Even before the COVID-19 shutdown, venture funding rounds and total deal volume of VC funding for esports were down noticeably from the year prior. The space received a lot of attention in 2017 and 2018 as leagues formed, teams raised money and surging popularity fostered a whole ecosystem of new companies. Last year featured some big fundraises, but esports wasn’t the hot new thing in the tech world anymore.
This unexpected, compulsory work-from-home era may drive renewed interest in the space, however, as a larger market of consumers discover esports and more potential entrepreneurs identify pain points in their experience.
To track where new startups could arise this year, I asked seven VCs who pay close attention to the esports market where they see opportunities at the moment:
- Peter Levin, Griffin Gaming Partners
- Beth Ferriera, Firstmark
- Ethan Kurzweil, Bessemer Venture Partners
- Jens Hilgers, BitKraft Ventures
- Doug Higgins, Sapphire Sport
- Rick Yang, NEA
- Kevin Baxpehler, Remagine Ventures
Their responses are below.
This is the second investor survey I’ve conducted to better understand VCs’ views on gaming startups amid the pandemic; they complement my broader gaming survey from October 2019 and an eight-article series on virtual worlds I wrote last month. If you missed it, read the previous survey, which investigated the trend of “games as the new social networks.”
Peter Levin, Griffin Gaming Partners
Which specific areas within esports are most interesting to you right now as a VC looking for deals? Which areas are the least interesting territory for new deals?
Everything around competitive gaming is of interest to us. With Twitch streaming north of two BILLION hours of game play thus far during the pandemic, this continues to be an area of great interest to us. Fantasy, real-time wagering, match-making, backend infrastructure and other areas of ‘picks and shovels’-like plays remain front burner for us relative to competitive gaming.
What challenges does the esports ecosystem now need solutions to that didn’t exist (or weren’t a focus) two years ago?
As competitive gaming is still so very new with respect to the greater competitive landscape of content, teams and events, the Industry should be nimble enough to better respond to dramatic market shifts relative to its analog, linear brethren. A native digital industry, getting back “online’”will be orders of magnitude more straightforward than in so many other areas.
Do you see opportunities for VC-scale returns in esports companies focused on team ownership and/or content creation as opposed to development of a software product?
Team ownership was never a consideration for our fund.
What startups do you wish to see in this space but don’t yet?
Native cross-platforming plays that tap into the social and ambulatory nature of gaming are of interest to us. We’re also looking for the killer app that expands the aperture with respect to onboarding more female gamers. There is a lot of ceiling left with this demographic and we will continue to seek out the right vehicles with which to address it.
How has the COVID-19 lockdown and corresponding surge in esports viewing impacted this space?
The COVID-19 pandemic has collapsed the window within which the broader, more traditional fan of sport got exposure to esports. Whether it’s EA’s FIFA Soccer on NBC, Rocket League, NBA 2K and Madden NFL 2020 on ESPN, virtual F1 racing on NBCSN and virtual horse racing on ITV, tens of millions of sports fans tuned in out of sheer lack of traditional programming or the novelty of virtual competitive gaming. Topgolf-owned World Golf Tour’s virtual golf app and related content has seen an unprecedented surge amongst stranded golfers around the globe. People are competing against one another and creating virtual “golf clubs” to coordinate tournament play and recapture lost social moments from the golf course. Regardless, people are talking about it, pundits are writing about it, podcasters are podcasting about it. It’s a thing and the genie is way the hell out of the bottle.
Beth Ferreira, Firstmark Capital
Which specific areas within esports are most interesting versus least interesting to you right now as a VC looking for new deals?
What is exciting about this market is that we are still in the early days of esports and there is lots of opportunity. As a VC, the areas I am most interested in are companies enabling monetization such as data and analytics, training (Statespace is in FirstMark Capital’s portfolio) and fan networks, to name a few.
To what extent do you expect the surge in gaming and esports viewing during the COVID-19 lockdown will impact startup opportunities in esports? Has it changed your interest in the space?
