EIEIO…Clear Eyes, Full Heart, Can’t Lose

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EIEIO Newsletter

12 min readJan 23, 2023

By: Michael Moe, CFA, Owen Ritz

“A coach is someone who tells you what you don’t want to hear, who has you see what you don’t want to see, so you can be who you have always known you could be.” — Tom Landry

“Football is a game designed to keep coal miners off the streets.” — Jimmy Breslin

“You go to college to get an education. I don’t like the transfer portal…all you are doing is transferring the address of your problem.” — Lou Holtz

Last Fall, 1.1 million high school students played football.

The ones that were captain of their TEAM, All Conference and/or All State might get a chance to play college football. There are nearly 25,000 High Schools and 65,000 College Football players. So on average, a typical school might have 2 or 3 graduates competing at the next level over 4 or 5 years. There are roughly 10,000 Division 1 football players on 135 teams.

The worst of those 10,000 players was likely the best player their high school had in the past decade.

Of those 10,000, a mere 256 will be selected by the 32 NFL Teams this Spring…think about that when you are screaming at a player for their ineptness. Just because a player gets drafted, doesn’t mean he will make the TEAM. And even if he does make the final roster of 53 players, the average NFL career is 3.3 years.

By the way, despite realizing their dream, nearly 80% of former NFL players have financial difficulties after retiring, with 16% filing for bankruptcy.

To state the obvious, people are passionate about football and it’s a huge business. In 2022, 92 of the 100 most watched TV programs were football.

Accordingly, the television contracts for Division 1 conferences are jaw dropping. The Big 10 (which with UCLA and USC joining is actually the Big 16) received a $1.4B deal that will provide each school $190M per year. The NCAA Football Championship will pay each school $608M.

Moreover, the “Flutie Effect” has been a phenomenon for 40 years, where a successful football team or basketball team has resulted in a huge uptick in new student applications. Ditto for alumni donations.

Maybe all that is to say, that the current disruption in College Sports of NIL’s (Name, Image and Likeness) and the transfer portal are a great thing… let athletes get what they can, while they can.

After all, the universities are making a boatload from college sports off of these athletes, with $14 billion directly going to the various institutions annually (95% comes from football and basketball)…The NCAA receives a $1 billion kiss a year.

Advocates for the changes are right that an ordinary student would have the right to make money off of their ability to get paid for promoting a product as many social media influencers do, but that’s missing the point of what a student athlete gains in terms of the overall experience and what the clear abuses of the new system have created.

Looked at a different way, if the reason an athlete went to college was to prime themselves for a pro career, it’s mathematically delusional at best. And if a retired NFL player has trouble managing money, how do you think an eighteen year old will do away from home? And what happens after the money is blown and the time spent in college was wasted?

Texas A&M had two #1 recruiting classes in a row which was rumored to cost the Aggie “Collective” $25 million. The result made a mockery of the concept of “student athlete” but fittingly, the 5 wins with 7 losses on the field showed that maybe money couldn’t buy happiness.

On Thursday, 5 star QB1 Jaden Rashada got released from his commitment to be a Florida Gator next fall when the “Gator Collective” reneged on its $13 million NIL Deal. Florida Coach Bobby Napier pleaded ignorance to the whole situation, which of course happened without any of his knowledge but one must ask how felt about an incoming freshman making nearly twice as much as he was (definitley would have been .

Later that day, California Representative Chris Holden proposed the “College Athlete Protection Act” that would require major money generating college teams to create a fund that would pay players a share of the annual revenue from a sports TEAM. 50% to the school, 50% to the players less scholarship cost.

As an example, for USC which had $50 million in football revenue in 2018 according to its filing with the U.S. Department of Education, it had scholarship cost of $6.8 million resulting in a distribution to players of about $18 million. With 85 scholarship players, this would be about $210K per player. (You might ask what do the non scholarship players get?).

NIL’s combined with the transfer portal have resulted in a chaotic college football environment with the advent of effectively “free agency”. If you don’t like your deal, don’t like how your coach looked at you at practice, are unhappy about the jersey number they gave you, a player can now go to the Transfer Portal and see what the market tells them. So far, over 1,300 players have put themselves in the Transfer Portal for the 2023 Season.

You carry this forward to it natural conclusion and I see two possibilities.

1). Universities sponsor affiliate sports teams like Emirates pays $70 million euros a year to have its name on Arsenal jerseys. Effectively, college sports becomes the minor leagues for professionals and give up the fantasy of the student athlete.

College basketball has served as the de facto minor leagues for years with the “one-and-done” reality of many of the “top programs.” The University of Kentucky has made this an art form, with Coach Calipari has coached 8 NBA All-Stars who played 1 year at Kentucky and then went on to the NBA. Kentucky signed Coach Calipari to a “lifetime” contract in 2019, and his buyout is $52 million.

2). College Sports Departments get “privatized” with outside investors helping monetize the embedded assets. Few universities have significant endowments like Harvard, Yale or Princeton and privatizing sports departments could be a way to change the game for less endowed institutions.

The data is even more eye-opening when you look at endowment per capita. 9 US universities have an endowment greater than $2 million per student. Meanwhile, the country’s largest university, Arizona State University, has 150,000 students and an endowment of $1.25 billion, which works out to an endowment per capita of ~$8,333.

ASU — voted the country’s most innovative university the past eight years in a row — has “spun out” part of its offerings to compete with its well-endowed peers. In 2019, ASU announced a partnership with TPG’s Rise Fund to launch InStride, a workforce education platform. Later that year, ASU partnered with Cintana to launch the ASU-Cintana Alliance, a network of global universities powered by IP that ASU had created internally. The objective is to create economic value from an existing asset that ASU had already created.

