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 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, 06 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 basis for any decision or action Leveling up: the rise of that may affect your business. Before making any decision or taking esports investment any action that may affect your business, you should consult a qualified professional advisor. Esports investment has made significant strides in recent years as Deloitte Corporate Finance LLC and The Esports Observer shall not traditional investors join venture be responsible for any loss sustained by any person who relies on this publication. capital in exploring many of the diverse investment opportunities Copyright © 2019 Deloitte Development LLC. All rights reserved. across the industry’s diverse ecosystem. 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 made The rising power (and risk) of investment: an investor view two of esports' best investments influencers in esports 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 key gain larger followings built on the industry, potential for diversification, investments into a position to social aspects of their entertainment and unique customer base intriguing capitalize on growth, MTG has value, the recognition of their brands as they increasingly explore potential solidified its position as a major in their own right may lead them esports investment opportunities. player within the rising esports away from the structure of traditional industry. esports team organizations. 26 31 39 The value of an esports Late to the party: learning from Dynamics of esports investment: an investee view the history of Heroes of the Storm’s Investments esports initiatives As the esports industry grows, Establishing a successful esports In order to best position themselves companies that invest in strategic league can offer its challenges, and to maximize potential investment partnerships can obtain access to a these challenges are not the exclusive dollars, esports companies should variety of tangible and intangible issue of the developer. Industry understand the different investors in benefits that can help to fuel growth, players further downstream who the industry and the key questions establish operational efficiencies, and invest time and capital to participate they will ask. drive market positioning. can also face significant risk. 02 The rise of esports investments | Executive summary Executive summary 80 $4.5B 70 68 USD invested 60 in 2018 50 40 34 15% 30 12% of investments Number 20 19 20 16 56% 14 17% 10 4 Venture Capital Family Office 0 2014 2015 2016 2017 2018 Jan. - Feb. Jan. - Feb. Private Equity Strategic 2018 2019 Breakdown of esports investments in Number of investments in esports, 2014 – February 2019.(2) 2018 by investor type.(1) hile popular streamers such disclosed investments into esports W as Tyler “Ninja” Blevins have businesses from private equity firms, dominated the public relative to the eleven that took place discourse on esports and gaming over in 2018.(4) the past year, an indication of the staying power of the industry and its Interest among traditional investors future potential is the underlying to explore different ways to gain story of investment dollars into the exposure to the industry is indicative space. of the maturation of the industry and its growing mainstream appeal from For esports, 2018 was a record year in an investor perspective. both number of investments and investment dollars. Over $4.5B USD The esports ecosystem offers a was invested into the industry in 2018 variety of different investment alone.(3) While this headline number opportunities across a range of is certainly significant, it is the subsectors. Some are unique to the composition of these investors that industry, such as team organizations, also offers interesting insights. while others hold similarities to other traditional industries, such as For the first time, traditional private consumer products and event equity investors have gotten involved planning, which could be more in a meaningful way. From 2014 to palatable to investors entering the 2017 there were only nine space for the first time. y 03 The rise of esports investment | Executive summary A key merit of the industry is the core specific valuation considerations. demographics. In 2018 the esports industry had a global fan base of The potential rewards (and risks) 380M with 37% representing males of an investment aged 21 to 35, and 16% representing females ages 21 to 35.(5) In addition, in After establishing the investment the U.S., 61% of esports viewers earn landscape in the prior section, this more than $50,000 per year.(6) section explores the potential benefits Investment offers exposure to this and hazards of partnerships for both demographic that is increasingly investors and companies alike. averting its attention away from traditional media. Through a series of articles written by The Esports Observer contributors, With increasing focus by investors this section presents examples of and an attractive industry profile, this some of the nuanced issues to thought leadership seeks to explore consider as one explores esports for the current state of the industry from investment potential. an investor perspective. Dynamics of esports investment In doing so, this paper is divided into three parts: the rise of esports Finally, the publication offers investment, the potential rewards companies in the space an overview (and risks) of investment, and the of the positives and negatives of dynamics of an esports investment. partnering with different investor types and a breakdown of key The rise of esports investment questions and diligence areas they should consider exploring before The first section examines the history agreeing to a deal. of investment into the industry up to today. More specifically it explores Overall, as the industry continues to how different investor types have grow and mature, investment interest engaged with the industry, such as from outside players is expected to be venture capital and private equity, in lockstep. The goal of this thought before ultimately analyzing the leadership is to provide a starting current state of the industry through point for the discussion; offering both five major subcategories. traditional investors exploring the space for the first time, and esports These subcategories (team companies that are considering organizations, developers, event raising capital or exploring a sale, coordinators, media platforms & some factors to consider when advertising, and consumer products) contemplating an investment in this are examined through an investor dynamic, fast-growing industry. lens with a focus on several key 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. he esports industry attracted culture. over $4.5B USD in disclosed T investment in 2018, up from Right now, there are uncertainties $490M from the previous year.(7) over the long-term viability of certain Interest is likely to increase with the esports competition series, and the introduction of more franchise-style revenue potential of lower valued leagues, the centralization of esports teams could stifle future investment teams (including management and into the space. That said, by far the support staff), and continued growth most capital intensive entities are in the esports audience—the latter in those building the infrastructure particular driven by a greater behind the industry: game awareness of esports and other developers, live streaming services, forms of live videogame and ancillary services (for in-game entertainment, within the popular communication, player data, etc.). 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 to venture capital firms. The high-growth support a competitive scene, and to potential, limited operating history, Competitive show matches have been develop professional esports and early instability of the industry part of gaming since its early days, competitions as marketing extensions led to cautioned interest from larger but the onset of online and local area of their products. “Free-to-play” conglomerates. network (LAN) support began with games, which originated in Asia and packet-based computer networking in were popularized in the west by There are a few key examples of the 1970s. Once further developed, League of Legends, largely replaced the mergers and acquisitions within the this allowed for higher simultaneous subscription model (used in games last decade that have had a measured player counts