a practical level, communities also have the added benefit of building powerful network effects which over time should bring down the spend to get new users. Leaning into this fact sports investors have expanded their arenas to include fitness & wellness where passionate communities gather around their celebrity instructors, to new forms of mobile media that turn viewers into commentators and micro-influencers, as well as to esports & competitive gaming concepts that growing avid fanbases exponentially year-after-year. To invest in sports is to understand that communities will play an critical role in the future of this ecosystem.
Taking The “Farm Team” Approach
“Name of the game is ‘get on base’. You get on base, we win” — Billy Beane Oakland A’s GM
Reviewing the data on investor interest in sports, we can see a concerning trend emerge. 2013 into ’14 represented particular inflection points in the sports ecosystem and marked key financings for some of the most recognizable brands we see today, including Classpass, DraftKings, Peloton, SBNation owner Vox Media, each of whom have gone on to raise $250M+ over their respective tenures. More recently, however, we’ve seen sports follow the rest of the venture world as the number of deals has declined overall while the capital into each deal has gone up significantly and the corresponding traction necessary to raise subsequent rounds gets higher by the day.
This confirms what early-stage investors know anecdotally — it’s never been easier to raise a Seed round, and never been harder to raise the Series A. If the Seed round is getting an at-bat, then the Series A is getting on base. Capital will always follow the opportunity and for new sports-centric funds that have emerged in the last few years, this opportunity has come from generalist VCs largely ignoring prospective outcomes under $1Bn, although the overall VC bias against sports is changing.
Just in the past year or so, Andreessen Horowitz invested in Overtime, Founders Fund and Comcast Ventures invested in The Athletic and Scripps & Fox backed FuboTV. That’s not to mention the active flow of venture dollars into fitness equipment makers like of Peloton, Tonal, Mirror and more. Important to note that most recent deals involving generalist or strategic investors were either growth rounds or larger Series As. To me that says, an early-stage company built around sports and community, now more than ever, has avenues for funding further “up the stack”, and the real opportunity for a sports investor to drive returns lies at identifying and investing at seed stage.
Like a farm team manager, a good early-stage investor can help a company scale to hit the right level of traction in the right amount of time before raising from the “big league” investors. Even the smallest of sports funds can provide outsized value by opening new customer or partner relationships, providing access to their teams or venues to pilot new products, and advising founder on best practices for building lasting network effects. Therefore, the worry should not be about the amount of capital, but rather whether the help that accompanies this capital, is most effectively allocated to the company’s goal of growing and engaging passionate fan bases and communities.
Getting The Right Free Agents On The Roster
“No one goes there nowadays, it’s too crowded” — Yogi Berra
When it comes to worrying about sub-optimal returns from too much money in the ecosystem, don’t tell that to the growing number of professional and retired athletes involved in technology investing. Though I’ve actively bemoaned this influx in the past, many athlete-investors I’ve met over the last two years have taken to the venture investing playbook well and most have partnered with experienced VCs to learn from valuable first-hand expertise, which is a positive sign. In employing this new strategy for investing in the $100M sports exit, I actually think athlete-investors can play an important role.
Traditional funds by nature will be disinterested in a singles-and-doubles approach as VC economics force them to swing for 10x returns. Athletes, however, aren’t beholden to this threshold because they invest from their own “balance sheet”, not from Limited Partners (LPs). Naturally, athlete-investors present more outsized value to sports companies than to most others in their portfolio.
For the current or retired athlete, their sports industry relationships, their professional and social networks, and their “celebrity” can and should be part of the strategic value they bring to help these investments build, scale, and acquire customers cost-effectively. We always ask companies we invest in: “What is your unique advantage?” Likewise, every athlete-investor should ask themselves this same question about how a company could benefit from their investment and involvement.
Two Minute Warnings For Founders
“If we play like the Yankees in here, were gonna lose to the Yankees out there” — Billy Beane, Oakland A’s GM
Though much of this piece has been about the investor’s mindset, I wish to offer two final notes critical for sports entrepreneurs employing a singles-and-doubles strategy:
1. Careful of How Much You Raise: Once a high-flier, FanDuel is now a cautionary tale for entrepreneurs on the dangers of raising too much, too quickly, and how founders of a billion dollar business can walk away with nothing at exit (see: Semil Shah’s note on preference stack for more detail). Most growth capital, especially in consumer businesses, gets shoveled into Facebook or Google for growth marketing creating more need for venture capital that sets a higher threshold for a successful exit.
The unsaid benefit of building a business in sports are the already passionate fan bases which your product should engage and delight. If you’re building and growing a sports business mostly off of paid marketing dollars, you’re missing the point. Differentiate your product, even in how people find out about it, and create ways for your customers to be rewarded for sharing their passion with other soon to be users.
2. Be Careful Who You Raise From: When it comes to athletes, teams, or corporate investors trying to invest, every single one will promise the world on strategic support and key introductions — not that dissimilar from generalist VCs touting “platform services” as they vie for a spot on your cap table. Very few actually come even close to providing what they promised.
This has been less concerning at the later stages but as these investors move down the stack to fund early stage companies, the founders should probe the true willingness of the investor, team, or entity to actually help the company before the investment (and do VC reference checks with other founders!), lest you add nothing more than a logo to the cap table.
I’ll leave you with the example of two daily fantasy companies acquired by PaddyPower Betfair. The first was Draft who raised around $5M before selling to PPB for $48M in 2017, wherein the founders and employees made a respectable, if not life changing, return. The second was FanDuel who raised $438M and later sold for $465M where the founding team and early employees left with nothing. Circumstances that led there aside, who would you rather be today?
Stop looking at every sports business for a $1Bn exit. In doing so we force each of them to inflate their addressable markets and take unsustainable amounts of capital to achieve these thresholds. Frankly, there aren’t even that many billion dollar acquirers for sports businesses and I for one reject the notion that this is an all-or-nothing market.
From fitness and health, to new media networks, to live mobile gaming, to Esports, I’m genuinely excited for the sports world to continue to broaden its engagement with technology over the next decade. As an investor I want to support customer-obsessed companies that understand that cultivating passionate communities around shared experiences on the way to an actual successful exit, even if its not a $1Bn, is the real trophy worth playing for.
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Please follow @JayKapoorNYC and @LaunchCapital on Twitter for up-to-date insights on sports VC and related topics around building communities, consumer behavior and technology investing!
