PwC’s Sports Business Advisory practice met with Amit Jain, CEO at Rewired.GG Esports Venture Fund, to discuss their esports investments and the future of the industry.
Why did you launch the Rewired.GG Esports Venture Fund?
The Rewired.GG Esports Venture Fund was established in 2018 to invest in the talent and ideas that are driving the global growth of esports. €50m was allocated to the fund and the first investment was a €20m investment into Team Vitality, a leading European esports team, in November 2018. That investment was followed by a further €14m investment into Team Vitality in November 2019, making Team Vitality Rewired.GG’s biggest investment to date, with a total investment of €34m.
The Rewired.GG Esports Venture Fund is backed and managed by Cascade Global, a multi-family office that invests in ambitious entrepreneurs. The lead investor in Rewired.GG is Kohli Ventures, the investment vehicle of entrepreneur and investor Tej Kohli.
Why have you invested in esports and what makes esports an attractive investment opportunity?
It’s best to compare esports investment to technology investments. Technology businesses often build a platform and attract users, and only then work out how to monetise their users. Esports is similarly attracting rapidly growing global audiences, and so the focus right now is building up that fanbase globally, and full monetisation will inevitably come later on. Predictions suggest that esports is heading toward one billion viewers globally. Getting a significant slice of that action is priority number one.
Monetisation does exist and Team Vitality in particular has an array of non-endemic blue-chip sponsors such as Orange, Renault, Red Bull and Adidas. But more widely across esports, monetisation is still modest. Esports currently has a global audience of comparative size to the English Premier League or NFL. The NFL earns around $50 per fan, but research suggests that the equivalent number for esports is only $3.20. So, there is a lot of obvious upside revenue potential still to be unlocked across esports.
The demographics of esports are also attractive. Many esports fans are yet to enter a phase of their lives when they are at their peak earning potential, and esports offers an engagement channel for brands to connect with this generation, who are hard to reach and engage with in traditional ways.
Esports also doesn’t have the limitations of traditional sport. Investing in an esports team is like investing in a soccer team, rugby team, cricket team, NFL team and a basketball team all at the same time. Team Vitality has ten competitive teams across nine games and faces no geographical or language restrictions to its expansion.
So the future opportunity is substantial.
How do you view the esports market today and how do you see it developing in the future?
Rewired.GG probably receives a deck for a new esports investment opportunity every single day. Most are from start-up or early stage ventures that seem to believe that by some form of ‘esports magic’ they will be able to deliver growth and profits far beyond what is predicted by the fundamentals of their business. Most quote the same esports growth statistics as the basis of their investment case. But as of today, there is simply not enough revenue within esports to support all of these ventures.
So, what I see right now are a few clear esports leaders, such as Team Vitality, who are actively driving and accruing the overwhelming majority of the monetisation and revenues, often from non-endemic sources outside of esports, and then a long tail of many other ventures with very little revenue to play for.
But even though esports is still in its infancy right now when you look at its full potential, as we see the global spread of the Internet and mobile access in developing countries in particular, the addressable market of content-hungry gaming audiences is growing exponentially.
Looking forward five or ten years, and I envisage that as these esports ‘leaders’ grow into the titans of the industry – the Manchester Uniteds of the esports world – then I predict that an ecosystem of other businesses and ventures will exist around them, providing the kind of products and services that they need.
I also predict that technological innovation will form the core of these products and services, and that the entrepreneurs and pioneers behind those ventures will be those who are currently aged 16-24. Right now, most esports ventures are started by people who have an esports connection and technical knowledge. But to the 16-24 year olds, generating video gaming is what they have grown up doing and it is second nature to them – they have a different perspective that will lead to new innovation. Our investment into Team Vitality gives us an anchor into this opportunity, but we are looking to back these new ventures and complementary investments as they start to emerge in the future.
Is there a risk the esports industry is becoming a bubble or does it have a sustainable long-term future?
A bubble is obviously when the cost of the capital being invested exceeds the returns that are available from that investment. Esports certainly has a lot of hype and high expectations, but I don’t believe there is rampant speculation or even much use of leverage at the moment. I would say that the majority of investment is flowing from sophisticated investors who understand that they are investing in a long-term equity play, and who can afford to be patient while playing that long-term game.
I think the best comparison right now is the early days of social media. There was lots of hype about social media and many said there was a bubble, but from it all emerged Facebook and Twitter and other social media platforms. Those who were in it for the long term, often without a clear revenue model in their early days, were the ones who emerged as successes. Esports is similar in that gaming is now becoming equally as habitual as social media, so right now it’s all about user acquisition and taking market share.
