Thread by @tomi

1/ Finally read the Kotaku esports bubble article.

I'm obviously biased, with a vested interest in the industry (and teams in particular) doing well, but I think the text missed the mark in many ways.

Thread below, focusing on the team (arguably most criticized) POV.

2/ Much like with other fast-growing, nascent industries, there are of course plenty of bad actors (see e.g. @DenialEsports) who use the apples to kiwis comparisons (differing viewership metrics, full events vs. single games, etc.), but it doesn't mean it's standard practice.

3/ From my experience, the smaller teams (w/ most to gain) tend to play more fast and loose, whereas the bigger teams (w/ most to lose) tend to be more conservative with data, assumptions, etc.

Bad actors can exist anywhere, but faking numbers isn't a viable long-term strategy.

4/ Perhaps ironically, the article comparing the worst examples they could find within esports/gaming to the standards in multi-billion, mature businesses (sports and entertainment) is the kind of apples to kiwis comparison it worries about within esports/gaming.

5/ What about valuations? The article cites a $300mm team valuation on <$25mm of revenue, or a >12x (likely prev. FY) multiple.

It also cites angels, VCs and PE firms as investors -- which doesn't quite capture most common investors, and entirely misses the mark for teams.

6/ Common/natural team investors are HNWs (typical sports team owner-equivalents) and strategics (who can derive value in other ways).

Both tend to have much longer time horizons on their investments, and view the investments differently than VC or PE firms (non-existent) might.

7/ Latest Forbes NBA team valuations article pegs average valuation at ~7x LTM revenue. Using a PEG-equivalent for revenue, that implies 70% faster growth, which isn't as insane as you'd think.

For NHL teams at ~5x, the equivalent would be 40% faster growth (for esports/teams).

8/ It's unlikely core team operations will ever be highly cash flow positive.

Talent tends to eat about half of the topline, as is the case with traditional sports, where teams also operate on both sides of breakeven year after year.

In teams, >100% of returns is made at exit.

9/ Why operate teams then? First off, it can be a vanity investment -- similarly to how people want to own their local sports teams, many are interested in owning an esports team. This is the HNW investor-type that may be least sensitive to the financial profile.

10/ Second, you can make money off teams outside core team operations.

For example, AEG (our investor) operates the LA Kings, who play at the Staples Center (their venue), pulling crowds to LA Live (theirs as well).

The Kings drive traffic where it can better be monetized.

11/ There are also other long-term options in esports given its digital nature -- it's not impossible (even if unlikely) that at sufficient scale opex is so much lower than in trad. sports that teams could actually turn a sustainable profit if ops are lean enough.

12/ The other obvious (if unlikely) option is better deals w/ publishers, who currently have the best business in gaming.

This might range from launch partnerships to better revenue share to other structures -- it all depends how much audience the team brands can shift around.

13/ At some point the fundamentals (demographics, revenue generation, etc.) and valuations will catch-up industry-wide (excl. corner cases that will always exist), either through:

1) improving fundamentals, or
2) lowering valuations, or
3) some combination of both.

14/ From what I can tell, the most reputable teams (again, reputational risk, long-term viability, etc.) tend to be (more) reasonable in how they market themselves and the industry, and yet the deals (w/ them leading the way) continue go to up.

Deals remain low vis-a-vis sports

15/ Now, we can argue about where current fair value is, but as @andreas said, long-term esports will be bigger than trad. sports (and even longer-term, everyone will be dead).

And this is coming from a massive traditional sports fan (more so than esports as a whole, by far).

16/ While average fan of trad. sports (PGA, ATP, MLB, NFL, NHL, Olympics...) continues aging at a rapid cliff (with NBA roughly flat), esports are starting from 20-30 years younger average.

That's the group (often with higher household income) that advertisers need access to.

17/ That's why IMO in the short-term this is all noise, as long as you have long-term investors who:

1) understand it's not a 5-year play
2) are willing to chip in more capital as the industry grows and consolidates.

The latter will be esp. important, given short-term headwinds

18/ I'm long esports and gaming. Reasonable minds can disagree over the right time to enter, but not of its long-term direction.

Goes w/o saying, but be selective in who you invest in or partner up w/ (like in everything else), especially in a young, fast-growing industry.

19/ Given my view that there's consolidation in the horizon, I don't see the smaller teams doing well in the coming 5-10 years.

Resources/capital, and the best talent will converge among the best operators, who are likely to claim an ever-growing piece of the total pie.

20/ Tl;dr: There are fair points in the Kotaku article (see below), but there's also plenty of misunderstanding, apples to kiwis (their term) comparisons, and quotes that border on fearmongering as it comes to many of the legit operators. kotaku.com/as-esports-gro…

21/ Final point -- I'd note any investor expecting teams to turn a profit in the middle of this growth period probably isn't right for the industry and any commentator expecting that to happen probably lacks insight into why people are investing.

22/ The reason to get in now (as opposed to waiting 5 years for the industry to de-risk itself to a much greater degree) is to find growth.

That's also why teams (and other players) look for investment -- to fund growth. For now, the cash burn is expected. But not forever.