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, investment, legal, tax, or other professional advice 06 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 80 $4.5B 70 68 USD invested 60 in 2018 50 40 34 15% 30 12% investments of Number 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) hile popular streamers such were only nine disclosed W 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. he esports industry attracted Right now, there are uncertainties over $4.5B USD in disclosed over the long-term viability of T 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