Here’s what ultimately led to the fall of FaZe Clan

At a FaZe Clan all-hands staff meeting in early 2019, the esports organization’s then-CEO Lee Trink raised his fist to the sky, aiming to get his employees excited about the company’s promising future.

“There will be books written about our legacy,” Trink said.

Trink might have been right. 

It would indeed take a book to truly tell the story of FaZe Clan’s collapse, which culminated in its roughly $16 million expected acquisition by GameSquare – a fraction of its initial share price last month. Many industry insiders blamed this coup de grace on the esport’s organization’s decision to go public in July 2022, but serious issues with the business were setting in long before then, according to eight former FaZe Clan staffers who spoke to Digiday for this story.

Here’s Digiday’s (non-book-length) attempt to make sense of what led up to the collapse of FaZe Clan last month. FaZe Clan representatives declined to comment on this story.

Ties that bind — and divide

The story begins years before Faze Clan’s decision to go public in 2019. At that time, the organization was riding high on a wave of success. It had serious financial backing and the endorsement of some big names in the entertainment world, including Migos rapper Offset and basketball player Ben Simmons. Plus, its merch deal with Champion was so hot that it raked in a cool $2 million in sales in just three hours. The management team had even pulled off a game-changing series A funding round led by entrepreneur Jimmy Iovine. 

Publicly, FaZe Clan execs were building a dream. But, behind all the celebrity endorsements, money and hype, a divide was quietly growing between two powerful but distinct aspects of the organization.

FaZe, the business, had diverged from FaZe, the brand. The org’s creator–founders, who had helped propel it to early success through their edgy, streetwise ethos, felt increasingly sidelined from FaZe’s corporate rebirth as advertising became FaZe’s primary revenue source over earnings from streaming and competitive gaming. As with most simmering issues, this one eventually reached a boiling point and spilled over. 

In March and April of this year, FaZe founders such as Richard “Banks” Bengston and Nordan “Rain” Shat took to social media to claim that FaZe was “dying,” and that “corporate fucks” had stolen the brand from them. The outburst was a long time coming. In recent years, FaZe creators had increasingly struck out on their own for independent partnerships and ventures, rather than staying within the FaZe sphere.

The frustration and resentment cut both ways. 

FaZe salespeople often secured lucrative partnerships with brands, only to find that the talent was unwilling to fulfill the promised content required for activation. This situation led to complications even when the deals were finalized and creators were involved, according to three former staffers who spoke to Digiday on condition of anonymity. It became a potential breeding ground for a perceived lack of transparency as well as ethical concerns.

In a specific instance from October 2022, shared with Digiday by a former FaZe Clan staffer, FaZe executives Trink and former chief strategy officer Kai Henry signed off on a $100,000 payment to the gaming influencer Adin Ross, claiming it was a scheduled payment for deliverables related to FaZe Clan’s partnership with the cryptocurrency platform MoonPay. When staffers pointed out that the payment was not actually on MoonPay’s schedule, Trink and Henry dismissed their concerns, ordering them to go through with it anyway. (Trink, Henry and Ross did not respond to requests for comment regarding this incident.)

In another instance shared with Digiday by an anonymous former FaZe employee, FaZe staffers asked the manager of a prominent gaming influencer to send them proof of deliverable completion in March 2023 — a standard request for brand partnerships involving influencers’ social posts. FaZe employees were surprised when they received doctored screenshots from the manager showing a falsified date underneath one of Ross’s tweets. They forwarded the photoshopped tweets to upper management at FaZe, only for FaZe executives to not take further action. (FaZe Clan representatives declined to comment on the instances above, but Digiday viewed screenshotted text and email conversations that confirmed they took place.)

Changing targets

FaZe Clan executives started tempering expectations years before the company eventually went through with a $725 million SPAC merger in 2022.

This was clear in a series of three of FaZe Clan’s pitches to prospective investors between 2020 and 2022, obtained by Digiday, including a request for proposal put out by FaZe and the bank Cowen and Company in 2020, as well as investor pitch decks from October 2021 and July 2022. (Here’s a detailed breakdown of the 2022 pitch deck.)

The RFP, for example, lists FaZe’s “ownership of industry-leading teams in the top franchised leagues including exclusivity in highly desirable geography” as one of the company’s strengths — but when FaZe’s next pitch deck did the rounds in 2021, the word “franchise” was absent from it. By this point, the decline of location-based franchised esports leagues such as the Overwatch League had made it clear to even inexperienced investors that geo-located esports franchises were not a money-making venture.

FaZe Clan toned down some of its language between the 2021 and 2022 pitch decks, too. The 2021 deck lists “NFTs” as a future revenue stream in its deck on consumer products, which was changed to the less controversial “metaverse” descriptor on the corresponding slide in the 2022 deck. Furthermore, the 2021 deck projects a revenue figure of $651 million for FaZe by the end of 2025; the 2022 version lacks a revenue projection entirely.

Not that Faze execs let these concerns stop them spinning a compelling yarn for everyone else. While they were carefully resetting expectations among their investors, execs were telling media — including Digiday — and fans alike that the company was going to become a media conglomerate for youth culture. They even enlisted the help of talent agency UTA to ensure a smooth landing.

Lack of strategic direction

But inconsistencies between FaZe Clan’s various investor communications demonstrate the general lack of strategic direction among the executives steering the ship during the organization’s peak years of 2019 to 2021, when the org signed some of its flashiest brand partnerships and generated wave after wave of media buzz. At the time, FaZe’s star appeared to be rising, and the org signed a run of lucrative deals with brands such as McDonald’s and Nissan. 

