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The rise of esports investments A deep dive with Deloitte Corporate Finance LLC and The Esports Observer April 2019
The rise of esports investments | Contents
Contents
Image - TEO
Page 06 Page 22 Page 28
04
Executive summary
06
This publication contains general information only and Deloitte
Corporate Finance LLC and The Esports Observer are not, by
means of this publication, rendering accounting, business,
financial, investment, legal, tax, or other professional advice
or services. This publication is not a substitute for such
professional advice or services, nor should it be used as a Leveling up: the rise of
basis for any decision or action that may affect your business. esports investment
Before making any decision or taking any action that may
affect your business, you should consult a qualified Esports investment has made
professional advisor. significant strides in recent years
as traditional investors join
Deloitte Corporate Finance LLC and The Esports Observer
venture capital in exploring many
shall not be responsible for any loss sustained by any person
who relies on this publication. of the diverse investment
opportunities across the industry’s
Copyright © 2019 Deloitte Development LLC. All rights diverse ecosystem.
reserved.
01
The rise of esports investment | Contents
Contents
Page 32 Page 34 Page 38
25 29 34
The value of an esports Why Modern Times Group The rising power (and risk) of
investment: an investor view made two of esports' best influencers in esports
investments to-date
Many investors will find the strong By recognizing the shifting media As esports influencers continue to
expected growth trajectory of the environment early and putting its gain larger followings built on the
industry, potential for key investments into a position to social aspects of their
diversification, and unique capitalize on growth, MTG has entertainment value, the
customer base intriguing as they solidified its position as a major recognition of their brands in their
increasingly explore potential player within the rising esports own right may lead them away
esports investment opportunities. industry. from the structure of traditional
esports team organizations.
26 31 39
The value of an esports Late to the party: learning Dynamics of esports
investment: an investee view from the history of Heroes of Investments
the Storm’s esports initiatives
As the esports industry grows, Establishing a successful esports In order to best position
companies that invest in strategic league can offer its challenges, themselves to maximize potential
partnerships can obtain access to and these challenges are not the investment dollars, esports
a variety of tangible and intangible exclusive issue of the developer. companies should understand the
benefits that can help to fuel Industry players further different investors in the industry
growth, establish operational downstream who invest time and and the key questions they will
efficiencies, and drive market capital to participate can also face ask.
positioning. significant risk.
02
The rise of esports investments | Executive summary
Executive summary
$4.5B
80
70 68
USD invested 60
Number of investments
in 2018 50
40
34
15%
30
12% 20 19
20 16
56% 14
17%
10
4
0
Venture Capital Family Office 2014 2015 2016 2017 2018 Jan. - Feb. Jan. - Feb.
2018 2019
Private Equity Strategic
Number of investments in esports, 2014 – February 2019.(2)
Breakdown of esports investments
in 2018 by investor type.(1)
W
hile popular streamers such were only nine disclosed
as Tyler “Ninja” Blevins investments into esports
have dominated the public businesses from private equity
discourse on esports and gaming firms, relative to the eleven that
over the past year, an indication of took place in 2018.(4)
the staying power of the industry
and its future potential is the Interest among traditional
underlying story of investment investors to explore different ways
dollars into the space. to gain exposure to the industry is
indicative of the maturation of the
For esports, 2018 was a record industry and its growing
year in both number of mainstream appeal from an
investments and investment investor perspective.
dollars. Over $4.5B USD was
invested into the industry in 2018 The esports ecosystem offers a
alone.(3) While this headline variety of different investment
number is certainly significant, it opportunities across a range of
is the composition of these subsectors. Some are unique to
investors that also offers the industry, such as team
interesting insights. organizations, while others hold
similarities to other traditional
For the first time, traditional industries, such as consumer
private equity investors have products and event planning,
gotten involved in a meaningful which could be more palatable to
way. From 2014 to 2017 there investors entering the space for
03
The rise of esports investment | Executive summary
the first time. an investor lens with a focus on
several key specific valuation
A key merit of the industry is the considerations.
core demographics. In 2018 the
esports industry had a global fan The potential rewards (and
base of 380M with 37% risks) of an investment
representing males aged 21 to 35,
and 16% representing females After establishing the investment
ages 21 to 35.(5) In addition, in landscape in the prior section, this
the U.S., 61% of esports viewers section explores the potential
earn more than $50,000 per benefits and hazards of
year.(6) Investment offers partnerships for both investors
exposure to this demographic that and companies alike.
is increasingly averting its
attention away from traditional Through a series of articles written
media. by The Esports Observer
contributors, this section presents
With increasing focus by investors examples of some of the nuanced
and an attractive industry profile, issues to consider as one explores
this thought leadership seeks to esports for investment potential.
explore the current state of the
industry from an investor Dynamics of esports
perspective. investment
In doing so, this paper is divided Finally, the publication offers
into three parts: the rise of companies in the space an
esports investment, the potential overview of the positives and
rewards (and risks) of investment, negatives of partnering with
and the dynamics of an esports different investor types and a
investment. breakdown of key questions and
diligence areas they should
The rise of esports investment consider exploring before agreeing
to a deal.
The first section examines the
history of investment into the Overall, as the industry continues
industry up to today. More to grow and mature, investment
specifically it explores how interest from outside players is
different investor types have expected to be in lockstep. The
engaged with the industry, such goal of this thought leadership is
as venture capital and private to provide a starting point for the
equity, before ultimately analyzing discussion; offering both
the current state of the industry traditional investors exploring the
through five major subcategories. space for the first time, and
esports companies that are
These subcategories (team considering raising capital or
organizations, developers, event exploring a sale, some factors to
coordinators, media platforms & consider when contemplating an
advertising, and consumer investment in this dynamic, fast-
products) are examined through growing industry.
04
The rise of esports investments | Leveling up
Leveling up: the rise of
esports investment
Esports investment has made significant strides in recent
years as traditional investors join venture capital in
exploring the diverse investment opportunities across the
industry’s ecosystem.