Rewired.GG entered this space very early, but we would not be in this sector if we did not believe that there was a sustainable long-term future. We see investment in esports teams as the equivalent of being able to invest in Manchester United one generation ago before the English Premier League became substantially monetised and teams became global megabrands. Except esports will grow and develop much more quickly, because the path to global growth is already well trodden and visible.
What are the risks associated with investing in esports and what should future investors consider before entering the industry?
In my opinion, esports in general is still an investment category that should be left to sophisticated investors who are prepared to enter the sector early and make a long-term play. For esports teams specifically, you can’t invest in an esports team as an income play. In fact, if you invest in an esports team you need to be prepared to continue to add more cash and make new investments into that esports team over the long term. Of course, if you get it right, the equity value of your team will grow significantly. But you also have to be able to keep putting new money on the table to support that growth. And there are not many investors with the liquidity, appetite or patience to be able to keep injecting cash while the equity value grows.
So the main risk, I believe, is not understanding the dynamics of esports investment and the magnitude of cash burn that might be required to build substantial equity value. We started with an esports team because the league franchise model and clear future roadmap provides attractive visibility regarding the future direction for that venture, but there are non-team esports opportunities starting to emerge too.
What do you look for when evaluating investment opportunities within the esports industry?
I look for a visible path to exponential growth. I look for opportunities that can be easily and quickly scaled globally to establish a huge base of fans or followers or customers that can later be monetised. And then I look at the leadership team and whether I feel that they are credible and able to deliver it in terms of their experience and track record. And I also look for opportunities where Rewired.GG can be a substantial participant: we prefer to be the sole or lead investor in a project and to take a substantial equity stake, in return for our global resources and the intellectual capital that we will put into that project to deliver rapid growth and substantial global returns. Ideally, we want investments where we can materially and substantially contribute to delivering exponential growth.
Where do you see growth coming from and what is needed to support the industry as it matures?
The business of esports is based on media rights, advertising, prize money, merchandise, sponsorship and partnerships. Across the industry, research suggests that at the moment approximately 38% of revenue comes from sponsorships and 14% from media rights. Industry expectations are that media rights will grow to 40% of esports revenue in the coming years.
Even in booming esports markets such as China and the USA, we still see a huge amount of upside potential as the fan base gets bigger and those fans become more affluent as they get older. But then there are also huge markets where esports is only just starting to take off.
I see South-East Asia as a key growth market. Esports is already big in Vietnam and the Philippines, thanks to booming economies, internet penetration and an emerging middle class. And I believe that India will be the next big market. From a population of 1.25 billion, India has 250 million mobile gamers and 10 million competitive videogame players. Young people make up 65% of India’s population, the ideal age group for making new discoveries and adopting new habits. With the right mix of entertainment and star power, esports could follow the success of the Indian Premier League, which has 362 million unique viewers.
In terms of what is needed to support the esports industry as it grows, I think more professional investors will be needed to help bring maturity, structure and protocols to the industry. There is a lot of passion and ambition in esports, but that also needs to be grounded in sustainable structures.
How will technological changes impact the future of esports and what opportunities (and threats) will technology provide?
Unlike traditional sports, esports can evolve and change with technology – it doesn’t stay the same, it changes and develops and becomes more interesting all the time. New technologies could enable fans to get even closer to the action. VR could enable fans to be present within the gameplay. 3D could mean we have stadium audiences watching the action as its projected live in 3D.
I suppose the ‘threat’ is that the leading esports brands will need to continually embrace these new technologies and innovations, because those that don’t will risk being left behind. But I see that as more of an exciting prospect than a daunting one. Just recently we have seen a big shift toward mobile gaming in many geographies, and this precipitated the launch of a mobile version of Call of Duty which has proven hugely successful. So I think the esports sector is good at evolving quickly.
Esports is also about connection and community, and I envisage new innovations in the social platforms that host esports fans and communities. At the moment most of those platforms look a lot like conventional social media, but with a tech savvy audience, and with increasing integration of the social experience with the esports and gaming experience, I think this area will evolve rapidly.
How do you see esports teams evolving in the future and which areas are you investing in to grow Team Vitality?
The first area we are focusing on is infrastructure. In November 2019, we opened a world first with V.Hive, a 10,700 sq ft esports complex in the heart of Paris. Created by HKS, the architects behind the Dallas Cowboys’ AT&T Stadium and the Minnesota Vikings’ U.S. Bank Stadium, the venue is a sprawling Apple-store-style concept store and community hub that is open to the public; a cutting-edge pro esports player training facility, and an operational base for Team Vitality. V.Hive offers more than 530 sq ft of store front in the bustling centre of Paris for Team Vitality fans and is designed to foster human esports experiences that will draw people into the Team Vitality universe.
