Eports take place on streaming platforms like Twitch.TV, YouTube and Mixer. So the competitions have a big advantage while precautions against the coronavirus are in place to traditional team sports, which, held in arenas or stadiums, have been shut down worldwide.
But Esports does have one sizeable disadvantage to traditional sports: capital. Even many of the most valuable Esports organizations still need to raise money to fund growth or because they are not profitable. As Forbes explained in our 2018 Esports Valuations, Player costs typically eat up half of a company’s operating budget. The vast majority of companies are cash-flow (in the sense of earnings before interest, taxes, depreciation and amortization) negative as they continue to spend money to build their rosters and brands.
This has led to esports companies raising capital by the buckets.A 2018 Goldman Sachs report stated that esports have landed venture capital investment totaling $3.3 billion since 2013, and $1.4 billion as of the middle of 2018, nearly 90% higher than the same period the previous year. In some cases the capital being raised by these Esports organizations is huge relative to their revenue.
For example, as my colleague Christina Settimi noted, Envy Gaming, which had $8 million in revenue, raised $20 million in capital last year. Gen.G, with $9 million in revenue, raised $46 million last April.100 Thieves raised $100 million in July, ten times its revenue. The Esports Observer noted in December, “Following two months that saw more than $200 million in disclosed investments, The Esports Observer tracked $343 million in disclosed investments in the esports industry”.
This marks the second-highest amount in 2019 after July’s $556.63M in disclosed investments. Financial terms were not disclosed for all deals highlighted in this article.But Coronavirus is likely to dramatically slow venture capital funding for all industries. A week ago, Morgan Flager, general partner of Austin-based Silverton Partners, said to Crunchbase News it told executives across its portfolio that it is “prudent to assume that fundraising velocity will slow from the fast pace we’ve seen as investors take time to process the new macroeconomic environment.”
He further explained “…volatility in the stock market and declining multiples will inevitably play through to the private markets. Companies that haven’t ‘gotten the memo’ and are still recklessly buying growth and burning lots of cash doing so will increasingly be viewed as risky and will see that risk premium reflected in their value.” And a week ago, Venture capital firm Sequoia Capital warned in an email to entrepreneurs that the coronavirus could potentially be the herald of a “prolonged” global economic slow-down.
The ultimate upshot for Esports organizations is unclear. It obviously depends on how long Coronavirus rattles the markets. But some consolidation in the industry would not surprise me if funding remains hard to come by for a prolonged period.