As the esports industry continues its rapid growth, its reliance on venture capital has increased. Teams rely on investors to fund their bid for franchise spots in the LCS and Overwatch League. New esports startups are launching every week, each looking for capital to fund their development and customer acquisition.
In many cases, VC funds go beyond simply writing a check to keep your teams afloat. Often, they also advise their clients on better business practices and long term strategies.
One such investor is Stephen Hays, managing partner at Deep Space Ventures, a venture capital fund with investments in several esports companies including FanAI and Quarterback. The Esports Observer spoke to Stephen about his passion for gaming and how esports organizations can improve their business model.
Could you tell us a bit about your background in gaming and esports?
I grew up playing video games. I remember getting a Nintendo when I was seven years old and my parents seemed to always be telling me how bad it was for me to stay up late playing Super Mario Brothers, Zelda, Kung Fu, and other games late at night…I played video games pretty consistently through college. Mostly console games. Then after West Point and the Army I didn’t play as much for a while.
When I got to New York City in 2009 to be an investment banker, I picked up Madden again in my spare time to relieve stress from my 100 hour work weeks. I played other games here and there like Call of Duty etc. I followed the Call of Duty scene and admired the [OpTic Gaming] guys, as well as others along the way too.
Once I quit banking and raised a venture capital fund, I decided I wanted to invest in a vertical that I could be passionate about, and that’s how I started looking to invest in the gaming / esports space. In 2016 I made my first investment in an esports related startup, Mobalytics, and started to learn more about the space, the fans, the users, the viewers, and how monetization works. Since then I’ve made a number of investments in the space focused on a number of different aspects of the esports industry, from fan engagement and monetization, to player improvement, and what I call the infrastructure of esports (making the experience better for gamers and fans).
What is your current role within the esports industry?
I run a venture capital fund, Deep Space Ventures, that invests regularly in early stage startups within the esports space. Since inception of the fund in early 2016, I’ve made nine investments in esports related startups (one of those isn’t really a startup, OpTic Gaming ). I also have a pipeline full of seed stage and series-A deals that I’m excited about right now as well. And as of the time of this discussion, I’m very close to funding two more investments in the space.
While my role is broadly defined as investing in early stage startups, my role is really a number of things in addition to just deploying capital. I spend a lot of time helping aspiring founders and CEOs find their way in the early days of turning their ideas into businesses (regardless of whether I’m investing or not), and I spend a lot of my time being an ambassador for the esports market in the broader investing and finance industries.
As far as the portfolio goes, I spend a good deal of my time helping my founders find talent, build relationships, expand partnerships and land customers in and around the esports space by leveraging my relationships in the industry. I like to view myself as a connector in the industry. The folks I look up to in this industry are the greatest at connecting key players within the space or the sake of the growth of esports more broadly. As they say, a rising tide lifts all boats. If we all win, then, simply put, we all win.
How do you see esports evolving as an investment opportunity over the next 5 years?
The number of seed deals in the market has climbed rather quickly in the last few years. That is a result of the influx of capital coming to the market. A lot of this capital rushing into the space is patient capital as I call it (family office, wealthy individuals, etc.) and some of it is later stage money pushing down into the early stages of VC investing, in order to get esports exposure. Needless to say, the seed market is jammed full of deals, and available money right now which is creating an unsustainable market dynamic in my opinion.
The result of these capital flows is a seed market where too many founders are getting funded, higher valuations, and a lot of “me too” startups jumping into the space. The seed market feels a bit frothy. The series-A market is still sparse. I see probably three to four really good series-A rounds getting done this year. Then I see that number going to 6 to 12 in 2019 just based on the seed deals that got done in the last 18 months (factoring for a number of those companies failing to raise A-rounds).
At the same time, the “esports team” investing market has matured a great deal and valuations are through the roof right now. This dynamic along with the emergence of the series-A esports market in the next 12-24 months will pull a lot of the capital back up into later stage deals and will help the seed market normalize on price and volume.
In broad terms, what do you see as the general business model of esports teams?
It really comes down to how esports organizations and teams are monetizing. Right now, I feel like most teams are focused on sponsorships, merchandise sales, league revenue shares, and some small amount of revenue from their content on various platforms. This should, and will change. When you look at the valuations at which teams are raising money right now, it’s clear that the investors are betting on some of these teams becoming billion dollar plus, businesses. You can’t build that kind of value on the back of merchandise and sponsorships in my opinion. This means the esports team model is changing.
The key will be monetizing great content, directly and indirectly with fans and casual viewers. The three main focuses every esports team should have right now in my opinion, should be around content:
- Content creation: original content, interesting stories, well produced
- Content distribution: through what channel is your content distributed or can you create your own channel to the consumer?
- Content monetization: how do you make money? Can you charge fans directly, and will it be one-time or recurring revenue?
Winning video game competitions is great. I love to win. I think most of us in this industry are highly competitive and we have all rage-quit a game or two after losing. But, the winning is great because it drives awareness of content and it also helps create content. Content is king in the esports world. These are media businesses. We can think of them as sports because they are “competition” so it resembles sports in a way, but this is entertainment, this is media, this is content first. Often I think about how the word “esports” originated and why we even call it that. It’s not really sports, it’s media. I wonder about what it should be called and what it will be called in the future often, because I know the business model is changing that much.
If you’d like to meet Stephen in person and hear more about his thoughts on the business model of esports teams, be sure to join us at the HIVE esports business conference on September 28th.