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Venture Capital in ESports


Key Takeaways

Carl Niedbala - Founder Shield
Carl Niedbala

COO & Co-Founder

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Although many individuals believe that eSports “suddenly” popped up out of nowhere, the industry’s success has been brewing for decades. Organizations such as Guinness Book of World Records, ESPN, and Rolling Stone Magazine have all taken note of the trendsetting market. Nowadays, everyone wants a piece of the gaming pie—but it wasn’t always so vibrant. Here’s a look at the money flow in this unique market and how venture capital (VC) is helping to shape the competitive gaming industry across the globe.

What’s the ESports Backstory?

Rewind to the early 1970s, when Spacewar was the “it” game and winning a Rolling Stone magazine subscription was dope. Stanford University held the first official video game competition, inviting players to combat each other in the popular Spacewar game. Bruce Baumgart won the epic magazine subscription and sent the ball rolling in this industry.

It wasn’t until 1980, though, when Atari held the Space Invaders Championship, that video games were carved out as a niche product—but the money wasn’t pouring in yet. However, Atari’s event attracted over 10,000 players, parking eSports directly in the eye of the public. 

This same year (1980), Walter Day formed a record-keeping organization called Twin Galaxies focused solely on video game milestones. The documented success of players, such as Billy Mitchell in Pac-Man and Donkey Kong, did all but satiated gamers’ appetites. All the fuss was starting to catch the attention of larger organizations, too. 

Unfortunately, from 1983 – 1985, after a slight dip in the global revenue for video games, gaming was once again pegged a “fad.” Technology changed this hum-drum mindset, though, when the Nintendo Entertainment System (NES) took flight in 1985. The Nintendo World Championship was held in 1990. And in 1991, Super NES (SNES) catapulted gaming forward even more.

Dennis “Thresh” Fong and his Red Annihilation prize, a Ferrari 328 GTS.s

From there, multiplayer action and Quake (ID software’s first-person shooter) saw daylight as the internet offered massive muscle to the industry of eSports. The Red Annihilation was held in 1997 and was considered one of the first genuine eSports competitions. Over 2,000 online competitors faced off, allowing for only 16 players to battle one-on-one at the Electronic Entertainment Expo at the World Congress Center. Instead of a magazine subscription, in-person and online spectators saw the champion (Dennis “Thresh” Fong) win a Ferrari 328 GTS—which had previously been owned by Quake programmer John D. Carmack

Although eSports relied primarily on in-house donations, it wouldn’t be long before investors started filtering greenbacks into the industry. 

How Has ESports Grown Over the Years?

Thresh was inducted into the ESL Hall of Fame and became a minor celebrity in the US. His accomplishments also served as solid proof for gamers worldwide that eSports wasn’t merely a “waste of time.” Plenty of news stations covered the Red Annihilation competition. Plus, both in-person and online viewers got a taste of the gaming experience and couldn’t get enough—which sounded an awful lot like the jangle of money to many VC firms.

Internet cafes popped up around the world, allowing gamers to play and connect. In 2011, the live streaming service Twitch was founded. Twitch broadcasted competitions and events worldwide, turning casual viewers into hardcore fans (or gamers). 

The lightbulbs in VCs’ heads were beginning to illuminate as more and more people took note of the eSports industry. Naturally, we can thank Twitch for much of that revelation, as outlined by the numbers below.

Source: Deloit

By 2009, over 160 eSports competitions were held, and 2010 gave birth to the Gaming Sports Leagues. The number of competitions skyrocketed to nearly 700 in 2012. Coincidentally, the annual prize money shot up from $2M in 2009 to $10M in 2012. 

As the prize money grew, and the internet connected the world, the eSport industry only benefited. Fans wanted to live stream games and get in on the action. In 2019, Paris hosted the League of Legends world finals in an arena that could only hold half of the 4M viewers wanting to watch. And that’s just for starters. 

Nearly four decades after Walter Day launched the first professional gamer team in 1983, thousands of professional eSports players, teams (aka clans), and franchises exist. Some of them started by large organizations, and others began in their homes.

Source: The ESports Observer

Given the substantial earnings per professional team, it’s evident why investors started viewing eSports as an appealing opportunity, especially in the realm of early stage ventures.

Are VCs Investing in ESports?

The eSports market was roughly valued at $493M in 2016, but jumped to $903M by 2018. Its value has only increased since then. As mentioned, investors have taken their time to jump on the eSports rush, but it’s all hands on deck now. So, the short answer to whether VCs are investing in eSports is yes.

