Esports companies are constantly buying and selling teams and players to compete in the best leagues and build audiences on Amazon’s Twitch and Alphabet’s YouTube. Facilities are being built where gamers can train. It’s a shoot-out to see who can be the biggest and baddest brand.
There are some similarities to traditional sports leagues. Riot Games began selling franchises for $10 million a pop for its game League of Legends in the summer of 2017. Activision Blizzard began selling franchises for $20 million for its Overwatch League around the same time. Iconic sports names—from the New York Yankees and Houston Rockets to Robert Kraft and Magic Johnson—have bought in.
They were smart. League of Legends franchises are being valued at $50 million by bankers. Overwatch franchise valuations are $60 million to $80 million, depending on country and city. In other words, theformer has seen a fivefold increase in a year, the latter a three- to fourfold increase.
Why? According to Newzoo, the number of esports enthusiasts worldwide will reach 165 million in 2018, which translates to year-over-year growth of 15 percent. Esports revenues will grow 38 percent this year, to $906 million, and reach $1.65 billion by 2021. Most of the business will come from North America (38 percent) and China (18 percent). Sponsorship is the biggest revenue stream ($359 million this year), followed by advertising ($174 million), media rights ($161 million), game publishing fees ($116 million) and merchandise and tickets ($96 million).
But media rights are growing the fastest and are projected to be more than $320 million by 2021, making it the second-biggest source of revenue behind sponsorships. In July, Activision Blizzard signed a multiyear deal with Walt Disney to broadcast the Overwatch League on linear television. The deal covers multiple Disney-controlled networks including ESPN, Disney XD and ABC. Overwatch is already adding expansion teams, and Riot Games has begun selling franchises for its European league.
Esports has its first crossover star in Tyler Blevins, better known as Ninja (and member of the 2019 US 30 Under 30 list). In an ESPN interview, Blevins suggested he earned seven figures a month. The ESPN cover boy has 3.5 million followers on Twitter, 19 million subscribers for his YouTube channel and 11 million on Twitch.TV, and has shown up on mainstream talk shows including Ellen. He has sponsorships with Samsung, Red Bull and Uber Eats. Ninja is the type of gamer every esports company and their sponsors covet.
Player costs typically eat up half of a company’s operating budget. The vast majority of companies are cash-flow negative (in the sense of earnings before interest, taxes, depreciation and amortisation) as they continue to spend money to build their rosters and brands.
This has led to esports companies raising capital by the buckets. In 2017 there were 74 deals (the majority from angel and venture capital investors) worth $1.52 billion involving esports companies, according to PitchBook, up from 6 deals worth $34 million in 2008. Thus far, there have been 63 deals worth $2.34 billion in 2018. The theory is: Dilution is an acceptable consequence because 20 percent of something worth $1 billion is greater than 100 percent of something worth $100 million.
The esports companies that end up winning this shoot-out will likely be those that have arenas and multiple teams in multiple leagues. Cloud9 is the most valuable professional esports company, worth $310 million, in part because of its success across a wide variety of games. This month, the five-year-old company, which is owned by Jack and Paullie Etienne, raised $50 million in Series B funding. A chunk of that will go toward building a 20,000- to 30,000-square-foot training facility and home base for its operations in Los Angeles, scheduled to open in 2019.
Cloud9 is tops from a competitive standpoint as well. Its North American LOL team made its sixth-consecutive appearance this year at the World Championships, the longest streak of any team in the esport. In July its London Spitfire became the first ever champion of the Overwatch League. In January its Counter-Strike: Global Offensive team became the first North American squad to take top honours at a major tournament.
Team SoloMid, the second-most-valuable company ($225 million) and the only one known to be cash-flow positive, is the winningest North American team in League of Legends, with six championships. Founder and former player Andy Dinh (member of the US 30 Under 30 list in 2017) has plans for TSM to be the Dallas Cowboys of esports.
He is betting that an expansion into Fortnite will help take him there. Earlier this year he signed 19-year-old superstar player Ali “Myth” Kabbani to his team and invested $1.5 million in a 4,300-square-foot house for his Fortnite roster of four to live, practice and stream for hours a day. That is already starting to pay off. Kabbani became the second-biggest star on Twitch, with 4.1 million followers. Chipotle took notice and signed what could be a seven-figure deal with TSM.
Million-dollar sponsorship deals are few and far between right now in esports. But having a rich owner can change that. Dan Gilbert, who founded Quicken Loans and owns the NBA’s Cleveland Cavaliers, invested in 100 Thieves after it got its League of Legends team last year. Soon after, Quicken’s Rocket Mortgage came along with a seven-figure sponsorship and branded itself around the company’s seven-bedroom mansion in Venice, California. It’s well-nigh impossible to stream 100 Thieves without seeing the Rocket Mortgage brand. And Scooter Braun, manager of Justin Bieber and Ariana Grande, recently co-led a Series A round, bringing total funding to $25 million.
What could go wrong? Games go in and out of style, which would mean companies would need to drastically change their rosters. Mainstream sponsors and advertisers involved with traditional sports like football and baseball may not jump aboard the esports bandwagon. Thus revenue and projections could be slashed, and the high valuations could tumble. The 12 companies on our list have an average enterprise value of 13 times 2018 estimated sales. That’s rich. Facebook and Amazon go for 7.4 and 3.8 times this year’s estimated revenue. Manchester United, the iconic publicly traded English soccer team, has a comparable multiple of 5.
Forbes compiled its list of the 12 most valuable esports companies by talking to company owners, bankers and industry experts. We leaned on PitchBook and other public documents to buttress our reporting. Our company appraisals are based on the valuations that were applied during each company’s most recent capital raise, comparable esports transactions and their prospects. We included only companies that compete in gaming and excluded game publishers and arena builders.