The surge in viewership is certainly creating strong tailwinds for esports, with increased viewing and new participants joining. As a result, we are seeing ESPN and other traditional broadcasters increase the airing of esports and some traditional brands spending more advertising dollars in the category. As esports develops into a strong ROI channel, this will spur even more innovation and monetization opportunities in the space.
What startups do you wish to see in esports but don’t yet?
The most exciting startups will be the ones that have not been imagined yet. In the meantime, new streaming platforms and companies formed around building community and monetizing fan engagement will be exciting to see.
Ethan Kurzweil, Bessemer Venture Partners
Which specific areas within esports are most interesting to you right now as a VC looking for deals? Which areas are the least interesting territory for new deals?
While our gaming practice is as active as it’s ever been, our esports roadmaps are far more focused these days. There are three areas in particular where we’re spending time: data platforms, betting and digital assets. One interesting esports category right now are the tech platforms tapping into data from players and publishers. If you can understand players’ behaviors across multiple game sessions and different games, there’s a world of opportunity to build an identity layer in gaming that can improve player performance and social mechanics. One example is the product Blitz.gg (part of our portfolio company TSM), which has become an indispensable product for League of Legends players around the world. We’re also continuing to spend time with founders building products to facilitate esports betting and marketplaces for digital assets within games.
When it comes to the less interesting aspects of esports, it’s important to remember that the industry is largely controlled by publishers. The other major esports categories: teams, tournament organizers, leagues, youth athletics are all as successful as the AAA game studios/publishers want them to be. In the team spaces specifically, Bessemer is an investor in Team SoloMid (“TSM”). In the years to come, we expect there to be a phase of “consolidation and collaboration” in the esports world. Unprofitable teams won’t make it and the remaining marquee organizations will need to implement collective bargaining, players’ unions and other mechanics that make the major professional sports leagues successful today. Without this cooperation among teams, eSports will not reach its full monetization potential with sponsors, media distributors and publishers. Even the NFL, NBA and other major leagues took years, if not decades, to self-organize in a manner that maximized earnings for all stakeholders.
What challenges does the esports ecosystem now need solutions to that didn’t exist (or weren’t a focus) 2 years ago?
As the industry has grown in recent years, the audience has expanded significantly, with audience numbers as large as Netflix and ESPN. The fundamental problem with the esports business is that it’s not easily run like a business at all! The NFL thinks about making money for NFL owners, the LoL commissioners don’t think about that at all — they think about getting more people to play League of Legends. The result is that the industry has become very fragmented, so there is a need for an infrastructure to support the business of the esports economy. Take Major League Baseball for example: Commissioner Rob Manfred runs the league like a business where his goal is to maximize revenue for players, coaches, owners and all other industry participants. The challenge is figuring out a win-win for the publishers to make the league a profitable, scalable, growing entity, as opposed to a tiny initiative within their marketing division. Beyond that, teams need to move to collective bargaining to increase their negotiating power against the publishers.
I also think there needs to be more thoughtfulness to player development and player career tracks. When players have a path they can follow and generate income and standing along the way, esports will start to be viewed as more of a legitimate career similar to other professional sports. We’re already beginning to see high school and college teams pop up, and we expect to see natural “career” ladders continue to form in the coming years.
Do you see opportunities for VC-scale returns in esports companies focused on team ownership and/or content creation as opposed to development of a software product?
Yes, and we have invested in TSM for that reason. However, it’s definitely a narrow path, because you need to create such a compelling brand and a strong, enduring relationship with your audience. The thesis that we see playing out is that modern teams will expand beyond player operations and content creation. For that reason, TSM has branched out in the past years and is just as much of a software company as it is an esports team and content creator. You need all three (brand, team success, software) to create a strong moat for the business. We believe they’re building a model for what the future of a sports franchise looks like — equal amounts of software engineers and players/streamers/content creators.
What startups do you wish to see in this space but don’t yet?