Source: 2019 Free Global Esports Market Report, newzoo.com

Here’s a round-up of recent investments that will help to push eSports into another successful gaming era:

  • Vindex – In one of the most significant eSports-related rounds, Vindex raised $60M in October 2019. This amount is undeniably excellent news for the eSports industry. Vindex is essentially a “holding company” with a portfolio consisting of Next Generation Esports and Esports Engine.
  • Mainline – With the support of Work America Capital, Mainline raised $6.8M in its second round of funding. Monetization has always been the central goal for this organization, explicitly helping brands “manage, monetize, and market their eSports programs.”
  • eFuse – The Ohio Innovation Fund helped eFuse raise $1.4M in a Seed round. Unsurprisingly, both companies are based in Ohio but strive to help deal with the nitty-gritty portion of the eSport industry. Mostly, eFuse focuses on talent recruitment, traditional job placement, and sponsorship deal sourcing.
  • Artist Capital Management – A $100M fund, named the “Artists Esports Edge Fund,” was gathered for Artist Capital Management (ACM) to invest in eSports.
  • 100 Thieves – In a Series B round, a well-known eSports organization, 100 Thieves raised $35M. 

How Does the ESports Industry Make Money?

Investors are becoming more varied in how they dole out their cash to the gaming industry, which only goes to show how maturely the market is developing. Mostly, VCs invest in existing eSports teams, develop an eSports division out of an existing franchise, or establish a new team altogether. That said, venture capitalists lead the way in investments, versus private equity or other investors. 

Source: Deloit

Investors tend to focus on one of five main investment opportunities in eSports, which include:

1. Media platforms and advertising

YouTube, Twitch, Facebook, and other social media spaces pay specific teams to stream on their platforms. Sometimes, teams can collect donations and subscriptions from platforms, too (i.e., Twitch). This investment avenue is one of significance, so plenty of VCs aim to gain from broadcasting licensing fees. 

2. Consumer products

Avid fans and gamers alike buy loads of branded merchandise from their favorite teams. For example, it only took less than three minutes for the 100 Thieves’ 2018 Fall Collection to ultimately sell out of stock. 

3. Team organizations

Some teams generate league revenue share when they own a franchise in a league. Most of this revenue comes from ticket sales, merchandise sales, and broadcasting rights. Let’s not forget about income from prize pools, either—which is frequently in the millions of dollars nowadays.

4. Third-party event coordinators

Whether it’s an international championship or a high school competition, third-party event coordinators play a vital role in eSports. Besides hosting self-branded events, they pay teams for a multitude of brand engagements via sponsorships, such as streaming content. Naturally, ticket and merchandise sales, as well as media rights, all generate revenue for third-party event coordinators. 

5. Developers

One part of the eSports foundation holds the entire structure up—developers. Not only does their game maintenance allow for continued gaming and competing, but they are often a chief source of prize money, too. It’s safe to say that the eSports ecosystem relies largely on the sustainable momentum of its most outstanding developers. 

Is the ESports Industry Risky?

If you’re making a side-by-side comparison between playing a video game and, say, cliff diving, the latter will undoubtedly land on a “Most Dangerous Sports” faster than the former. However, eSports has its own unique risks that players, teams, franchise owners, investors, etc. all face. 

But let’s be real, it can be tricky knowing how to mitigate the vulnerability of gaming. 

From both an investor and investees perspective, eSports are both wildly rewarding and risky at the same time. Take Rick Fox and the news about Echo Fox. When an investor made racially charged remarks against Fox, he swiftly departed, denied any involvement, and moved on. 

Situations, such as the one Fox encountered, make it all the more convincing how valuable a directors and officers (D&O) insurance policy is to an organization. Even in an evolving space, this type of plan protects the members of the organization from claims arising out of decisions or actions taken. 

But investors aren’t the only ones risking their stake. Players face exposures, too. For example, Tfue—a top Fortnite player from FaZe clan—filed a lawsuit against his employer, alleging they misrepresented the signed contractual agreement. Not only that, but he’s also alleging a violation of California State law regarding the salary he was supposed to have been paid. 

Both Fox and Tfue would benefit from a robust D&O insurance policy, which is often bundled with an employment practices liability (EPL) insurance policy. Both plans would work to cover the risks that often surface in the eSports industry. 

Understanding the details of what coverage your eSports company needs can be a confusing process. Founder Shield specializes in knowing the risks your industry faces to make sure you have adequate protection. Feel free to reach out to us, and we’ll walk you through the process of finding the right policy for you. 

Want to know more about D&O insurance? Talk to us! You can contact us at ​info@foundershield.com​ or create an account ​here​ to get started on a quote.

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