T
he esports industry attracted Right now, there are uncertainties
over $4.5B USD in disclosed over the long-term viability of
investment in 2018, up from certain esports competition series,
$490M from the previous year.(7) and the revenue potential of lower
Interest is likely to increase with valued teams could stifle future
the introduction of more investment into the space. That
franchise-style leagues, the said, by far the most capital
centralization of esports teams intensive entities are those
(including management and building the infrastructure behind
support staff), and continued the industry: game developers,
growth in the esports audience— live streaming services, and
the latter in particular driven by a ancillary services (for in-game
greater awareness of esports and communication, player data, etc.).
other forms of live videogame
entertainment, within the popular
culture.
05
The rise of esports investment | Leveling up
06
The rise of esports investments | Leveling up
The esports gold rush years This greatly incentivized publishers venture capital firms. The high-
to support a competitive scene, and growth potential, limited operating
Competitive show matches have to develop professional esports history, and early instability of the
been part of gaming since its early competitions as marketing industry led to cautioned interest
days, but the onset of online and extensions of their products. “Free- from larger conglomerates.
local area network (LAN) support to-play” games, which originated in
began with packet-based computer Asia and were popularized in the There are a few key examples of
networking in the 1970s. Once west by League of Legends, largely mergers and acquisitions within the
further developed, this allowed for replaced the subscription model last decade that have had a
higher simultaneous player counts (used in games like World of measured impact on esports’
and team play, dedicated servers, Warcraft), and allowed developers acceleration:
and persistent user information (i.e. to justify the need to keep a game
▪ In February 2011, Chinese tech
win/loss records, rankings). Esports running for years, potentially
conglomerate Tencent Holdings
through the 2000s remained a high- decades—provided revenue remains
Limited (Tencent) paid $232M
cost consumer hobby, with the consistent.
USD for a 93% stake in League
global financial crisis, in particular,
of Legends developer and
limiting spending on PC gaming The simultaneous emergence of
publisher Riot Games, Inc. (Riot)
hardware.(8) At this time, options for dedicated online streaming services
—later acquiring the totality of
broadcasting competitions were also allowed esports to expand its
the company for an undisclosed
extremely limited, and monetization audience and support regularly
amount.(10) The game’s
was restricted to small batches of scheduled broadcasts. The resulting
professional competition in China
ticket and merchandise sales at live consumer brand interest in pro
is run as a joint venture between
events, which were held gaming competitions allowed a
Tencent and Riot. Tencent is also
infrequently. number of tournament operators to
an owner or investor in multiple
scale into sustainable enterprises.
esports game publishers,
The 2010s saw a growth in both This spawned a number of
including Supercell, Activision
online viewership and prize money tournament brands, many of which
Blizzard, Inc. (Activision
for esports.(9) If one imagines all were financially backed by global
Blizzard), and Epic Games, Inc
the stakeholders in the industry as “tech giants.” Examples included
(Epic).
“planets,” then this was a period of Samsung’s World Cyber Games, the
near perfect alignment. Game Boost Mobile-sponsored Major ▪ Amazon.com, Inc. (Amazon)
publishers began to transition from League Gaming circuit, and the acquired Twitch Interactive, Inc.
cyclical game releases to the Intel Extreme Masters. (Twitch) on Aug. 25, 2014, for
“games as a service” (GaaS) model, $970M.(11) This followed months
where revenue is generated Early team organizations, of reporting that Google LLC
continuously from competition organizers, and (Google) had reached a
microtransactions, rather than one- software developers were, and still preliminary deal to acquire
time physical and digital sales. largely are, backed by Twitch through its YouTube
subsidiary, for $1B.(12) In
subsequent years, Amazon’s
Target Investor/Acquiror Year Amount Category subscriptions services and
(USD) payment methods have been
Riot Tencent Holdings 2011 $93 Developer integrated into Twitch. The latter
Games(10) is used in microtransactions,
Twitch(11) Amazon 2014 $970 Streaming allowing esports operators as
well as individual streamers to
ESL(12)(13) MTG 2015 $78 Events
monetize their content.
MLG(19) Blizzard 2015 $46 Events
Entertainment ▪ In July 2015, Swedish media firm
Modern Times Group (MTG)
Astro(14) Logitech 2017 $85 Consumer Products
acquired a majority stake in
Cloud9(15) Valor Equity 2018 $50 Teams esports competition organizer,
content producer, and services
Discord(16) Tencent Holdings 2018 $150 Streaming
provider Turtle Entertainment
Roccat(17) Turtle Beach 2019 $19 Consumer Products (ESL) for $87M (it currently owns
82.48%).(13) In November of that
Notable transactions in the esports industry over the last decade ($ in millions) same year, MTG fully acquired
gaming festival company
07
The rise of esports investment | Leveling up
80
68
70
60
Number of investments
50
40
34
30
20 19
20 16
14
10
4
0
2014 2015 2016 2017 2018 Jan. - Feb. Jan. - Feb.
2018 2019
Number of investments in the esports industry, 2014 - Feb. 2019.(21)
DreamHack AB (DreamHack), recognized the maturation of the the predominate driver of
which also runs a series of esports industry and its potential for investment within the esports
esports competitions.(18) At the growth. While the highest individual industry over the last several years.