I’d love to see companies that are making esports more accessible to watch for the average fan. Right now, the very popular casual games aren’t very high on the watchability scale, and the most popular games — e.g., League of Legends on Twitch — are hard to follow for amateur or casual gamers. I’d be interested to see companies creating games that are more fun to watch and easy to play for the casual gaming audience – expanding the reach of the esports industry beyond just the hardcore professional gamers.
I think it would go a long way toward making esports sustainable if we created a structure to let another party run the leagues, while still meeting the publisher’s objectives and ensuring they can monetize. This infrastructure would help develop players and run the league — with a community of gamers at various levels. There are many opportunities to participate in building this league infrastructure, if the major publishers would give up just a tiny bit of control. As investors in Twitch, we experienced this type of symbiotic growth first hand in their early days. Publishers allowed Twitch to thrive while also giving all of the games an outlet to bring in new fans and players – the growth has benefitted everyone and facilitated the boom in gaming/streaming we see occurring today.
Jens Hilgers, BITKRAFT Ventures
Which specific areas within esports are most interesting to you right now as a VC looking for deals? Which areas are the least interesting territory for new deals?
From a thematic perspective, we continue to spend more time with exciting games studios on the one hand; and with gaming infrastructure and platforms that integrate across various IPs on the other. From a geographic perspective, we are paying increasing attention to emerging gaming markets such as India, Middle East and Southeast Asia while we have dominantly invested in North America and Europe to date.
What challenges does the esports ecosystem now need solutions to that didn’t exist (or weren’t a focus) two years ago?
The ecosystem didn’t change in a way that solutions are needed that were not in demand or of benefit two years ago. The biggest challenge for the esports ecosystem remains a structural one on how IP holders, leagues, teams and players are collaborating and interacting through professional sports structures. While time and more experiments at greater scale are providing a valuable new experience to all market participants, it will still take many years for the industry to be at a point where it feels like it’s come together in a highly sustainable and beneficial way for all participants.
What startups do you wish to see in this space but don’t yet?
I would like to see a platform that serves as a trusted authority to authenticate and validate the identity of an amateur or professional esports player as well as to implement a more holistic approach to combat cheating and toxicity. This platform would be highly useful for the industry at large, and in particular, the tournament organizers and professional teams.
Doug Higgins, Sapphire Sport
Which specific areas within are most interesting to you right now as a VC looking for deals? Which areas are the least interesting territory for new deals?
We take a broad view when we think about the sport market including gaming and esports. That means we’re really looking at everything from publishers to infrastructure to global sponsorships, digital health and fitness, betting, software management and everything in between.
One area we have been, and continue to be, skeptical of is the valuations investors are assigning to some of the esport teams. As an institutional investor, it is difficult for us to see the risk-adjusted returns you expect from venture capital for many of these organizations. This is especially true now, with COVID, as teams are suffering from the lack of live events and reduced sponsorship dollars.
We believe that while most investors’ attention has been focused on professional gamers, there is a larger, more underserved market with amateurs. Tournament platforms, coaching tools and other enabling technologies, all of which touch the grassroots foundation, will be necessary to engage larger audiences and grow the esport market. With our investment in PlayVS, we’ve identified a company which has provided structure and access for gamers to engage in organized competition at a young age and technologies that can provide similar value on a broad scale.
Finally, companies like Roblox have proven that gamers don’t just want to be players, they also want to be creators, and we are very excited about technologies that put the power of game development in the hands of the gaming community, such as our investment Manticore Games.
How will COVID-19 and a recession reshape the market — and the opportunity for startups within it — over the next two years?
COVID is affecting esports like traditional sports since they can not have live events and sponsorship dollars are being reduced. There seems to have been a boost to gaming overall as everyone is sheltering in place, and we believe over the next few years that you’ll see virtual, esports events becoming more popular — especially if there is a new generation of infrastructure technologies that can help these events run more seamlessly, and fan immersion technologies to enhance the viewing experience.
