Professional esports teams have been receiving significant investments over the past few years. These pro teams are often referred to as “esports organizations,” and their valuations have continued to climb over the past 36 months. Forbes recently published a piece showing the valuations and revenues of the top 12 esports organizations, many of which are now worth over $100M.

We believe investors are betting that esports organizations are going to grow like tech companies, not sports teams.

Taking a closer look at these esports organizations, their current business models mimic those of traditional sports organizations (valued at ~5x revenue) yet current valuations of esports organizations (valued at ~13x revenue) more closely mimic tech companies (valued at >10x revenue).

Esports Organizations = ~13x revenue

Tech Companies = ~10x revenue

Sports Franchises = ~5x revenue

In short, we believe that to sustain these multiples, esports organizations will have to shift their underlying business models away from traditional sports monetization strategies and towards scalable and technology-driven revenue streams.

If they can make that shift, then the top-tier esports organizations will be worth >$1B, ultimately surpassing many traditional sports franchise valuations, and justifying the high valuations they are receiving from this latest wave of investors. If they can’t, then we believe there will eventually be a pull-back in valuations over the next 2–3 years.

Source: Forbes + Pitchbook

Below, we take a deeper dive into the valuations across esports, traditional sports, and tech companies.

Esports Valuations

According to a recent Forbes report, the highest valuation today belongs to Cloud9 at $310M on $22M of revenue (2018e). This implies a 14.1x revenue multiple. As the highest valued esports organization, they rank second in revenue next to Team SoloMid at $25M (2018e). As the chart below shows, the average valuation for a top esports organization today is trading at 13.8x revenue.

Based on the valuations that investors are paying for these teams, it shows a high demand for these assets at premium valuations. This is especially evident with organizations that are valued under $100M where you see revenue multiples at 20x (Immortals), 19x (Envy Gaming), and 18x (100 Thieves).

To avoid investor fatigue & eventual disappointment, the bar is incredibly high on these esports organizations to produce revenue & profits that justify current & future valuations.

But what is their benchmark?

Current investment valuations indicate that investors are looking for these esports organizations to have similar growth trajectories to technology companies (10x+ multiples).

However, we don’t see evidence today that their current underlying revenue comes from scalable technology plays.

To date, their business models more closely mimic the revenue streams of traditional sports teams (sponsors, advertising, merchandise, prize pools, franchise revenue, etc) which trade closer to 5x revenue (sports teams), not 13.8x revenue (esports organizations).

Therefore, in order to avoid a situation where investors try to pull out of esports organizations or future investment is discouraged from coming in, we believe that:

Esports organizations need to figure out a way to build their businesses to be globally scalable and driven by recurring revenue streams.

In the esports market today, there are a variety of revenue streams that contribute to the overall industry’s revenue which includes: sponsorships, advertising, media rights, game publisher fees, merchandise, tickets, and more. Esports organizations at present do not make public their revenue structure, though we’re confident that their current sources of revenue are similar to those of traditional professional sports teams.

(Disclaimer: we know that every esports organization is unique, yet their revenue sources to date are not too dissimilar to those of traditional sports teams. Our goal here is to point out that esports organizations will need to evolve into tech companies in order to justify their valuation premiums. We are not saying that they are not valuable or won’t be worth billions (quite the contrary, actually). From our perspective, we believe that if esports organizations can be built into scalable tech companies that they will be worth far more than any traditional sports teams (which is very exciting).

Traditional Sports Franchises

Like traditional sports franchises (NBA, NHL, NFL, MLB), esports organizations generate revenue through building teams that attract a loyal fanbase. The main difference is that esports organizations build teams across multiple game titles, unlike traditional franchises that make money through a single sport. In addition, esports organizations attract major followings across the world in numerous regions (Asia, North America, Europe, LatAm, etc) which is much less common for U.S. sports franchises.