In this Brave New World, it wouldn’t surprise us to see universities privatize their athletic departments. Other institutions could follow ASU’s footsteps and privatize their sports departments. College sports teams have business models that make any private equity firm swoon. They have natural scarcity, fervent fan bases, predictable revenue streams, and lots of opportunties for margin expansion. And while private equity funds are swarming pro sports leagues for opportunties, college sports remain an untapped opportunity.

While I think this scenario is possible and maybe even probable, I really hope this doesn’t happen. I think it’s not just a disaster for College Sports, or the student athletes, but for society at large.

Done right, student athletes get an experience that can’t be replicated by any class, club, or community on campus. They get extensive support, exposure to success, and a friend group that’s often the most diverse group on campus — not to mention a scholarship worth $250k+ for many athletes.

The biggest opportunties for most student athletes aren’t on the field — they’re in the classroom, courtroom, and boardroom. 90% of Division I athletes earn a degree within six years, while less than 60% of students at 4-year colleges have earned a Bachelor’s degree. 95% of Fortune 500 CEOs played sports, while 90% of women CEOs played sports.

Last October, The National Football Foundation formed the NFF Education Committee to promote the best strategies and tactics for excellence on the field and the classroom.

My perspective is shaped by the experience I had at the University of Minnesota where I was a quarterback. Growing up, I never thought my family was privileged, going to college was expected but we didn’t go on any fancy vacations…I thought you needed passport to go to Wisconsin. I remember one Christmas receiving a beige button down shirt for the big present.

But, when I got to the University of Minnesota, with my TEAMMATES, I felt like I was a Rockefeller. Most were minorities, and with almost all of them, they were the first in their family to go to college. I had TEAMMATES who had bullets that were lodged in their bodies, and few of them had been exposed to successful business people.

My early days at Minnesota were a disaster. Nobody on the TEAM went to class. Huge racial issues. Huge drug issues. And not surprisingly, we were awful on the Football field — literally being the worst Division 1 program in the Country. We lost to Rice. We lost to Northwestern when they weren’t any good. We lost to Nebraska 84–13…and it wasn’t that close.

In fact, when Lou Holtz was brought in to be the Football Coach, he famously said, “when the recruited me, they told me that we only lost to Nebraska by 11…nobody told me that was 11 touchdowns!”

When Coach Holtz’s regime began, it was like somebody flipped it switch things turned so dramatically. You were required to go to class, participate and get a note from your professor that you were active in class every week. We had to take drug test and if you failed once, you got help. Twice and you were gone. Color disappeared between your TEAMMATES. Coach Holtz brought in successful people to tell their story. We all got great summer jobs getting real experience as opposed to getting paid to watch a water sprinkler. And we won a bowl game with the same cast of characters that were the worst TEAM in America.

A couple of the players on that TEAM went to play in the NFL (CNBC Fast Money’s Pete Najarian was a pro for 7 years) but the real moral to the story is what that group has done in the past forty years. Successful business people, government officials, coaches, lawyers and media personalities. All which were made possible by that student athlete experience many years ago. Done right, the scale impact can be enormous.

GSV’s North Star is to ensure that everybody has an equal opportunity to participate in the future. At its best, college sports is a bridge for providing that. While getting a few thousand bucks to post on Instagram may seem like a good deal, it’ll be worthless in the long run if it comes at the expense of the intangible benefits of the student athlete experience — the friendships, experiences, and opportunties that don’t just last for four years, but for the rest of your life.

Market Performance

U.S. stocks were mixed in the Holiday shortened week with Dow falling 2.7%, the S&P 500 off .7%, but the NASDAQ gaining .6%. Year to date, the NASDAQ is up 6.4%.

Inflation has been coming down for the sixth month in a row, with CPI at 6.4% in December. On the flip side, retail says were below expectations off 1.1%. Additionally, last week Microsoft announced the layoff of 10,000 workers and Google announced it was letting 12,000 employees go.

Earnings season has begun with 11% of the S & P 500 having reported slightly worse than “normal”. As of now, 69% of the companies that have reported have “beat” analyst estimates where over the past 10 years, 73% of companies typically exceed forecast, with year over year earnings decline of 4%.

A bigger story that should be getting more attention is China, which for the fourth week in a row had positive stock performance up 2.2%. The Chinese New Year (Year of the Rabbit) will have markets closed until Monday, January 30th.

It’s too early to claim victory, but two calls that we made for 2023 were a rebound of Bitcoin and the reemergence of China. Bitcoin is up 36% YTD, while the Chinese Internet ETF has nearly doubled since we published Broken China? in October 2022.

We are more optimistic than we’ve been for over 1.5 years on the outlook for growth companies and year to date, our growth portfolio is reflecting our optimism with it advancing 12.1%.

GSV’s Four I’s of Investor Sentiment

GSV tracks four primary indicators of investor sentiment: inflows and outflows of mutual funds and ETFs, IPO activity, interest rates, and inflation. Here’s how these four signals performed this past week:

#1: Inflows and Outflows for Mutual Funds & ETFs

Source: Yardeni

#2: IPO Market

While the IPO Market remains on pause, there are a few companies that could help break the logjam: Bytedance, Shein, and Starlink.

Source: Renaissance Capital

#3: Interest Rates

Fed officials continue to play a game of “he said, she said” on potential rate increases. New York Fed President John C. Williams said that rate increases have a ‘ways to go,’ while notorious hawk Fed Governor Waller said that rates may be “close” to sufficiently restrictive. We’ll see whose words carry the most weight in the coming months.

Source: Barron’s

#4: Inflation

Larry Summers said this week that the “greatest tragedy” for the global economy would be if central banks don’t finish the job on inflation. Summers warned that a 1970s-style stagflation crisis could reappear if the Fed prematurely pauses rate hikes. History never repeats itself, but it does often rhyme…