The obvious other places we will be looking to invest is placing Team Vitality into new league franchises, and then building out the brand and the fan base. Esports is about entertainment. Not every team can win every title, so what matters is having good authentic content and connections between the team, players and fans so that the esports world is a fun and entertaining place to be. So that’s going to be a key area that we focus on even more going forward.
I think in Team Vitality we have a good team that embodies good values, and with a unique French heritage that will remain even as the team becomes more global. And I think, looking forward, what you will see is a handful of esports teams emerging as the global leaders, and that those will be the ones who ‘keep it real’ and make it all about the fans and improving the esports experience and community for their fans. And so investing in global growth is all about investing in growing fan numbers worldwide, without compromising the authenticity of the brand or the experience of being a fan.
What is Team Vitality doing to drive fan engagement and achieve global scale?
It is important to understand the behaviour of Gen X and millennials. They approach life differently, access life through technology and have more temporal goals. While family, career and the future are still important to them, there is also now a well-defined space for passion, and this passion is not just what defines them, but what helps them to belong. They view life as more than 9 to 5 and they are constantly on the lookout for interesting things to follow. And esports is a natural community within which to satisfy those passions, and sponsors want to be there to connect with them in authentic ways, too.
There is no quick fix for esports teams to achieve scale. A team has to be an active participant in the communities where it has fans and build trust and affinity from the grassroots up. It has to create genuine content and foster relatable human connections between the team, the players and the fans.
It might look tempting to go into new markets and spend a lot of money on immediate fan acquisition, but without deep and meaningful connections with those fans, they will quickly disappear. Esports fans don’t want to see slick and meaningless ad campaigns – they want real and authentic esports brands that share their interests and their passions, and that – through the network effect of bringing more fans together – bring even more fun, entertainment and enjoyment to the world of esports.
How do esports teams develop and manage talent and how will this change in the future?
That’s a question that would be better asked of the management of Team Vitality, but fundamentally it is a little different from the way that talent is spotted for regular sports like football. There are scouts who try to spot talent early on, and at our V.Hive HQ in Paris and also at our high performance centre at Stade de France, we have lots of facilities to train and nurture talent. And of course, occasionally an esports team might acquire talent through transfers in the same way that a soccer team does.
The management of talent goes much deeper. Professional esports players go through lots of physical and mental preparedness training and get lots of nutritional advice. Every squad within the team also has a manager or coach, and a squad will spend a lot of time training together in bootcamps. When playing in a different city, the team will set up a ‘gaming house’ in that city for players to live and train together, sometimes for weeks at a time. It is extremely sophisticated.
How can esports teams create synergies with other entertainment sectors (e.g. sports, music, lifestyle)?
A key thing that people don’t understand about esports is that it is a spectator sport that falls in the category of entertainment. We’ve already seen in the sector a partnership between a music brand and an esports team, and the list of sports teams who now also have their own esports team is endless. So, there are very natural synergies between esports, sports, music and lifestyle. We’ve seen evidence of that at Team Vitality in some of the recent merchandising collaborations: the team has launched its own pair of trainers in partnership with Adidas, which is one of many crossovers with the lifestyle sectors.
What lessons have you learnt about investing in esports? What are the similarities and differences compared with other investments you’ve made?
In terms of similarities, Rewired.GG’s sister fund is Rewired.com, which is an AI and robotics-focused venture studio. In many ways, investing in esports is no different from investing in technology. You can never be sure exactly how much capital it might take to get to a goal, which in the case of Team Vitality is to be among the first billion-dollar esports teams in the world. And with both esports and technology, as an investor you need to be in it for the long run and know from the start that you have the funds and liquidity to keep on investing – as well as the patience.
We talk about the Rewired.GG Esports Venture Fund not as private equity or venture capital, but as a ‘venture studio’. Many investors claim to be actively involved because they put people onto the board of the companies that they are invested in. We do that, but because we like to go in as the sole or lead investor, we also become very actively involved in the day-to-day operations of the companies that we invest in. This is important in esports, because you’ve typically got amazing young founders who have built exceptional teams of people around them, but they might not have the experience to know how to deal with and manage exponential growth, or how to deal with rapid global expansion. They are often coming from a background of gaming and esports passion, and so sometimes they simply do not know what they do not know. Whereas in tech the founders typically have some technical expertise in a very specialist area, in esports you might make the comparison with a professional footballer starting their own team: he or she will have passion and drive but will also need experienced guidance and support.
So, for me, one of the biggest lessons has been that esports opportunities don’t just need investment, they also need an ongoing investment of human capital and know-how to elevate them to the next level. And that is how esports is different from other investments that we have made. But equally, the returns on offer from getting in early and getting the recipe right make it wholly worthwhile.
Thank you, Amit, for taking the time to share your valuable insights on investing in esports and we wish you and Team Vitality all the best for the future.