time these were among the investments in 2018 were raised by
largest investments by a private game publishers, streaming 2018 was a record year for venture
traditional media company into platforms, and software developers, capital investment, with 49
esports and signified the firm’s individual team organizations investments, double the number of
commitment to gaming as a (which typically recruit player investments in 2017.(20) In terms of
staple online video category. rosters across multiple games) also subindustries, venture capital was
raised significantly higher capital largely focused among media
▪ In December 2015, game than in previous years, with the top platforms & advertising (45%),
publisher Activision Blizzard five highest valued teams developers (31%),
acquired “substantially all” assets collectively raising over $150M in and team organizations (18%).(24)
of esports competition organizer disclosed funding rounds.(23)
and broadcasting network Major This is likely due to the pre-revenue
League Gaming (MLG), for Venture capital nature of many types of
$46M.(19) MLG continues to investments. These are largely tech
organize and broadcast As expected in any nascent focused investments with unique
competitions for Activision industry, venture capital has been concepts, such as BITKRAFT Esports
Blizzard game titles. In 2018, the
company created its own
Activision Blizzard Esports 60
Leagues division to
50 49
Number of Investments
commercialize its esports
properties, such as the 40
Overwatch League and Call of
Duty World League.(20) 30
20 15
With maturation comes
13
expanded interest 10
11
In the period following these high- 0
2014 2015 2016 2017 2018
value acquisitions, many investors
from industries adjacent to Venture Capital Family Office Private Equity Strategic
esports/gaming (i.e. sports teams
and entertainment companies) have Esports investment breakdown by investor type, 2014-2018.(22)
08
The rise of esports investments | Leveling up
Venture’s investment into Epics.gg, in a series A round at the end of developers (27%).(29)
a digital trading card platform for 2018.(27)
esports.(25) Private equity
Family office
Among developers, analytics has The esports industry experienced a
been a key focus area among Similar to venture capital, in the significant increase in private equity
venture capital investors with over early stages of an industry, such as investment in 2018.
40% of investments within this esports, family offices also provided
subcategory.(26) A unique significant investment. Private equity groups made 11
component of esports is the investments in 2018, two more
inherent ability to track a variety of Family offices include high net- investments than made over the last
data from games played. worth individuals or investment four years combined.(30) Unlike
vehicles that invest on behalf of an venture capital or family offices,
This data could be leveraged by individual or family. As they are private equity will typically require a
teams, looking to gain an investing their own money, family level of maturation in the underlying
advantage in competitive play, or offices typically have more business before investing.
among a game’s casual player base flexibility to take greater risk than
to beat their friends. traditional private equity investors. This can be seen in the types of
investments that private equity
One such example is the artificial Family office investments in esports made. The major categories of
intelligence (AI) analytics company, more than doubled in 2018, from 6 investment were Media Platforms &
Visor, a support tool for Overwatch investments in 2017 to 15.(28) Advertising (36%), Event
that can analyze gameplay in real In 2018, family office investments Coordinators (27%) and Team
time and provide in-game tips to were mostly made into team Organizations (18%).(31) Within
players. The company raised $4.7M organizations (33%) and these categories, there was a
Changing esports league structures may entice investors
The adoption of “franchises” and similar league structures may offer esports teams protection
from new entrants and investors comfort regarding their potential investment.
By Graham Ashton, The Esports Observer
Consulted by Tobias Seck, The Esports Observer
In the U.S., investors typically performance-based financial benefit introduced revenue sharing models,
make one of three plays: 1) private models for teams. or provided stipends for participants.
equity investments in an existing Growing sports property, and a team
esports team organization and/or League of Legends has integrated a brand that is appreciating in value, is
ownership group; 2) developing an partner team model into four one model traditional sports
esports division out of a pre- professional circuits (China, North investors are well used to. Cloud9, a
existing sports franchise; or 3) America, Europe, and Turkey), with multi-game esports organization
establishing an entirely new esports the prices and processes for entry with teams in both the Overwatch
team brand, usually as part of a differing between regions. The League and League of Legends
franchise league. Overwatch League has pulled in Championships series raised $50M in
franchise fees ranging from a its Series B funding round.(36) For
In 2018, multiple esports reported $20M-$60M for its first comparison, the average franchise
competition organizers either two years of operation and intends deal for a National Basketball
restructured their existing leagues to expand its team count from the Association (NBA) team during the
or built entirely new closed circuit current global 20 to an eventual 1980s was $58.25M.(37)
competitions.(34) Not all of these 28.(35)
competitions are “franchised” in the Competitions in lower-tier titles, While the viability of esports leagues
strict sense of granting partners the such as the Clash Royale League, as 10, or 20-year ventures is
right to own/operate teams in a Paladins Pro League, or national untested, the entry cost is so
specified location, but all feature PLAYERUNKNOWN’s comparatively low, and the target
buy-in fees, preclude any kind of BATTLEGROUNDS leagues have audience value so high, that dozens
promotion-relegation system, and either offered slots with of traditional investors have taken
introduce revenue sharing and comparatively lower entry fees, the bet.
09The rise of esports investment | Leveling up
$800 Developers
Media Platforms&
Advertising
$700
$600
$500
Investment Amount
$400
$300
Event
Team
Coordinators
Organizations
$200
Consumer
Products
$100
$0
0 5 10 15 20 25
Number of Investments
2018 esports investment breakdown by category ($ in millions). (38)
Note: In order to avoid skewing the an average 6 investments per a breakdown of the five
data the chart above does not year.(33) primary categories of esports
include the transactions listed investment opportunity:
below: Strategics have explored
investments in the space as a
▪ Tencent investment of $632M means to expand their presence or
into Douyu TV and $461M into capitalize on a growing market. Team organizations
Huya TV.(39)
Today’s esports investment
▪ Epic’s capital raise of $1.3B.(40) ecosystem
Developers
consistent story of later stage In 2018, the esports industry
investments into established reached $4.5B USD in disclosed
names, such as Greenoaks Capital funding across a broad array of Third-party event
investment into Discord Inc., a free companies.(41) From startups to coordinators
voice and text chat app for gamers, established companies entering the
and ICONIQ Capital’s participation space, the esports ecosystem is
in Epic’s, the creator of Fortnite, filled with investment opportunities Media platforms &
$1.25B capital raise.(32) of every shape and size. advertising
Strategics With so many different ways to
invest in the space, it can be
Consumer products
Strategic companies have been difficult to identify where an
consistently involved in esports investor’s capital may be well
M&A over the last five years, with placed. To that end, the following is
10The rise of esports investments | Leveling up
Team organizations Team organizations investment snapshot
Just like in traditional team sports,
competition within esports takes Investment in esports
place between players representing teams has increased
a specific organizational brand. The significantly over the 13% Venture
difference in competitive gaming, last several years. Capital
however, is that most prominent While this investment Family Office
team brands have diversified across has been driven 31% 56%
multiple games. Think of it as largely by venture Private Equity
though the Washington Capitals, capital, it has been
Washington Wizards, Washington largely deployed to
Mystics, and Baltimore Brigade all the major teams.
wore the same jersey sporting the
logo of their ownership group: 2018 team organization investments by investor type.(43)
Monumental Sports Entertainment.