Traditional sports franchises make money through a few distinct verticals: ticket revenue, food & beverage, media rights, sponsorships, and merchandising. This mimics the current business model esports organizations use today yet traditional sports franchises trade at less than 50% of the revenue multiples that esports organizations are trading at today.

Investors today are certainly paying for potential growth, which is understandable given the market’s trajectory, but this raises the bar quite high on these esports organizations. To justify these multiples in the coming years, we fundamentally believe that esports organizations will have to adopt business models that are more similar to scalable tech companies than those of traditional sports franchises.

NHL (National Hockey League)

The NHL has the lowest average valuation of the major professional sports leagues in North America and is likely the first league that esports organizations will surpass over the next 3–5 years. The average valuation of an NHL team is $549M, compared to the average valuation of $143M for top-tier esports organizations. In esports, Cloud9 ($310M) is already more valuable than 2 NHL franchises (Florida Panthers and Arizona Coyotes) with several other esports organizations like TSM ($250M) and Team Liquid ($200M) not far behind (source: Forbes).

NBA (National Basketball Association)

At the lowest end of the NBA spectrum (Milwaukee Bucks), their $170M in revenue is 7x higher than the TSM’s $25M, the highest revenue producing esports organization. However, the Milwaukee Bucks ($1.07B) are only 4.3x more valuable than TSM ($250M). The average revenue multiple across all NBA franchises is 6.5x with the highest being 9.7x and the lowest being 4.7x (source: Forbes).

NFL (National Football League)

NFL franchises have the highest valuations across sports franchises by a large margin with the lowest Buffalo Bills ($1.6B) still being valued higher than the NHL’s highest valued team with the New York Rangers ($1.5B). While NFL franchises generate hundreds of millions in revenue, all of the NFL franchises have lower revenue multiples than even the lowest multiple for a top-tier esports organization (Gen G at 9.2x revenue multiple). NFL is arguably the most proven league in terms of fanbases, revenue, and long term media rights deals but the franchises take a much more conservative valuation compared to revenue when compared to esports organizations (source: Forbes).

MLB (Major League Baseball)

The MLB, America’s pastime, only averages a revenue multiple of 5.04x. The MLB puts on 5,460 regular season games a season and accounts for many franchises that have been around for over a century. Baseball has proven to pass the test of time but still only has a revenue multiple of 5.04x, which is 64% lower than the average top-tier esports organization revenue multiple of 13.8x (source: Forbes).

Tech Company Multiples

This is where it gets interesting.

Esports organizations seem to be getting valued much closer to tech company revenue multiples (10x and above).

While they have very little in common in terms of revenue streams today in 2018, investment valuations indicate that investors seem to view them with similar growth trajectories as tech companies.

What first caught our attention when looking for comparisons to tech company valuations: the amount of users (tech companies), amount of viewers/attention (esports orgs), global reach (video gaming audience), and scalable business models (subscriptions, etc).

Top-tier esports organizations fanbases are under-monetized, similar to tech companies in early days, and need to quickly move to subscription models and alternative recurring methods of producing revenue that is based around premium content and fan experiences with their favorite teams.

We believe investors are betting that esports organizations are going to grow like tech companies, not sports teams.

Below are some examples of Tech revenue multiples for companies ranging from $15M-$2.6B in revenue. While many of these transactions are a bit older, this type of data is private data and is relatively challenging to obtain:

Source: Pitchbook

(Note: revenue, valuation, and their respective multiples represent estimates used in the rounds raised / exits in that current year)

(Below is our appendix of charts & data for each of the traditional sports leagues)

Appendix — Sports Team Valuations

NHL (National Hockey League)

NHL franchise valuations and revenue (source: Forbes)

NBA (National Basketball Association)

NBA franchise valuations and revenue (source: Forbes)

NFL (National Football League)

NFL franchise valuations and revenue (source: Forbes)

MLB (Major League Baseball)

MLB franchise valuations and revenue (source: Forbes)

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