It was recently reported that FaZe Clan Inc. will go public through a merger with B. Riley Principal 150 Merger Corp. (NASDAQ: BRPM), a SPAC sponsored by the investment banking firm B. Riley Financial Inc. The deal, which includes a $118 million PIPE investment and could net FaZe Clan as much as $291 million in growth capital, values the combined businesses at roughly $1 billion, making the company the first esports franchise unicorn.
Relative to sectors like sports betting and NFTs, there has been little investment activity within esports over the last 18 months. So, the implied valuation may be staggering. But FaZe Clan is much more than an esports team, organization or franchise. It is a digitally native lifestyle and media brand rooted in youth culture—one with a robust content arm, a meaningful brand sponsorship business, an emerging IP engine and a coveted audience. If the investment thesis sounds familiar, it is because FaZe Clan is largely following the same formula as another new age lifestyle and media company, LeBron James’ SpringHill Company—a business that recently raised nine figures at a $750 million valuation.
JWS’ Take: To be clear, FaZe Clan has an esports business; it operates teams across 10 games/leagues (think: Call of Duty, Rainbow 6, PUBG, CS:GO). But the bulk of company revenues (expected to reach $50 million in 2021 according to the company’s investor presentation, +32% YoY) do not come from the segment. Brand sponsorships and digital content have become its two biggest income drivers.
Faze Clan’s investor presentation referred to the company as “the voice of youth culture,” a characterization Jacob Wolf (chief reporter, Dot Esports) supported. A large portion of its talent roster is comprised not of competitive gamers but popular entertainers and influencers who create gaming content (Cardinals quarterback Kyler Murray and LeBron James’ son Bronny). “They are envied by a lot of the esports teams—even the successful ones, because they have this rabid fan base,” Wolf said. The lifestyle and media brand claims to have more than 350 million followers across social. The New York Yankees have fewer than 17 million.
For large brands and advertisers seeking a conduit to the 13-34 demographic (an audience increasingly difficult to reach with traditional media), Faze Clan presents an attractive option—80% of its fan base falls within the age range. McDonald’s, General Mills, Corona, Nissan, Beats by Dre and the NFL are among the blue-chip companies that have inked sponsorship or branded-content deals with the company.
Like SpringHill, Faze Clan is capitalizing on the insatiable appetite that currently exists for original content. B. Riley Financial chief investment officer Dan Shribman explained, “One of the many verticals [FaZe Clan is leaning into] is wholly owned content, which can be monetized in several ways on an ongoing basis, while still maintaining the ownership of the IP, which can be packaged in the future.” The company recently announced a tie-up with United Talent Agency to support its expansion into scripted and unscripted entertainment, podcasts and livestreams. FaZe Clan CEO Lee Trink said the company sees the greatest opportunity for growth in the expansion of its “in-house content business and IP creation.”
Shribman argues that Faze Clan’s direct connection to the fan base makes it unique. He says unlike other high-growth companies, the company has the ability to increase revenues without spending heavily on paid advertising. The SPAC executive cited fashion and “consumer products, gaming and—in the future—metaverse and related digital goods,” as some of the ancillary revenue streams the company is tapping into. The investor presentation points out that if Faze Clan were able to reach the same level as the other big sports leagues in monetization per audience member, it would represent growth of 10x to 200x existing levels.
Esports teams and leagues struggled during the pandemic, in part due to the inability to hold in-person events. But Shribman says the long-term prospects for the segment—and company—remain strong. The global video streaming market is expected to grow at a CAGR of 21% through 2028, and esports market research firm Newzoo projects the number of esports viewers to climb at rate of about 8% per year (there are currently more than 400 million of them worldwide). “We think esports is a hypergrowth market, and FaZe has the opportunity to take its gaming and esports base and convert that into a multifaceted, multi-vertical media platform,” Shribman said.
Due to its uniqueness and the fact that most publicly traded esports teams are small and micro-cap companies, there isn’t a great public comp. Shribman said you really “need to look at the individual verticals where FaZe is represented—merch, esports, content, NFTs/crypto, meta [to get a feel for its true value]. We view the company on the basis of the sum of its parts.”
But Wolf isn’t convinced the math adds up. The $1 billion valuation is “$300-$400 million more valuable than what Forbes called last year the most valuable esports team, TSM (which is owned by Swift Media Entertainment),” he says, noting the Swift business is “more diversified” and more “stable” (in part because they have tech products that drive consistent revenues) than FaZe’s heavily influencer-driven model. The thing with “these high-profile stars on the roster is you’re always one contract away from losing them.”
Sustainability aside, Wolf also has doubts about the business’ potential for long-term profitability—at least as it currently stands (the investor presentation shows the company does not currently make money and is not projecting to until 2023). “They are going to have to go out and buy, really aggressively,” he said. “They’re a successful media company… but I think they are going to have to go buy technologies, platforms, other things that will diversify their business.”
Trink mentioned M&A would be among the ways the company used the growth capital. He said it would “continue identifying new fresh talent and investing more resources into our current talent. We’ll also create a more expansive content engine, [develop] new intellectual property, [and expand] content formats such as longer form content and podcasts. Consumer products will also be an important area for growth, as we’ve had early success with apparel and non-apparel goods. And this is one of the areas where we see opportunity via acquisitions. And of course gaming will continue to be an important part of our brand, and we’ll be including more esports teams and looking at moving into new markets to expand globally with our proven U.S. business model.”
The few esports companies that are publicly listed have not traded particularly well of late (see: EGLX down ~50% since April, ASGRF down ~40% since February, GILD down ~55% since May, GMSQF down ~40% since July). While none of those names are as attractive as FaZe, Wolf doesn’t believe any of them should be public. “Esports is not mature enough [as an industry] to start having publicly traded companies,” he said. “The value proposition hasn’t quite been figured out. The reason they are [all] public is because private equity is drying up in a lot of instances, and this is a way to raise money.”