($ in millions)
Major esports organizations like
16 $250
Cloud9 or Team Liquid compete $193
across anywhere from five to 12
different games with varying levels 14 $200
12
of success and scale. This
diversification allows a single $150
organization to reach a much 8
broader audience (creating more
$100
value for its sponsors) and helps to $65
protect against the risk of any one 4
game losing its value either due to 4 $50
$1
poor performance by the team, or
1
reduced support from the developer. 0 $0
2016 2017 2018
However, casting such a wide net
Count Amount
can create substantial added costs
for an organization as it must pay
Team organization investments over time, 2016-2018.(42)
salaries for each extra player, coach,
and support staff member. The
turnover in game popularity outside A potential exception comes in the
of the big three (League of Legends, form of single-game organizations
Dota 2, Counter-Strike: Global which are involved in franchised
Offensive) is often so quick that leagues. Teams such as the
teams should consider broadening Overwatch League’s Boston Uprising, When making an
their scope to remain relevant, owned by the Kraft Group, will not be
which can also result in a net loss able to diversify into any other investment into a
from games which never take off games due to league rules.(44) team organization
enough to generate revenue for the Similarly, Clutch Gaming was
organization. founded by the Houston Rockets investors should
ownership group, and controls a
identify a company
When making an investment into a franchise spot in the League of
team organization investors should Legends Championship Series.(45) In that has consistently
both cases, the added revenue
identify a company that has
sharing opportunities for league
made smart decisions
consistently made smart decisions
when choosing which games to sponsors and media rights can make when choosing which
invest in, and has also shown a investing in these single-game
willingness to cut its losses in failing organizations attractive. However,
games to invest in.
titles. such an investment likely carries
11The rise of esports investment | Leveling up
25.0x
20.0x
20.0x 19.0x
15.0x 14.1x 13.6x
11.8x 13.0x 13.1x
10.0x 10.9x Median: 13.1x
10.0x 9.2x
5.0x
0.0x
Cloud9 Team Team Echo Fox OpTic Fnatic Gen.G G2 Esports Immortals Envy
SoloMid Liquid Gaming Esports Gaming
2018 estimated revenue multiples for top 10 team organizations. (49)
substantially more risk, as the
Of the $234M USD in ▪ International expansion,
brand could lose significant value if with teams either recruiting
that league or game were to investments made to game rosters or building
collapse. subsidiary team brands in
team organizations in the Latin America, Southeast Asia,
With the industry experiencing last two years, over 50% and the Asian Pacific regions.
significant growth over the past few
years, esports teams have enjoyed
has gone to the top ▪ Stronger merchandising
strong growth multiples, as seen 10.(46) arms and retail presence.
above. Growth multiples such as In the League of Legends
these are largely driven by the Championship Series (LCS),
expectation of strong future ▪ Dedicated training facilities for example, nearly all teams
performance. For esports teams, are replacing the long-used have an ongoing apparel
this is the expectation that the “gaming house.” For partnership with brands
industry will continue its strong organizations, this can offer including Puma SE and
growth trajectory and the given revenue potential in the form Champion Athletics.(47)
esports team will remain a major of naming rights, on-site
brand in the ecosystem. activations, and content The result of these trends is that
creation. In addition, it allows newly formed teams may have
However, as the industry matures, consolidation of staff and difficulty when exploring investment
investors will likely expect these players, with management options. They may also have limited
teams to achieve operational and talent working under the ability to achieve the scale required
efficiencies as they determine and same roof. for operational efficiencies.
develop their core competencies.
Rather than attempting to be a ▪ Recruitment of high- As a result, while investment for
“one-stop shop” of all things esports quality management and team organizations has increased,
(such as teams, media, analytics, sales teams, typically with the focus of this investment has
consumer products, etc.), many professional experience wholly historically been towards making
teams are narrowing their focus to outside the esports and the strong stronger. Of the $258M
the development of winning rosters gaming industries. USD in investments made to team
for the games they are in. organizations in the last two years,
▪ Talent development and over 50% has gone to the top
Based on market activity by some of youth outreach, including 10.(48)
the highest valued esports teams, academy or secondary teams
the following appear to be the most for tier-one esports titles, and
likely sources of expenditure over seasonal competitions for
the next two to three years: college students.
12The rise of esports investments | Leveling up
Developers Valuation considerations The development of a video game
by a developer often takes several
Developers are the core difference
Unlike the other subsectors of the years and requires significant
between esports and traditional
esports ecosystem, developers capital outlay to complete. Having
sports. If the National Basketball
represent a more mature industry multiple studios under a developer
Association (NBA) was to disband,
with several major developers working on different games all at
you could still get a group of
attaining market capitalizations well once allows developers to have a
people together to play basketball
into the billions. greater opportunity of creating a
whenever you wanted. New groups
blockbuster title while also
could form to organize professional
These larger developers consistently spreading revenue throughout the
play for the sport. The success or
dominated the market, with the top year.
failure of that game is not
25 companies accounting for 77% of
dependent upon the ability of a
the total global game market in These developers can also leverage
single governing body to generate
2017.(54) their economies of scale for
revenue.
production and distribution.
The dominance of the space by this
This is not the case in esports. In
smaller subset of developers is due in When examining investments over
order to play League of Legends,
part as a hedge against the inherent the last several years, one can see
even at the amateur level, Riot
risk of video game development. how the strong developers have
must continually spend resources
and capital maintaining the game.