“2020 to 2021 was kind of the height, or the peak, of FaZe and its glory,” said a former FaZe Clan executive, who agreed to speak to Digiday about the org’s strategy on condition of anonymity.

Unfortunately for FaZe Clan’s investors, the company’s expenditures ballooned even faster than its revenues.

In 2021, FaZe Clan’s operating expenses were $37.1 million, according to public filings; by 2022, that number had increased to $59.4 million, resulting in a loss of $53.2 million for that calendar year. The org signed a merchandising partnership with the live shopping e-commerce company NTWRK, which the anonymous former executive described as “the world’s shittiest deal.” (Digiday was unable to obtain the specific revenue split negotiated in the deal, but FaZe Clan’s consumer products revenues decreased from $5.9 million to $3.5 million between 2021 and 2022, according to the company’s public filings.)

“Merch used to be one of the biggest revenue drivers at FaZe Clan,” the exec said. “The second the NTWRK partnership came in, now we’re giving almost — I don’t know the percentage — but let’s just say FaZe Clan is not making much money off merch anymore, because of that partnership deal with NTWRK.” Both FaZe Clan and NTWRK declined to comment on the circumstances of the deal.

Another example of FaZe Clan’s carefree spending came in 2021, when the organization signed a sponsorship deal with Totino’s centered around branded content featuring FaZe member and rapper Lil Yachty. According to a former FaZe employee, FaZe staffers coordinated with the rapper’s team to schedule a video shoot in Las Vegas for June 1, when Yachty was set to perform in the city. But they were surprised when upper-level executives unilaterally moved the shoot to an earlier date, requiring FaZe to double the fee it paid Yachty to participate in the shoot.

The misspending continued. In 2021, FaZe spent hundreds of thousands of dollars renting pricey Los Angeles mansions for its members to use as residences and film sets; the following year, FaZe’s overall lease expenses increased to $1.54 million, according to public filings. That July, FaZe Clan spent $1.7 million on an exclusive San Diego party featuring the musician Travis Scott. Amid all this spending, top FaZe executives were pulling in salaries in the hundreds of thousands, according to public filings.

FaZe executives’ March 2022 decision to bring the rapper Snoop Dogg into the company’s board of directors was yet another costly blunder. Dogg reportedly received millions of dollars in FaZe stock as part of the deal, with the expectation that he would participate in branded content and activations for FaZe’s sponsors, according to the former executive.

“But no, Snoop was not interested at all in any of our brand deals, because the bag was not big enough for his standards,” they said. “So, there really were no benefits to that.” 

The rapper exited FaZe Clan’s board in April 2023.

By the time FaZe Clan sold to GameSquare last month, the organization’s monetization strategy had not evolved significantly past the brand partnership strategy pursued by the majority of today’s largest esports teams. And with FaZe’s appeal to potential sponsors drying up in 2023, it’s unclear how much longer this business model will be able to keep the company afloat.

“If you’re an endemic brand, you would still go to FaZe as an obvious choice to promote your latest gaming controller,” said Matthew Woods, CEO of the marketing agency AFK. “But I don’t think their ambitions were ever to work with endemic brands.”

A problem in the making

To understand how so many of these missteps were tolerated, it’s important to understand FaZe Clan’s values and how they impacted the org’s revolving door of talent.

For many staffers, one impetus to jump ship was FaZe’s occasionally tone-deaf responses to social issues.

When the Miami Heat player and self-described FaZe member Meyers Leonard used an anti-semitic slur during a March 2021 livestream, for example, staffers felt unsatisfied by the response from FaZe Clan, which didn’t address the slur until several hours after Leonard’s sponsors Origin PC and Scuf Gaming issued their own statements disavowing it. (Leonard, a FaZe investor, was not a formal, paid member of the team.) When FaZe Clan member Talal “Virus” Almalki posted an anti-LGBTQ tweet in June 2022, the organization declined to officially comment on the matter, with Almalki remaining on FaZe’s roster until January of the following year.

“I can’t think of a brand I’ve ever worked with that would look at FaZe Clan right now and think, ‘well, if they offer us a really good deal, maybe let’s go for it.’ The basic brand safety and reputational considerations will just make that totally prohibitive,” said Grant Paterson, head of gaming and esports at the agency Prism Sport + Entertainment. “So, clearly, they’ve got to get their house in order and try to sort out the issues that they face before seeing if there’s a commercial opportunity to grow their business through partnerships again.”

FaZe Clan’s cultural struggles included internal management issues as well. Top executives would regularly scream at each other in meetings, often within earshot of lower-ranking employees. When FaZe Clan laid off 40 percent of its staff in May, FaZe executives scheduled meetings with impacted employees using their public online calendars, allowing other FaZe employees to easily view who had been laid off before some of the affected staffers even found out, according to an anonymous former employee.

Still, The FaZe Clan story is far from over.

The company commands a fanbase in the hundreds of millions, as well as several championship-winning competitive gaming teams. Joining the portfolio of GameSquare — also a publicly traded esports company — might allow FaZe to focus on its strengths as a brand by letting GameSquare’s other esports and gaming properties cover its shortcomings as an actual business.

“Look at the Web 1.0. A lot of companies that paved the road for the companies that ultimately became huge successes — their models maybe had some similarities, but the timing wasn’t right, the technology wasn’t there, the financing dried up,” said Ned Sherman, an M&A expert for Skybound Entertainment and GOAL Ventures. “And then Web 2.0 came along, and you saw these massive successes. Maybe we’re going through a similar thing with esports.” And, perhaps, Faze Clan in particular.

https://digiday.com/?p=524546

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