Ernst & Young recently determined venture-backed U.S. companies raised $64 billion in Q1 2021. The record-setting quarter comes on the heels of a record year in 2020 (despite the pandemic) and three straight years of at least $100 billion in venture funding. The flood of investment capital pouring into startups has—and should continue to be—a boon to the sports sponsorship business. Block Six Analytics CEO Adam Grossman explained: “As venture [backed companies], particularly over the last couple of years, have been successful at raising funding, obviously they’ve started to deploy capital. That has led to [a slew of new] companies entering sports partnerships for the first time or significantly increasing their investments.” Those investments have come in new sponsorship categories, and some of the more traditional ones typically dominated by mature companies.
Our Take: Historically speaking, teams and leagues inked marquee sports sponsorships with long-established, large corporations. But the rise in venture funding over the last several years has changed that. “Now it’s more companies that have [VC] money to spend, that are looking to build brand awareness,” Grossman said.
The trend of VC companies investing in sports began in earnest with Social Financial Inc.’s 2019 purchase of the naming rights to the new football stadium in Los Angeles (home of the Rams and Chargers). The FinTech startup agreed to pay more than $30 million/year over the next 20 years for the high-profile opportunity. “That deal sort of opened a lot of eyes given the massive investment they made,” said Ben Foreman (account director, Scout Sports & Entertainment).
Venture-backed startups were investing in sports prior to the pandemic (as evidenced by the SoFi and Allegiant Stadium deals). But the trend picked up steam in 2020 (in part because several new categories emerged), and it is expected to continue with the pandemic now largely under control in the U.S. Foreman predicted that “the emergence of all these tech brands and new categories as our physical and digital worlds blend together” will help the gravy train continue to roll. Remember, traditional sponsors are also looking to increase sponsorship spend now that the economy has bounced back. That combination could certainly drive the cost of sponsorship assets up.
There are several reasons why venture-backed companies are investing in sports. For starters, they have money to spend. As Grossman explained, “When a company takes venture capital, it typically does so to maximize brand awareness, acquire customers and maximize revenue generation.” And in the wake of the SoFi deal, more and more VC-backed companies view sports as a platform they can use to authentically engage their core customer base at scale.
There is strong overlap between the sports fan demo and the target customer of venture-backed companies. Sports fans “can be younger and more diverse [than the average consumer]. And even from an income perspective, they can be on the poles in terms of being more affluent and potentially less affluent.” While traditional categories like automotive and insurance may not always highly value the lower-income fan, “in an emerging category like FinTech, having access to a less affluent demo, one that traditionally hasn’t had access to banking services, [can be attractive],” Grossman explained.
There is also trust, credibility and the perception of stability to be gained from a sports sponsorship. Foreman believes that has largely driven sponsorships within the cryptocurrency category. “[The logic is] if the team trusts this brand, then I can trust them too. We saw this with FTX coming to the Miami Heat.” The crypto exchange did a 19-year deal (worth $135 million) to acquire the naming rights to the NBA team’s home arena. The length of the deal helps communicate to consumers that they plan to stick around for the long haul.
While VC-backed startups are taking a closer look at sports sponsorships, teams and leagues are also making a more concerted effort to facilitate deals in emerging categories than they have in the past. They realize these companies are often a better fit for their partnership, and there are simply fewer mature companies interested than there used to be. “Venture-backed startups are the types of companies getting the most value from these deals—particularly on larger [assets] like stadium naming rights and jersey patches. More established companies may not get as much out of [a high-profile sponsorship] as a newer company looking to establish brand awareness,” Grossman explained.
Teams and leagues are “seeing upticks in demand for examining partnership investments” from companies that haven’t traditionally been on their radar, Grossman said. “Whether it is in newer verticals [like neobanks and crypto] or more traditional categories [like ride sharing, food delivery and e-commerce], businesses that people haven’t heard as much about are looking at sports sponsorship.”
SoFi’s apparent success leveraging stadium naming rights to achieve their revenue and brand goals (including the public listing) has no doubt contributed (along with the increased adoption of products and offerings, and near record level venture investment) to increased interest from the FinTech community. Chime, Robinhood, Cash App, Q2 and Klarna are all examples of venture-backed FinTech startups that have increased or are currently growing their profiles with investments in sports. But they are not the only ones. Grossman said at least eight of the top 20 most valuable venture-backed companies in 2021 (according to Pitchbook) are actively engaged in sports partnerships or media investments.
In theory, there is some additional risk associated with a team or league doing a deal with a less established brand (as presumably they are more likely to become insolvent). But as Grossman reminds, “we’ve seen over the course of history even companies people thought were well-established went out of business. Enron, of course, being the most famous example.” Liquidity risk is inherent in doing corporate partnership deals.
Of course, there may be less risk in doing a deal with a funded startup today than there was in the past. “These companies have shown they are capable of raising more money,” Grossman said, “and there is more capital available in private markets now, particularly given the influx of money into VCs and private equity.”