If the company shut down its
Developers investment snapshot
servers, the entire League of
Legends esports ecosystem would
Investment in
immediately collapse.
developers has
continued to grow
With the exception of some fighting
over the past several
games, every single prominent Analytics
years. While the space
esport played today relies on the 35%
is dominated by the 41%
active support of the game’s Software
largest developers,
developer.(53) Developer
there remains
opportunities for Game
Not only that but in many cases Developer
smaller investments in
today the developer is also the 24%
fledgling subsectors
primary source of that esport’s
such as analytics or
infrastructure and prize money.
early stage game
The modern esports ecosystem is
developers. 2018 investments in developers by subcategory.(52)
heavily reliant on the success and
sustainability of its most prominent
developers. ($ in millions)
$758
20 $800
That said, the industry is constantly
evolving. Many of the biggest 16
$600
esports titles today have come
from developers who were not 12
players in the space just two years $400
ago. Whether it’s a well-established 8
company maintaining its big $123 $200
4
esports games, or a smaller $12 $27 $37
company developing the next big 0 $0
thing, there are investment 2014 2015 2016 2017 2018
opportunities available with Count Amount
developers at every level.
Developer investements over time, 2014-2018.(50)
For comparison purposes, This table does not include Epic Games
$1.25B capital raise in 2018.(51)
13The rise of esports investment | Leveling up
30.0x
25.0x
Enterprise Value/EBITDA
20.0x
15.0x
10.0x
5.0x
0.0x
Jan-2016 May-2016 Sep-2016 Jan-2017 May-2017 Sep-2017 Jan-2018 May-2018 Sep-2018 Jan-2019
Game Developer Index S&P 500 Index
Index of game developer EV/EBITDA multiples compared to the S&P 500 from 2016-YTD 2019. (Game Developer
Index includes Electronic Arts (EA), Activision Blizzard (ATVI), Take-Two Interactive Software Inc. (TTWO), NetEase,
Inc. (NTES), and Nintendo (NTDOY).
been getting stronger. per year in the future.(59) Another developer multiples seen above.
trend has been the emergence of
Since 2015, the major investments micro-transactions. Micro- While this subsector is dominated
among game developers have been transactions consist of smaller in- by the major developers, there
with the larger developers.(55) This game items that a player can continues to be investment
would include major activity such purchase to enhance their in-game opportunities among smaller start-
as Activision Blizzard’s acquisition experience. up developers with unique
of King.com Limited, the creator of concepts or gameplay.
the popular Candy Crush mobile Micro-transactions have benefited
game, for $5.9 billion in 2015 and developers as they can have lower This includes the largest
NetEase Inc.’s (NetEase) development costs and allow them investment of 2018, the $1.25B
investment of $100M into Bungie to maintain consistent revenue capital raise of Epic.(61)
Inc., the creator of popular titles streams from the same player base.
such as Halo and Destiny, in In addition to game developers,
2018.(56)(57) While this trend has been a boon other developers have also seen
for many developers, in the past significant investment interest.
Compared to the S&P 500, these year there has been increasing Particularly among venture capital
investments appear to be paying player pushback on this over investors and analytics companies.
off. Game developers have monetization. In addition, one These developers typically seek to
consistently outperformed the S&P particular type of microtransaction, harness the underlying data within
500 when comparing EV/EBITDA the “loot box”, where players pay video games to enhance the
multiples. Multiples for game for a randomized set of in-game player experience whether
developers reached a high in items of varying quality, is facing through improving their gameplay
January 2018 of 25.5x.(58) greater scrutiny from governments or providing meaningful analysis
that consider it a form of gambling. for competition. Since 2016 there
This performance has been largely For instance, in 2018 the has been over $35M invested in
driven by several positive trends Netherlands and Belgium analytics developers alone.(62)
that have been favorable for these determined that some loot boxes
developers. These trends include violated their gambling laws.(60) Overall, while the space is
the rise of mobile gaming, dominated by major developers,
particularly in Asia, where demand Increasing pressure on micro- there remains opportunities for
for mobile games is expected to transaction revenue could be investments of all sizes.
drive revenue growth by 10-15% contributing to the declining
14The rise of esports investments | Leveling up
Third-party event coordinators Operate small weekly tournaments Not only can these companies
such as the Connecticut-based diversify into a wide range of
While many of the most prestigious Great Value Smash.(63)(64) tournament products and
esports tournaments are operated organization services, but
by developers, there is an entire In addition to running their own organizers at every level have the
ecosystem of third-party event self-branded events, many event potential to scale almost infinitely.
coordinators operating throughout coordinators also run white label DreamHack
the world. From international tournaments for various clients. has expanded into India, Spanish
championships to high school Some also offer on-demand online organizer LVP works with Riot to run
leagues, third-party organizers play tournament services which allow a U.K. league, and Chinese
a critical role in the industry and are amateur players to experience a company Mars Media will soon
often contracted by developers to tournament environment. operate a Dota 2 Major in
operate regional leagues and select Additionally, third-party organizers France.(65)(66)(67) Successful third-
events within a tournament circuit. generate revenue through ticket party organizers can expand not
sales, sponsorships, media rights, only the size and scope of an
Event coordinators vary greatly in and merchandise. individual tournament, but
scale from major names like ESL continually move into new
and DreamHack that operate events Perhaps the most appealing thing territories to work with new
for thousands of attendees across about third-party organizers to a partners.
the world, to regional groups that potential investor is their scalability.
