As esports organizations widen their revenue streams, valuation continues to be a challenge

Growth versus product

Valuation is a tricky proposition for any business, but it is particularly challenging in the media and entertainment industries, where companies’ production costs and profit margins can be less straightforward to ascertain.

Still, most traditional media and entertainment businesses have agreed-upon core products: sports teams, for example, are united by their shared revenue streams of ticket sales, merchandise and media rights.

Esports organizations, on the other hand, simply haven’t figured out what their core product is quite yet. Media rights, a major revenue source for traditional sports teams, are not a factor in an industry whose audiences are accustomed to watching esports broadcasts free of charge on platforms like Twitch, while live events remain a relatively untested (but promising) revenue source. Merchandise is a proven revenue stream for organizations such as 100 Thieves, but the lower margins of these commercial models are less enticing to potential investors.

“It’s really hard to value pre-product companies — and a lot of esports teams are still ideas, they’re not yet to that sort of product stage,” said esports journalist and longtime industry watchdog Jacob Wolf. “But the hype and FOMO around the industry over the past few years was so high that even though the companies necessarily were in that early stage, they started being valued like they were middle-stage companies.” (This Digiday reporter is a friend and former colleague of Wolf).

Reality eventually caught up. And now that it has, those esports companies are under more pressure to make money. They can’t drop tens of millions on a creator house and say they’re growing with millions of fans worldwide. A culture of spending and asking for permission later no longer sits well with esports’ bankrollers. 

Building the funnel

Esports organizations often speak about their business successes in terms of growth: more acquisitions, more fans, more advertising inventory and so on. But the industry is now decades old, and investors are starting to tap their fingers. These days, outside observers are beginning to care much more about revenue streams and actual profits — and Forbes, a publication that serves many of those observers, has taken note. The methodology of its first annual ranking of esports valuations, in 2018, was largely cribbed from Forbes’ longstanding annual valuation of traditional sports teams. These days, it’s become clear that esports valuations are an entirely different beast.

“In some ways, it’s not that different. But what does feel different is that, in those traditional sports organizations, the sports team itself is still the crown jewel; it’s still at the heart of that business,” said Brett Knight, the editor at Forbes who produced the publication’s most recent list of esports valuations. “In esports, the teams themselves are becoming smaller and smaller pieces of these companies. As they diversify, the esports team is seen both internally and externally as less and less important. It’s just one piece of this organization — and in many cases, it’s treated almost as marketing, as promotion for these other businesses. It’s a customer acquisition funnel.”

Early-stage mindset in a maturing industry

Part of the problem is that esports organizations haven’t diversified their business models fast enough. And that can make them seem younger than they actually are. 

“Esports teams don’t always look like early-stage startups at first glance — some of them are 10 or even 20 years old, and some are already generating real revenue,” Knight said. “But teams and investors believe that they’re still in the very early innings here. That’s why the multiples with these valuations are higher than you would see on our lists for more traditional sports; there’s an expectation that those businesses are still growing.”

In other words, those expectations create a self-fulfilling prophecy of sorts that esports organizations are more valuable than they actually are. The Forbes valuations can inadvertently fuel this perception. Even so, most industry experts agree the Forbes articles are fundamentally sound and well-reported. They’re just better used as a bellwether of how the biggest esports organizations stack up against each other, rather than a definitive ranking.

Envy/OpTic Gaming, whose portfolio includes a live events business, is among the esports organizations that say they are still in the process of laying the groundwork for more significant revenue generation. 

“It’s a very difficult thing to say, ‘well, all the work you’re doing in the background isn’t going to be valued’, because it’s not necessarily revenue-generating at the moment, even though it has asset value,” said Envy Gaming CEO Adam Rymer, who was critical of Forbes’ esports valuation process in a LinkedIn post last year. “My concern is if there’s no consistency in how the methodology has been calculated from year to year, and it can result in big increases or big decreases, then it makes it hard for us to do our job the way we should be doing it, which is just focusing on building the business.”

What makes an esports org an esports org?

The more esports organizations diversify their holdings, the more they’re increasingly finding themselves in direct competition with other operators in the space, from game developers — 100 Thieves recently announced its own plans to get into development — to esports leagues such as ESL. As a result, it is difficult to produce accurate valuations for companies across the space, not just the so-called esports orgs.

“The idea of a single value for the entire esports industry is difficult because it’s always shifting. You can’t get an accurate picture because the movement of sponsors, investments, acquisitions and talent mean it’s always in a state of flux,” said ESL Pro League commissioner Alex Inglot. 

The ESL Pro League, for example, has had $20 million of investment from new partner teams over the past year, much of which came via the teams’ external investors. In other words, the value of the teams, to some extent, rests on the continued success and value of the ESL Pro League itself. This is far from ideal for esports organizations, given the cutthroat nature of the industry: if the Overwatch League goes up in smoke, so too do the hopes and dreams of the teams that dropped tens of millions on franchise spots.

This is yet another reason why it is becoming more difficult to accurately value esports orgs. Organizations often point to league franchise spots as tangible, valuable assets: the operating logic is that they spent millions of dollars on them, and so owning them should naturally add millions to the value of the orgs. But with Overwatch viewership declining and Activision Blizzard allowing teams to defer the payment of franchise fees, it is becoming increasingly unclear whether observers such as Forbes can take the financial worth of these franchises at face value.  

The Forbes valuations are a much-anticipated annual event in the esports industry — but in future years, it might not necessarily make sense to compare the diverse spread of companies now known as “esports organizations” against each other. Already, Forbes decided to exclude Luminosity Gaming parent company Enthusiast Gaming from its latest valuation report, as the company’s public filings indicated that only three percent of its revenue came from esports in 2021. 

Right now, many esports organizations are more brand hype than tangible value. And while the holding company model might help esports organizations figure out how to turn a profit, it doesn’t make it any easier to determine their true worth. 

“I think the word ‘esports’ probably doesn’t fit as well as it did once upon a time, in terms of what we are because it seems to be a one-size-fits-all word for what these companies are,” Rymer said. “And when you get into it, esports is part of what we do — but we’re really about building brands and communities around gaming.”