The esports bubble
Does the rise in layoffs within the industry paint a picture of what the future might hold?
In the past year there has been story after story around mass layoffs at various esports organizations. Most of the stories have similar subject matter, a specific company downsizing most of their roster due to economic instability. Like layoffs in other industries during this past year, the roles of those affected can vary but within this industry a lot can be seen within marketing and content production.
So, the question I pose, “is this the esports bubble bursting?”
Short answer for those that just want to know, no it’s not (yet).
But why then are there continuous issues within esports staffing and why is it even affecting brands that seemingly are successful? Well to add another short response before diving into some opinions, esports is of course not unique in the current times. With a recession that some will say is “looming” and others believe is already here, companies from almost every sector have announced layoffs and restructuring. But the thing is, the current trend within esports isn’t a direct result of this recession more so this recession has shed a light on a problem that was already there. That problem is something I will call venture backed culture.
Venture backed culture and profitability
Without getting to in-depth about what a venture backed business is for those who might already have an understanding. A company that is venture backed, is almost fully or at least a majority supported financially by a firm who controls other investor’s money (limited partners or LPs) to go out and find companies that can potentially produce a return to the firm and then to the initial investors.
Although the craze of venture in the last decade has been extremely impactful when it comes to getting some companies off the ground, the reality is most venture deals don’t work out.
The reason why most of these companies end up not working is because they aren’t profitable. Turning back to that last piece on the venture cycle, if the venture firm can’t get a return to investors, they don’t invest, or if they already have invested in a business they won’t reinvest. There are a ton of venture deals within esports, whether it be through a venture capital firm (VC), a private equity firm (PE), or a parent company corporate venture. During times of economic decline, these firms will all start to ask a similar question, “who in our portfolio is profitable, and who isn’t?” Sadly, esports in 2023 isn’t an incredibly profitable business.
A study in 2018 showed that “sponsorships represent a key channel of revenue for the industry, currently the largest at roughly 40%” (Maloney, 2020)
With a business model that relies on almost 50% of their gross revenue to come from another businesses marketing budget, you can somewhat see why the battle to become profitable is a difficult one. With other businesses also cutting back, the pool of sponsorship money for multiple companies within esports becomes smaller.
As a result of bigger corporations directly or indirectly shying away from esports, investors look at those decisions and start making an exit as well. A great example of watching the investment interest of esports decline is looking at Faze’s IPO and recent ticker price. Since going public via a SPAC in July, their price dropped almost 80% in 6 months. The big summary to venture culture is that, when money isn’t there, investors leave and when investors leave companies fail.
The “answer,” which anyone should be able to think of to this problem, is that esports needs to find a way to become more self-sustaining. It’s something that is much easier said than achieved. Without going into each specific idea here, things like using capital to launch corporate startups in esports adjacent industries, developing original content that advertisers can back, and sadly cutting back on staffing, could help companies focus in on what their key value propositions are thus figuring out what the consumer will “buy.”
As someone who has been laid off before I understand that it’s not easy, it also doesn’t make it easier when you see it all over your industry. The difficult part is that in a venture culture space, profit return is key and HR spending is usually high, a recipe that leads to the trends we are seeing. Many esports businesses in my opinion are spreading themselves to thin. Buying franchise spots in multiple titles, working on merchandise, and taking sponsor deals for the sake of taking a sponsor deal. With esports, the model of being a “jack of all trades, and a master of none” doesn’t apply. Like most startups and companies in niche industries, it’s even more important to figure out what your core product is and be incredibly good at delivering that product before moving to the next. Expansions come with more people and when times get rough any venture manager will look at the people expense line first to see how many it really takes in order to get the main product out.
The answer to my original question, “is this the esports bubble bursting?” is still no, however the current times have shown that it could be right around the corner. The next question will become will capital investments into the space ebb & flow back to pre-pandemic rates or has this been a great trial and error for investors?
