Esports market shows first signs of maturity
Direction of esports funding and exit opportunities suggest esports market is slowly maturing
VC ecosystem remains resilient amidst pandemic
2020 will be remembered by many as the year when the world went into a lockdown, faced a global pandemic and coped with economic uncertainty and volatility. As the year comes towards an end, we realise that the venture capital and start-up ecosystem has proven quite resilient. According to Pitchbook, US VC deal activity in Jan-Sept 2020 stands at 223 deals for a total value of $53.2bn vs FY 2019 242 deals for a total value of $55.3bn (Pitchbook Venture Monitor, 2020). Fundraising remained even healthier with US VC funds raising total capital of $56.6 billion across 228 funds in Jan-Sept 2020, already surpassing the $54.9 billion capital raised in FY 2019 (Pitchbook Venture Monitor, 2020). Finally, the year had a slow start in terms of exit opportunities, but quickly recovered in the second half mainly driven by public listings of tech unicorns (examples include Snowflake, Asan, Unity, Palantir and others).
Overall, it is fair to conclude that the recent pandemic situation has not only driven numerous early stage ventures into financial distress, but also created a lot of new opportunities. To name a few, digitalisation across SMEs was accelerated, telemedicine adoption was encouraged by favourable regulation and robotic process automation was rigorously applied to industrial and logistics processes to facilitate business as usual while limiting human contact.
Among all favourable trends, it is hard for one not to mention the esports phenomenon observed in the past year. In 2020 we saw the first three signs of the esports market slowly approaching maturity: i) increased interest from mainstream investors, ii) shift of funding towards business models which target monetisation and iii) increase in mega rounds and exit opportunities.
Esports growth potential attracts investors
It is very difficult to ignore the esports investment opportunity. While previously the sector attracted mainly investments from esports-specific VC funds (Bitkraft, Play Ventures, Makers Fund and London Venture Partners), currently it is common to find an esports target in the portfolio of most VCs. According to Pitchbook, the top 10 VC investors in the mobile gaming industry include some of the most active VCs such as Accel (16 deal counts), Sequoia (15) and Andreessen Horowitz (10) (Pitchbook, 2020).
To quantify the esports investment opportunity, the global gaming market in 2020 is about $159bn ($200bn in 2023), global esports revenues (a subset of the gaming market) in 2020 are about $1.1bn ($1.6bn in 2023), and global esports audience in 2020 is estimated at 495m (646m in 2023) (Newzoo, 2020).
Overall, the global esports market is growing twice faster than the global gaming market, but still represents less than 1% of it, suggesting the industry has a high growth potential. The recent pandemic accelerated esports market growth and we expect tailwinds such as an increase in audience and active streamers to carry over to the next year.
Shift of funding from game developers and publishers to other stakeholders
A few years ago, the investment thesis in esports was always revolving around the next big game developer or publisher. Investors rushed towards funding game developers with the hope of finding the next global game mimicking the success of League of Legends (published by Riot Games), Star Craft (Blizzard Entertainment), Fortnite (Epic Games) or Counter Strike (Valve Games). Therefore, it is no surprise that the most funded esports business models (in terms of total rounds and raised capital) in 2011–13 were game developers of MOBA (multiplayer online battle arena) and FPS (first-person shooter) games (Tracxn, 2020). As the esports industry became more mainstream in 2014–17, venture capital was shifted towards funding league organisers and live-streaming broadcasters, which became the new top funded business models (Tracxn, 2020). Once the infrastructure of the industry was created, private capital shifted once again to focus on funding player organisations which employ and train professional teams to complete. Player organisations was the most funded business model in 2018–19 (Tracxn, 2020).
Overall, game developers and publishers have attracted c30% and broadcasters and league organisers c45% of total funding since industry inception (Tracxn, Rocket Capital, 2020). Going forward we expect VC investors to focus on funding companies and business models which target monetisation such as fan engagement, betting, real-money gaming and in-game advertising, which is another sign that the industry is maturing.
Increase in mega rounds and exit opportunities
In the last couple of years, we observed a few trends in esports fundraising, which suggest that the industry is maturing. Based on the latest data in Dealroom, the global gaming industry has seen a significant decrease in funding rounds in 2020 (273 vs 518 in 2019), while the total raised amount almost doubling yoy (€3.8bn raised in 2019 vs €5.6bn in 2020). This is mainly driven by a significant increase in mega rounds (capital of more than €100m) in the last two years (Dealroom, 2020).
Overall, the average funding per deal has increased from €4.7m in 2014 to €20.4m in 2020 (Dealroom, 2020). Among the mega rounds this year are Tencent-led $100m Series B investment in VSPN, MPL’s $90m Series C round and Sony’s $250m investment in Epic Games, followed by another Series E round for undisclosed amount. Naturally, as we see more late stage fundraising, there have been more exit opportunities. Out of the 969 esports companies covered by Tracxn, overall there have been 75 exits in the industry (11 public and 64 acquired) (Tracxn, 2020). Despite the short IPO window in 2020, we have seen some of the biggest esports IPOs — Unity Software ($13.7bn valuation), Corsair Gaming ($1.3bn) and Guild Esports ($52m), with Roblox expected to close by the end of the year (around $8bn). As the industry showcases more successful, viable exit opportunities, we expect to see increase investor interest going forward.
Excited about esports opportunities going forward
We at Rocket Capital believe that esports is only at the infancy of its growth and monetary potential. We expect tailwinds from the current pandemic situation to carry on in the next year, presenting numerous opportunities for investors, as the industry continues its path towards maturity.