Valuation considerations
As event coordinators become
increasingly important in the
Event coordinators investment snapshot
esports industry and the landscape
grows more competitive,
Event coordinator coordinators are looking for ways to
companies differentiate themselves. Without a
20% Venture Capital
experienced a unique and scalable platform, many
significant increase coordinators are unlikely to
47% Family Office succeed.
in both number of
investments and
dollars invested in 20% Private Equity One manner in which event
2018. These coordinators are differentiating
investments were Strategic themselves is through the
also well diversified 13% development of their own facilities.
across the range of At the inception of the industry
investor types. coordinators would utilize existing
2018 event coordinator investments by spaces that could offer reasonable
investor type.(72) accommodations for tournaments
and events. However, as the
industry has grown so has the
($ in millions) demand for events with hyper-
10 $250 specific offerings.(68) This had led to
$208
the development of dedicated
8 $200
esports arenas, training facilities,
$138
6 $150 and venues across the globe.(69)
$85
4 $100
The rationale for the continued
$38
2 $50 investment in the space has varied
depending on the stage of the
0 $0 company and type of investor. The
2015 2016 2017 2018
recent investment into N3rd Street
Count Amount
Gamers by SeventySix Capital and
Event coordinator investments over time, 2015-2018.(71) Comcast Sports Ventures (Comcast
Spectacor) was meant to help
15The rise of esports investment | Leveling up
Russia Denmark South Africa
#1 #5 #9
$200,000,000 $24,575,000 $570,000
United States China Germany
#2 #6 #10
$114,700,000 $15,430,000 $127,200
Sweden France
#3 #7
$54,590,239 $3,400,000
Canada Netherlands
#4 #8
$26,400,000 $1,600,000
Cumulative event coordinators investment by country (2015 – 2019).(73)
facilitate growth in pursuit of a Top investments by country $11M to help local esports fans
national expansion strategy.(70) create their own tournaments.(81)
As the data above suggests, Russian- Smash.gg works to create smaller
In a similar fashion, the based companies have received the events from the ground up –
investment by Creandum and largest amount of capital in the event enabling fans to take organizing into
Sunstate into RFRSH coordinators space.(76) These their own hands.(82)
Entertainment was to expand the investments are directly tied to the
brand by bringing competitions to funding and subsequent sale of Sweden-based event coordinators
three new locations in 2019: Sao ESforce Holdings.(77) In 2015, the have received $54.6M in capital
Paulo, Brazil; Miami, United company held its first funding round, since 2015, with the most recent
States; and Madrid, Spain.(74) The receiving $100M in its Series A.(78) investment of $1.3M into
investors hope to establish the Only three years later the company Challengermode.(83)(84) Similar to the
company on a mainstream level, would be acquired for $100M, the rationale of investment into RFSH
in leagues with NBA, UFC, football exact amount it had previously Entertainment, Challengermode
and online entertainment in raised.(79) sought to achieve their next phase
general.(75) of growth by going mainstream.(85)
In comparison, the investments
Notable investments that work to within the United States are more This continued alignment in
establish brands on a mainstream diverse with a total of 10 investment thesis supports the
level help strengthen the investments, into 5 different notion that as capital flows into
industry’s credibility. This companies, since 2015.(80) One of event coordinators and
additional awareness may even the most noteworthy investments demonstrates its viability,
serve to direct more capital into into a U.S.-based esports event incremental funds will follow.
the space. coordinator was Smash.gg’s raise of 16The rise of esports investments | Leveling up
Media platforms & investor.(86) Excluding significant income. In the U.S., 61% of
advertising outlier investments by Tencent into esports fans over the age of 18 are
Douyu TV and Huya TV for $632.0M earning more than $50,000 a
Media platforms & advertising and $462.0M respectively, the year.(89) Many fans are increasingly
encompasses a variety of different average investment size was just shifting away from traditional forms
categories that are focused on fan under $10.0M.(87) of media and are instead engaging
engagement. This ranges from with streaming platforms such as
advertising agencies that support With an actively engaged and Twitch and YouTube. In 2018 the
nonendemic brands seeking to gain growing demographic, the esports average concurrent viewer count
exposure within the space to industry will likely see an increasing for Twitch was around 1.1
companies exploring new ways to get number of nonendemic brands million.(90)
viewers more engaged with the explore different ways to engage
influencers and teams they watch on with the space. For many brands, Both endemic and nonendemic
a regular basis through different the underlying demographics of brands will increasingly be drawn to
streaming services. esports are appealing. Esports has these underlying dynamics, and as
an estimated global fan base of 380 a result, the need for advertising
From an investment perspective, this million and this is largely comprised support is expected to remain. In
category remains in its infancy. Of the of millennials between the ages of fact, according to a SuperData
15 investments into media platforms 21 and 35.(88) Not only are these research report, by 2020
& advertising companies in 2018, all viewers young, they also represent advertising and sponsorship will
but three had a venture capital expendable account for 60% of the industry’s
overall revenue.(91)
Media platforms & advertising investment snapshot
Brand engagement could take a
Largely dominated by variety of paths. For example,
smaller venture capital some can take a traditional
investments, the sponsorship route, such as Audi
category has 23% Denmark’s $750,000 partnership
experienced steady Venture deal with popular Danish esports
investment growth over Capital team Astralis for branding on
the last few years as Private Astralis jerseys.(92) Engagement
investors increasingly Equity can also take other forms, such as
recognize the value of 77%
KFC Corporation’s partnership with
the esports fan base notable Twitch streamers of the
demand for greater game PLAYERUNKNOWN’S
engagement. BATTLEGROUNDS, such as DrLupo,
2018 media platforms & advertising where if the streamer won a game
investments by investor type.(97) viewers could post a KFC emoji into
the stream’s chat for a chance to
win a $5 KFC gift card.(93)
($ in millions)
25 $689 $800
No matter the form that
20 engagement takes, nonendemic
$600
brands will rely on advertisers with
15
$400 an understanding of the underlying
10 $226 demographics of the industry and
$179
$200 effective ways of engaging. This
5 $35 $19 creates an opportunity for investors
0 $0 to capitalize on this trend.
