Spurred on by the coronavirus outbreak and subsequent shelter-in-place orders, 2020 was a banner year for the video game sector. So, it wasn’t surprising to learn Digital Development Management reported investors placed a record $13.2 billion behind gaming companies last year (+77% from 2019). But the rising tide did not lift all ships. Esports teams and leagues received little interest from the investment community in 2020 despite the additional exposure received during the sports hiatus.
Our Take: Bitkraft Ventures founding general partner Jens Hilgers (he’s also the co-founder and chairman of G2 Esports and was the founding CEO of Electronic Sports League) said the early returns—or lack thereof—from team/league stakes, combined with the downward pressure on revenues as a result of the pandemic, explain the lack of investments made in 2020. “Overly ambitious expectations [set in 2017 and 2018] kind of led to [investors asking] where is the growth in revenues at the end of 2019 and into 2020.”
The unrealistic expectations of early esports team/league investors are the product of “hype driven by mainstream exposure (see: news of sold-out arenas, high-profile television coverage) and FOMO. There was this expectation that esports [leagues] would become, over a fairly short time period, the next NBA or NFL, and investors got ahead of themselves,” Hilgers explained. They invested too much money at too high of valuations.
For what it’s worth, it wasn’t just esports team/league investors who overestimated the opportunity. Epic Games disclosed they overshot the mark by $154 million. George Washington University professor and Esports and the Law editor in chief Ellen Zavian suggested the industry’s reliance on self-serving data and anecdotal evidence might be to blame for a portion of the overvaluations.
Underlying the market conditions Hilgers described circa 2017-2018 was the formation of entities “like Overwatch League, which positioned [themselves] as building the NFL of esports.” In doing so, they appealed to and managed to draw in the traditional sports investor (see: Bob Kraft, Jeff Wilpon).
But as the G2 Esports executive explained, “Overwatch League so far didn’t turn out to be a particularly successful league” (in large part because the game itself is not particularly popular as an esport). Early investors have since begun to second guess their investments—and the esports business in general. To date, there has not been a single large exit of a premier esports franchise (there have been several mergers and smaller team buyouts, and two teams went public via an IPO, including David Beckham’s Guild Esports). It’s worth noting no new major franchise slots have been made available within the last two years, either.
The lack of early success certainly dampened investor interest over the last 18 months. But 2020 also wasn’t a particularly good year for the esports business. While the video game sector set an all-time sales record (NPD Group pegged software, hardware and accessory sales at $56.9 billion), esports teams—especially those in leagues which model themselves after traditional sports (like OWL)—struggled to deliver on sponsorship value. Remember, while these are online games, “Professionally the circuit is played offline,” Hilgers noted. The absence of such high profile events didn’t just lessen the viewing experience, it torpedoed a portion of sponsorship revenues. “[The live events] part of the business just went away entirely, slowing down esports [as an industry] last year,” Hilgers said.
But with some strong industry tailwinds (including the fans return to the arena) and a reset in investor expectations, the Bitkraft Ventures founding general partner believes “we’ll probably see some stronger financing again later this year; we’ll see more money pouring in again [beginning in H2 ‘21].” He said the mentality among early esports team/league investors has evolved from: “‘Hey, we should be careful with this, it’s not exactly what we expected,’ to, ‘We might have been ahead of ourselves in terms of expectations.’ [Revenues are] actually growing nicely for the top tier teams (at least on a margin basis).” Hilgers pointed out that “the good leagues continue to gain viewership and popularity. There are [also] more games moving into esports and showing future promise” (giving him another reason to be optimistic).
In addition to the shift in investor attitudes, esports teams are realizing they may have gotten ahead of themselves in their projections and are finding themselves in a position where they need to raise more capital. So, there should be more opportunities for investment than there were last year.
There is also likely to be a larger pool of investors looking at esports teams and leagues by the time H2 ’21 rolls around. At least a dozen SPACs included references to esports and/or video gaming in their mission statements, and those already invested in esports teams, who were preoccupied with their core businesses during the pandemic (see: pro sports team owners), should be able to double down on the opportunity as stadiums return to capacity this summer. Of course, that assumes they still believe their investment thesis was correct and that the timeline was simply off.
Hilgers falls into that bucket. “The revenue growth of the premier esports teams is looking stronger than the average revenue growth of premier teams in traditional sports over the last 10 years,” he said. “So, if I just look at that and draw a line, I think it’s pretty clear esports teams will over the next five to 10 years continue to catch up to teams in premium sports.”
One of the reasons esports team revenues have been climbing is because they are starting to meaningfully monetize the in-game experience. “Esports teams are finding better ways to deploy in-game,” Hilgers said, “and that revenue stream opening up to a larger extent is quietly guiding [the growth] and creating additional excitement [in the space] again.”