I receive a lot of inbound communication from investors seeking exposure to gaming and esports (for the purposes of this discussion, I will consider the esports sector to be all encompassing of gaming, esports, and adjacent markets). The esports industry is hot right now, and many investors feel like they are missing out. When they look for investment opportunities, often it becomes clear, there is not an ample supply of investment opportunities in esports.
1) How do I invest in esports?
2) Should I invest in the publicly traded game makers?
3) Can I put money to work in an esports specific Venture Capital fund?
4) How do I get access to early stage esports startups?
I’m astonished by the frequency with which I hear these questions. It seems as if weekly, I get a call or email from an institutional investor, family office, or even an individual investor asking about both direct investment opportunities and institutional investment opportunities in esports.
There are a number of ways to gain exposure to esports as an investor. In an attempt to broadly answer the questions above and outline where those opportunities are, I’ve summarize the public and private opportunities as I see them and categorized them into three groups:
There are very limited “pure play” institutional investment opportunities focused on esports. BITKRAFT is the only truly “esports only” VC fund that I know of currently (I’d consider them a clear market leader in the esports industry). There are other funds investing frequently in esports who have substantial domain knowledge, but have non-esports exposure as well (many of those are listed in my blog post here: Who is Investing in Esports).
As you can see in the blog post, Who is Investing in Esports, there are hundreds of investors putting money to work in esports. There are dozens of venture firms doing so and a few, are very actively pursuing a thesis within the space. Some of the most active venture investors in the space include: March Capital, Crosscut, Courtside, Deep Space Ventures, Everblue Management, Greycroft, Index Ventures, CRCM, Catalyst Sports, Sterling VC, BITKRAFT and others. These are the names I come across and bump into all the time around early stage founders in deals that I’m chasing in esports.
Most of these funds listed above are not focused solely on esports, so if you’re looking to make an institutional investment in a fund to get esports exposure, you’re likely going to have to accept their exposure to other end markets that you may already have exposure to, or may not want. That could be a good, or a bad thing, but that’s up to you to consider when evaluating the risk/return profile and exposure profile of these funds.
Good news, this is changing, as I’m aware of at least 3 “esports only” venture funds and one esports focused early stage accelerator that are in the process of raising money right now. Additionally, there are a couple other funds raising money right now that will be “esports heavy” with exposure to other things like VR, AI, etc. These funds may be a good way to make a macro bet on esports.
The risk of investing in one startup, is diversified away to a basket of startups when you invest in a fund, but at the same time, the upside from a fund investment, is lower than that of investing in one startup that hits it big. Additionally, the time horizon of a fund investment is typically 7–10 years. Startups can often take that same time to mature as well, but often there is a chance they pay out much sooner as well. In a fund investment, you’re getting slightly less risk, slightly less return, and a longer duration.
For those seriously interested in making institutional bets, I am happy to make introductions to the fund managers I’ve alluded to above who are currently raising capital.
Maybe becoming a Limited Partner (investor) in a VC fund isn’t appealing to you due to the minimum check sizes, investment horizon, unwanted market exposure, etc.
The alternative would be to invest directly into early stage esports startups yourself. The hard part, is that the startup market is very challenging to navigate. If you’re about to make your first startup investment, you are likely to face some of the following challenges:
1) Quality Deal Flow — You will likely need to have a relationship with one of the investors / funds mentioned previously to be in the flow on the best deals coming to market in the sector. Occasionally, there will be exceptions to that rule, but do not expect that the be the norm. The best deals are usually circulated among a subset of these investors who are very active in the space, and bring strategic value to the cap table when they invest.
2) Skyrocketing Valuations — There is currently a flood of capital chasing deals in the esports space. A lot of that capital is what I call “patient capital” coming from family offices and high net worth individuals that do not have the same investment time horizon and return hurdles that institutional investors face. This drives up valuations, and makes good investments even more scarce.
3) Strategic Value — One of the best ways to get into the hottest deals in the space is to offer some sort of strategic value to the company, as an investor. This is a bit of a chicken or the egg scenario for some people, as you need investment exposure to the space to add value in some cases, but you need to have a clear value-add to get that investment exposure. If you’re not an experienced angel or early stage VC, these founders in the “hot” deals likely don’t see any strategic fit to have you in their cap table.
4) Diversification — I tell all early stage investors or angels, to do more than one deal at the early stage in any sector. Any one early stage bet has a very high chance of failing. So you need a portfolio of exposure to the early stage asset class, which means that getting access to just one great deal isn’t enough, you need access to many great early stage deals which takes us back to item number 1 above (Quality Deal Flow).
5) What do you invest in? — Do you invest in an esports organization? Do you invest in a startup? How about a game developer? At what stage? How do you decide? With a lack of experience investing in either startups or esports, you may struggle to honestly answer these questions and land on the right investment opportunity for yourself.
I’m not trying to discourage you from investing directly in esports startups (or startups in general), but I am encouraging you to become familiar with the risk/return profile of the asset class and not dive head first into something without knowing the mitigating factors to the risks you are taking.
Investing in one startup or a few startups is the highest risk, highest return potential of any investment discussed here. You have to consider that the odds are that any one startup investment will fail, but you do have the potential for a decent sized short term win, and a massive long term win if you place your bets correctly in direct startup investments.
To date, you can certainly gain exposure to esports via some publicly traded companies, but similar to the institutional dilemma, direct, pure-play exposure to esports is hard to find.
You can however, get some uplift from the rising tide of the gaming and esports market via exposure to some of the following publicly traded companies.
The public companies that have the greatest percentage of their revenue levered to the esports space are: Tencent, Activision Blizzard, Electronic Arts, Nintendo, NetEase, TakeTwo. In my opinion, if you’re looking to catch some uplift from the rising esports tide, these stocks would give you exposure to that broad trend. Although these are mostly game makers, and less directly impacted by the performance of “esports” directly, their games are the IP behind the space and are correlated.
Some publicly traded companies that do have esports and or gaming exposure, but as an even smaller percentage of their overall business include names such as: Amazon, Microsoft, Sony, Apple. Additionally, there are hardware manufacturers such as Nvidia that have benefited a great deal from the growth in esports (however, a lot of their growth is attributed to the use of GPUs for B2C and B2B processing). I would suspect that the ‘beta’ between esports market momentum and movements in these stocks is very low, or even negative.
The downside to investing in these public stocks, is the limited upside and lack of pure play esports exposure. While you likely won’t lose all of your money as if often the case in startup investing, the real home runs in the space are in the early stage private market.
Publicly traded stocks allow investors to trade the upside of a fund, or direct startup investments for relative safety and liquidity.
In conclusion, There are a number of ways to get exposure to the esports space, but none of them are perfect. You must consider your investment objectives, timing, risk tolerance, risks and mitigating factors to those risks among other things.
To help those who may not be as familiar with the asset classes discussed here, I’ve compared what I feel are the risk, return, duration and liquidity considerations among the three types of investments, on a relative basis here in this table. Some of this is subjective and up to interpretation based on your perspective, market position and experience.
A special thank you to Nahid Giga who provided very helpful insights while drafting this article.