2014 2015 2016 2017 2018
Count Amount An example of this is the
September 2018 $3.6M Series A
Media platforms & advertising investments over time, 2015-2018.(95) capital raise for Upfluence, an
For normalization, this table does not include Amazon’s $970M acquisition influencer focused marketing
of Twitch in 2014 or Tencent’s investment into two streaming platforms agency with an emphasis on
for $1.0B in 2018.(96) offering brands support in working
17
with Twitch influencers.(94)The rise of esports investment | Leveling up
Streaming
Services $135M
$21M
$526M
News Agencies
Networking & Social Media Advertising $6M
Breakdown of media platforms & advertising investments in 2018 by subcategory. (99)
Note: this table does not include Tencent’s investment into two streaming platforms for $1.0B in 2018. (98)
As noted above, the use of An example would include Discord has grown quickly over its
streaming services has increased StreamElements, a “full-stack” three years of existence as users
rapidly over the last several years. platform that supports streamers have used its voice and text
For example, for Twitch, average in broadcasting their gameplay. communication services to talk
daily concurrent viewer count has The company raised $11.3M in with teammates and friends during
grown from a little over 100,000 in Series A funding in 2018.(102) and outside of gameplay. (104) By
2012 to 1.1 million viewers in May 2018, Discord had 130 million
2018.(100) In addition to these software tools registered users, tripling its user
that assist creators in their base since 2017.(105)
Viewers are engaging both with production
presentations of competitive play of streaming content, other media Other examples within this space
and popular influencers. As larger platforms & advertising companies include Taunt, a social
streaming services, such as Twitch have focused on enhancing the engagement platform for fans that
and YouTube, compete for viewer experience through various allow viewers to compete against
viewers, an industry has emerged applications that add an additional each other by predicting the
for tools that support and enhance layer of connectivity with other outcome of games they are
the streaming experience for fans or the creators themselves. viewing. The company raised
content creators and fans alike. $3.0M in 2018 from The Foundry
One of the larger investments in Group.(106)
Investments into streaming 2018 within the media platforms &
services and social media advertising category relates to this
engagement has increased by over engagement. Discord, a popular
200% from 2017 to 2018.(101) gaming chat application, raised
These investments have largely $150.0M in 2018 at a $2.05B
consisted of capital raises by valuation.(103)
venture capital firms into early
stage startups.
18The rise of esports investments | Leveling up
Consumer products Valuation considerations(108)
One of the most attractive esports
segments for traditional private equity
and strategic buyers continues to be
• Strategic Range of Assets
consumer products. These companies
typically offer consistent revenue Astro • Ability to Target Millennial
Consumers
streams with a strong runway for
• Growth, Strong Operating
growth, which can make for a well- Performance
suited partner and investment Jaybird • Strong Product Offering
EV/Revenue
opportunity. This thesis aligns with the • Near-Term Growth
figure presented on page 20, which
1.5x
shows large strategic investors
(namely Logitech and Foxconn)
directing capital into consumer Roccat
• Mature Company
technology products.
• Evolving Growth Story
For the apparel segment of consumer
Corsair • Mixed Operating Performance
• Less Branded Portfolio Mix
products, there has been rapid growth
in the west, with dedicated streetwear Saitek
brands competing with merchandise
designed by team organizations.(107)
Case study: Logitech acquires ASTRO Gaming
Tapping into a popular esports headset brand offers significant opportunity to major
computer peripherals player.
With esports rising popularity, trend due to a combination of factors ASTRO also gave Logitech access
peripheral brands are seeking ways including market saturation, to higher margin products with
to resonate within the space. One extended replacement cycles, and retail values between $200 and
example of this dynamic is the competition from other consumer $300.(116)
acquisition of ASTRO Gaming devices.(114)
(“ASTRO”) by Logitech International The result for Logitech was a
(“Logitech”) for $85M USD in July By contrast, the esports hardware significantly stronger brand
2017.(109) With an expected revenue market, however, has been able to presence in the esports industry
of $35M in 2017, this purchase price insulate itself from some of these commanding the attention of
implies a multiple of 2.4x trends, due in part to the promotion major influencers in the space –
revenue.(110) of products by influencers and specifically with those already
teams. Similar to a basketball fan gaming with ASTRO headsets,
In the years leading up to the wanting to get the signature shoe of such as Nick “NICKMERCS”
transaction, Logitech was their favorite player, esports fans are Kolcheff and Brett “Dakotaz”
experiencing fairly flat annual motivated to get the hardware they Hoffman.(117) As of today, ASTRO
revenue growth of (0.15%) from see their favorite players using. and/or Logitech constitute a piece
2014 to 2015 and 0.69% from 2015 of the gaming setups of more
to 2016. (111) By comparison, overall The industry has shown to be a than 60% of the top
esports revenue grew 67.52% and revenue generating avenue and as streamers.(118)
51.69%, respectively.(112) gamers demand more customization
the hardware manufacturers are For Astro, the transaction offered
Additionally, the acquisition of driven to offer these options with the a great opportunity to leverage
ASTRO was an opportunity to further latest high-performance processors the capabilities of one of the
diversify in an increasingly and graphics cards.(115) largest players in the technology
competitive hardware market that hardware industry.
has faced headwinds in recent As such, the acquisition of ASTRO
years.(113) Worldwide PC shipments offered the opportunity to further While ASTRO’s operations were
have sharply declined, and peripheral expand Logitech’s product portfolio previously limited to the United
hardware has followed a similar within the esports industry. States, the acquisition offered the
19 (Continued on next page)The rise of esports investment | Leveling up
ability to expand sales globally.(119) Previously, ASTRO’s flagship Although the total revenue of
headset product line was limited to ASTRO only contributed 2% to
In fact, one of Logitech’s first steps three SKUs due to high R&D costs. total net sales growth, the guiding
following the acquisition was to Post-acquisition, capital was strategy of diversification into
capitalize on the new product line invested into the development of esports was likely a significant
by making them available outside new high-margin product lines, success factor for the 57% growth
the United States.(120) increasing the total number of experienced in the gaming
SKUs.(122) segment of Logitech.(124)
This acquisition also provided
ASTRO access to a vast network of The years following the transaction Following this acquisition Logitech
distributors and suppliers, which Logitech experienced revenue continues to build a diverse
could be leveraged to reduce costs growth far in excess of the years business that incorporates esports
and increase efficiencies.(121) preceding, at 10.08% from 2016 to and gaming peripherals.