What startups do you wish to see in this space but don’t yet?
We continue to be most interested in enabling technologies for the gaming industry. For example, we continue to look for coaching and player-development technologies that are truly unique and innovative. We also believe that there remains a significant opportunity for infrastructure technologies — companies with solutions that minimize latency issues, address security concerns or provide ways to immerse fans in the experience above and beyond watching a gamer’s live stream. Transactional solutions are another area we’re watching closely.
Rick Yang, NEA
Which specific areas within esports are most interesting to you right now as a VC looking for deals? Which areas are the least interesting territory for new deals?
Interesting areas:
- New scalable and creative ways of monetization for esports
- Ideas at the center of the Venn diagram of e-commerce, media, social, and gaming
- Broadly, enabling mass consumer gatherings for live events within gaming worlds a la Travis Scott’s Astronomical (but apply this to everything —religious gatherings, education, etc.)
Uninteresting areas:
- Platforms for how to get better at X game
- Traditional ideas around esports influencers
What challenges does the esports ecosystem now need solutions to that didn’t exist (or weren’t a focus) two years ago?
The market isn’t mature enough to try and mimic revenue streams and ideas from traditional sports successfully, which was the initial push by the space to gain credibility
What startups do you wish to see in this space but don’t yet?
I don’t know what shape these might take (which I think is the point of this question), but I hope to know it when I see it:
- Companies that are able to create a completely proprietary, high-value set of data for this ecosystem
- Companies that will be able to completely re-imagine what a live esports event is and how it is experienced (both in person and remotely)
Kevin Baxpehler, Remagine Ventures
Which specific areas within esports are most interesting to you right now as a VC looking for deals? Which areas are the least interesting territory for new deals?
At Remagine Ventures, we mainly focus on software solutions, addressing the needs of esports fans and casual gamers, and less on the professional players, teams or leagues. Currently we are looking at esports data solutions, monetization/innovative advertising products, viewer engagement tools, innovative broadcasting and publishing or OTT/infrastructure solutions.
We like the trend of how esports as a cultural phenomenon is crossing over into other industries, e.g., music, e-commerce, content and social. With 5G rolling out, we also expect mobile gaming to reach new levels.
We don’t invest in teams or leagues.
What challenges does the esports ecosystem now need solutions to that didn’t exist (or weren’t a focus) two years ago?
- Clear league and tournament structures. Currently in some titles it is still fragmented and complicated, some publishers take control, some franchise and some keep it open.
- Revenue — while esports is increasing in popularity, it is still small compared to most other sports when it comes to attracting sponsorship, media rights and advertising funds. Most blue-chip companies still struggle to engage with FPS games since it still lacks broad social acceptance. The esports industry is not mass-marketable yet.
- New ways of monetization: advertising and pay models in the traditional way don’t fully work in the community.
- There is a lot of data we don’t have access to as most publishers don’t have public APIs and the streaming platforms are selective in what data they share.
Do you see opportunities for VC-scale returns in esports companies focused on team ownership and/or content creation as opposed to development of a software product?
We’re mainly focused on software, ideally with some tech differentiation. Furthermore, given the structural challenges most leagues and tournaments face we currently do not invest in teams. That said, we like how some teams are building lifestyle brands, e.g. 100 Thieves or FaZe Clan.
There certainly are opportunities within content creation. Our portfolio company Minute Media owns DBLTAP, for example. One of our investors acquired the domain www.esports.com and is re-launching its platform and brand. Mostly we look at how technologies can help create or discover content, e.g., automatic video summaries or our investment Novos, a technology-driven gaming-training platform.
What startups do you wish to see in this space but don’t yet?
We are looking for new and innovative ways to collect and analyze data or to advertise. Technologies like computer vision and machine learning can impact how the consumer plays, interacts, learns or watches esports. We also don’t have a common currency yet of how to measure reach and engagement, which is needed to measure attribution and attract more money.
