We continue to firmly believe that the best way to get exposure to the rising trends within esports & video gaming is by investing into the infrastructure and “picks & shovels” of this industry: not through teams (overvalued) or games (binary).
Given the recent events in the esports team space, below are a few observations as our predictions continue to play out as this space grows.
Esports teams are starting to look more like entertainment holding companies instead of purely competitive organizations as they creatively seek more revenue streams. As I wrote back in November, esports teams are being valued like tech companies in their investment rounds yet their business models do not generally resemble models that allow for scalable growth (i.e. 10-20x+ revenue multiples).
Their recent diversification into new revenue streams is not only expected but also necessary if they hope to justify the premium valuations that they have received over the past 24 months. However, even in the midst of their recent expansion into new verticals, I believe the pro-team space will see a pullback before it gets better.
This pullback will include esports teams going out of business, being sold in a fire-sale, raising at down-rounds, talent flight, and more (some of which is already happening today). These events will be largely due to their business models being in the earliest stages of maturation while simultaneously receiving “hyped up” valuations from the investment community.
Here are a few examples of esports teams becoming holding companies (mimicking a media conglomerate vs a pure Denver Broncos sports model):
We believe that the current landscape of esports teams is not the best way to get exposure here, hence why we are focused on the technology & infrastructure side in this industry where the business models & economies of scale are much more developed.