David Fenlon: There are hidden gems around the fringes of esports for investors

The emerging tech and support businesses in the esports industry will be snapped up by savvy investors in the next 12–18 months, writes David Fenlon in this guest piece.

Esports currently offers one of the few bright investment opportunities in an otherwise dismal economic landscape. Audiences numbers have increased, brands are spending money to get in on the action, and the flurry of temporary media rights deals struck in the last eight weeks, all indicate that confidence in the esports market is high. There has also been a hive of activity around the investment side of the industry.

Yet investors are not fully exploiting the areas of esports in which the real growth is going to happen. The areas around the fringes of esports i.e. the tech, products, and services that support the industry have not been well advertised. As a result, they have not garnered the sort of attention that high profile teams and tournament organisers have achieved. In fact, they are relatively unknown except for industry insiders. Yet, there is a myriad of great value opportunities for those willing to look beyond teams and tournaments, which will help investors combat the coming economic crunch.

The hunt for return

Investors will need to find high return prospects if they are going to avoid erosion of capital from inflation. The vast spending programs announced by various western countries point to a period of heavy inflation in the next few years with very little growth to accompany it. The United States jobless claims have risen to over 40 million, and countries such as the United Kingdom have also seen a surge in people claiming unemployment benefits, so it seems highly unlikely that the spending programs are going to be funded by increased tax returns.

Thus, governments are likely to inflate their way out of the debts that they are driving up. And given the extent of the current spending, the previous recession inflation highs of 4 percent and 5.2 percent in the US and UK respectively might not be the most reliable guides to estimating inflation in the future. Inflation could simulate what happened after WWII where inflation hit nearly 20 percent hurting both investors and consumers alike. This leaves investors hunting for anything with double-digit yield for multiple years, and esports entities may fit these criteria.

US Inflation 1945 – 1950

US Inflation Graph

To provide context, the video gaming sector as a whole appears to be a good hedge against this inflation threat, and esports is the fastest growing area of this sector. For instance, Activision Blizzard smashed analysts’ estimates with a 21 percent growth in revenue YoY in the first quarter of 2020, partially driven by lockdown conditions. Some esports entities are more than doubling in size per annum, and the relative lack of maturity of the esports industry means that there is much more room for them to grow. Investors, such as OverActive Media and Guinevere Capital, have identified this and have already started to buy parts of esports teams and franchises.

Valuations of pro teams don’t seem so punchy now

Cloud9 LCS Team
Photo credit: Riot Games

The last three months have completely changed the external perception of esports. Six months ago, the estimated $400 million (£319 million) valuation of Cloud9 – which has very few physical and digital assets – seemed crazy, as did franchise slots for Call of Duty slots coming in at $25 million (£19.9 million) each. In today’s climate, anyone who invested in these ventures to diversify their interests in traditional sports teams or other live entertainment has been vindicated. Esports is still the only competitive entertainment medium not just surviving but thriving.

However, most teams and tournament organisers are still loss-making and will likely continue to be so for the immediate future. To a certain extent, the valuations do not matter as much as their capacity for growth, which seems enormous especially when you consider that commercialisation has barely started to happen in esports. That said, a lot of money has been invested mainly into teams and tournament organisers in the last two years which are long-term, heavy capital demand entities. In the current economic climate, investors will be looking for prospects that require less capital and provide a quicker return, and there are a multitude of options in esports which can fulfil this need.

Areas of opportunity: esports tech and services

Both the emerging tech and support services subsectors of the industry benefit from the international nature of esports and are scaling quickly. They are trading at great value and require modest investments. They tend to be much closer to breaking even than many professional teams as well – this makes them far more attractive to investors. Equally, they are starting to provide a partial solution to the problem of the lack of products in the market, which is an enormous opportunity. However, they can be difficult to find. Insider knowledge will be essential to ensure that opportunities do not pass by potential investors who do not necessarily know where to look.

The tech subsector is particularly hot right now, with a number of firms seeing exponential growth. An example of rising stars in the tech area is Skybox, which provides visual 3D analytical tools for Twitch broadcasters to use in post-game analysis. It also has created training tools for gamers who are looking to improve their skills. The rapid adoption of Skybox both by professional teams, tournament organisers, and the gaming audience demonstrates a growth that will far outpace any inflation threat. The fact that “to Skybox” has become a verb in Counter-Striker circles outlines that this company is onto a good thing. 

Skybox Technologies
Image credit: Skybox Technologies

Another area which is doing well is the services subsector, with the esports PR area providing a good reflection of other service types. Success in the esports industry is often linked to how well the gaming community is engaged, and this requires deep knowledge of the dynamics of gaming audiences. Specialist agencies such as Swipe Right PR and The Story Mob have capitalised on this by providing relevant narratives to both those already in the industry and non-endemics entering esports. Demand has surged in recent years due to the tidal wave in attention esports has generated. This has resulted in explosive growth for Swipe Right PR and The Story Mob, and this is only going to continue as more non-endemics are poised to enter the industry.

These examples of minnows rapidly becoming big fish are reflective of many stories of emerging service providers in the industry. Their lack of visibility belies the enormous opportunity that is slipping past investors. They are great value given their potential, and this is the time to buy. Investors looking to diversify into this rich ecosystem need to get cracking because “those in the know” are already casting their nets and will land these deals in the next 12 months with very little competition for the prize.

David Fenlon is a commercial consultant who has advised dozens of global brands on key strategic budget decisions across various sectors. He specialises in the esports world and has worked with governments, endemics, and non-endemics on their esports strategies. His “Get in the Game” report captures the main body of his research into the esports sector, and is available on Esports Insider. David does not own shares in any of the companies referenced in this article nor has been paid to mention them.

Disclaimer: This article is for information purposes only and does not offer investment advice and nothing in it should be construed as investment advice. Neither David Fenlon nor Esports Insider are investment advisors, nor do either provide investment advice or recommendations. Those looking to invest in certain companies should do their own research and anyone unsure about any investment decision should seek a professional financial advisor. The value of shares may fall as well as rise and you should not invest in a company unless you are prepared to sustain a total loss of the money you have invested plus any commission or other transaction charges. Information relating to past performance is not a guide to future performance.