Mentioned in this article Games: League of Legends

Azubu, an esports streaming and content site, recently announced that it had raised $59 million in debt financing. Pop the champagne, bubbly all around, right?

Wrong.

Take a closer look: “debt financing.” It is crucial to understand how startup financing works and the different methods used by companies to secure cash. In the past, Azubu received what is called “equity financing,” where a company sells ownership shares in exchange for money. This is useful in many ways, because it can be used to build relationships, along with giving everybody an idea of its total valuation.

Debt financing, however, is basically a loan. A company puts up collateral or secures a guarantor, and then receives money with the understanding that later on, it will be paid back. If the company fails to pay it back, it loses the collateral, along with potentially other penalties.

Azubu’s case is even more complicated. Sapinda, the investment group largely responsible for Azubu’s financing since its inception, is paying for this financing by issuing bonds. It is currently seeking “high-net-income investors” to buy up those bonds, which in turn will secure Azubu’s financing. In layman’s terms: the money doesn’t exist yet.

That’s not to say that it won’t come. Debt financing is a very useful method for startups, especially ones looking to expand rapidly. Re/code writer Liz Gannes describes the benefits:

[perfectpullquote align=”full” cite=”” link=”” color=”” class=”” size=””]”It’s funding on good terms and it doesn’t dilute the ownership of your company. In addition, you can choose to spend it or not and get to know banks and their bankers, should you ever decide to go public.”[/perfectpullquote]

There are countless examples of companies that have used debt financing successfully, such as Square, Dropbox, Facebook, Twitter, and Box. Sometimes, it can even signal that a company is ready to begin offering public stock options in the form of an IPO. Major League Gaming, a U.S.-based esports tournament organization, has filed multiple notices to the SEC for debt financing this year alone, for a total over $6 million.

Still, this strategy carries significant risk. According to Ben Popper at The Verge, “debt financing can also be a bad sign… as evidence that the company was struggling to attract new investment without deflating its valuation.” There’s also always a chance that investors don’t subscribe to the bonds, essentially making them worthless. It all comes down to whether investors see value in your company—and for esports, value can be hard to come by.

[perfectpullquote align=”right” cite=”” link=”” color=”” class=”” size=””]Azubu, then, treads dangerous waters. [/perfectpullquote]

As a streaming site, it faces significant competition from the likes of Twitch and YouTube, both giants in their own right.

Azubu’s plan to survive, at least on the surface, relies on creating a niche site for esports—one where viewers can go and know they are watching only the most competitive and skilled players. However, that clashes with other moves Azubu has made in the past, such as opening up their streaming site to anybody that wants to sign up and since the launch of 3.0, streaming games not related to esports like Grand Theft Auto 5, Mad Max, and Super Mario Maker.

Then, there’s the very public dissolution of their League of Legends esports teams, Frost and Blaze, along with a handful of pros in other titles. That, coupled with a legal standoff Azubu made earlier this year against a re-streamer named SpectateFaker, created a lot of bitterness in the community towards the streaming company.

So what, then, is Azubu really trying to do? According to tech research firm Newzoo’s CEO, Peter Warman, per a report on Fortune, “Azubu has a very different business approach from Twitch and other companies.”

[perfectpullquote align=”full” cite=”” link=”” color=”” class=”” size=””]”Azubu is focused on getting content rights and then riding the wave of growth that could help them cash in when media rights are traded similar to traditional media—if that day ever comes.”[/perfectpullquote]

These media rights include Korean League of Legends team SKT T1, which includes Lee “Faker” Sang-hyeok, one of the most popular players on the planet. Azubu’s partnerships also extend into the Brazilian scene, where it teamed up with UOL BoaCompra XLG League, which recently took control of the League challenger circuit in Brazil.

Holding these media rights certainly does have value, but it definitely remains to be seen whether that value can be sold. If other streaming sites don’t see the worth in paying for those media rights, or if the streamers and tournaments don’t want to continue with Azubu, the streaming site might end up holding nothing of value at all.

Other theories have arisen as well, such as the potential of this all being a play to get bought out, much like Twitch was by Amazon last year to the tune of nearly $1 billion. If that’s the case, Azubu needs to step up its game and really make a bid to potential media giants that would be able to take the reins. If Azubu can’t, it could be held liable for defaulting on this debt financing, which could spell the end of the streaming site.

Azubu’s new debt financing raises a lot of questions. How much has the company secured, exactly, since Sapinda appears unable to finance the $55 million itself? Will they be able to pay the loan back solely on their own revenue stream? Or are they instead angling for media rights and a potential buyout to resolve this debt?

One thing, at least, is clear. Azubu is making a risky play in order to stay in the game against Twitch. It’s a coin toss. Either it’s the best trip they get, or their golden shot.