2017 and 15.55% from 2017 to
2018.(123)
Consumer product enterprise value to revenue multiples
3.0x
2.4x
2.5x
2.0x 1.8x
EV/Revenue
1.5x
1.0x 1.1x 1.1x
1.0x
Median: 1.1x
0.5x
0.0x
Roccat (125) Corsair(126) Astro (127) Saitek (128) Jaybird(129)
Close March 2018 July 2017 July 2017 Sep. 2016 April 2016
Acquiror Turtle Beach EagleTree Capital Logitech Logitech Logitech
Size(1) $MM: $19.2 $525.0 $85.0 $13.0 $50.0
Designs and Designs and
Manufactures Designs, develops,
manufactures video manufactures
Manufactures and markets and manufactures
gaming equipment, consumer electronics
computer high-performance Bluetooth
Target such as, wireless products, such as
components and PC peripherals and headphones and
Description and Bluetooth computer games
accessories, such as components, such as activity trackers for
headsets for Xbox, accessories, input
keyboards and mice. cases, keyboards, sports and active
PlayStation, PC, and devices, and audio
PCs, and fans. lifestyles.
mobile systems. products.
Target
Germany Global United States Global Global
Geography
20The rise of esports investments | Leveling up Conclusion Ultimately, the esports ecosystem is vast and growing every day. Making sound investments in the space requires significant research, and likely partnering with a group or advisor who has an intimate knowledge of the industry. However, by understanding the basic structure of esports, you will be better equipped to begin asking the right questions, identifying where your investment can have the most impact, and yield the greatest potential return. 21
The rise of esports investment | Rewards (and risks)
Potential rewards (and
risks) in esports investing
As the esports industry becomes increasingly more
appealing as an area for investment, investors and
companies alike should understand the potential benefits,
and risks, of exploring partnerships.
ESL IEM Katowice 2019 (Copyright: ESL | Adela Sznajder).
22The rise of esports investments | Rewards (and risks)
Introduction
I
This section begins with two brief DreamHack.
nvestment interest in the esports
primers on the potential benefits
industry is increasing.(130)
of an investment in esports. Late to the party: learning
Investments, measured by from the history of Heroes of
number of deals and amount For investors, esports offers the Storm’s esports initiatives
invested were larger in 2018 than access to a fast growing industry
any year prior.(131) In addition to highlighted by a youthful The second examines some of the
this general increase in deal flow, demographic. potential challenges of developing
the types of investors considering an esports league and the
investments has also grown. For esports companies, in addition challenges this can have for not
to investment proceeds, investors only developers, but also team
2018 was a record year for private can offer business expertise and organizations and other groups
equity investment into esports, credibility as these esports that are vested in the leagues
and as the industry continues to companies aim to capitalize on success.
grow these traditional investors near and long term opportunities.
will continue to look for ways to The rising power (and risk) of
explore potential This section then highlights some influencers in esports
opportunities.(132) For traditional of the nuanced challenges and
investor groups, entering a new considerations an investor should The final article considers the rise
industry for the first time, consider when exploring of influencers and the potential
understanding the key benefits, investment options. Through a challenges their popularity poses
and perhaps more importantly, series of articles written by The to the existing team organization
key challenges is critical. Esports Observer, major topics structure.
and trends within the industry are
This section seeks to address presented and discussed from an The core focus of these articles is
these considerations for a investor perspective. to demonstrate that while the
traditional investor considering industry has experienced
esports investments. Through a Why Modern Times Group significant notoriety over the past
series of short articles, this section made two of esports' best several years, there are nuanced
highlights some of the potential investments to-date considerations that will require in-
advantages and risks of depth diligence.
investment for both investors and The first article highlights the
companies operating within successes of MTG’s two
esports looking for investments. investments into ESL and
23The rise of esports investment | Investor view
The value of an esports
investment: an investor view
Many investors will find the strong expected growth trajectory
of the industry, potential for diversification and hedging, and
unique customer base intriguing propositions as they explore
new opportunities within the esports ecosystem.
W
hile endemic brands and Diversification opportunity Access to key demographic
investors already involved in
esports can already see its Due to the uniqueness of the In 2018 the esports industry had a
value, outside investors will likely industry, traditional investors may global fan base of 380M with 37%
be drawn by several potential also view esports investments as a representing males aged 21 to 35,
benefits and considerations. means of diversification. and 16% representing females
ages 21 to 35.(134) In addition, in
Although each subsector of the Unlike more mature industries that the U.S., 61% of esports viewers
esports ecosystem will have may have a more limited growth earn more than $50,000 per
nuances that can add further profile, the esports industry is still year.(135)
benefits depending on an in its nascent stages and offers
investor’s current portfolio; exposure to trends that are not The industry offers access to a
overall, the strong performance of wholly reflected in other unique demographic that is
the industry to-date and its industries. As such, an investment increasingly turning away from
unique customer base are driving in esports could offer strong traditional media.(136)
factors in its appeal. hedging implications.
By investing into this space,
Industry with strong growth investors can gain access to this
profile demographic. Whether this would
be nonendemic brands attempting
With $869M of revenue in 2018 to increase awareness among this
and an expected CAGR of 34.9% demographic, or traditional private
over the next four years, the equity investors seeking to
esports industry is an attractive leverage access to cross-sell
market.(133) In addition, the products and services from
disruptive nature of the space and ancillary industries within their
its impact on traditional media Diversification portfolio.(137) No matter intent,
and sports, will likely appeal to
opportunity
the industry’s unique fan base
investors looking to get in on a would likely be a key investment
“the next big thing.” highlight.
Strong growth Access to key
profile demographics
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