Sports. Do you miss them? I do. Not soccer, never was my kind of thing but, as a petrolhead, I do feel the withdrawal of WRC, Rallycross, F1, MotoGP and yes, Formula E.

And it has been interesting to see how the world is coping with this sudden gap in entertainment content. Some are growing bored of watching old baseball games, others are experimenting with new sports (eg. new league sponsored by “Last week tonight with John Oliver” - it’s actually more exciting than I thought it would be. #subscribed)

Luckily, I have filled that gap in my life not only with my kids' tantrums, but mainly by extending the hours watching esports, and happily done so since major motorsport leagues already had decided to move to esports a few years back - F1, Formula E, WRC. And while it isn’t like the real deal as there isn’t any damage modeling (yet), it is curious to see that the drama outside the track is all there.

Confinement has driven a huge spike on esport (motorsports alone, the spike has over 1000%) and while some will argue that is a conjectural growth, data seems to show that the lockdown accelerated a structural change in entertainment, with esports audience growing 3.3 times from 2012 to 2019 (443 million by the end of 2019) and as an example, 2018’s most-watched esports event (League of Legends) had 127 million viewers, more than seven times the viewership of the 2018 NBA finals games. And if you look at prize money, we’re now talking about serious money - 18 years old Fortnite World Cup winner Bugha has surpassed Novak Djokovic / Simona Halep, winners of the Wimbledon Tennis tournament ($3m vs $2.88m)!

I know, I know… Audience KPIs are nice and all, but what does it represent investment-wise? Well, the number of global investments in esports doubled from 2017 (34) to 2018 (64), with a total of €3.9bn, being VCs responsible for 56% of this value, which indicates the early stage of this sector.

And where did VCs deploy the capital? Media platforms & advertising (45%), developers (31%) and team organizations (18%). As a “fun” quiz question for all those crazy investor parties you guys attend: can you guess what is the average and highest multiple EV/EBITDA of a game development company in this space? Average is above 20x and the highest multiple was recorded Jan-18 at 25.5x. As a reference, S&P 500 had a EV/EBITDA multiple of 10x over the same period. 

And who are the reference investors in this space? According to Pitchbook, in the top 5 investors in this space (by # of investments) you have one specialized VC - Bitkraft with 28 esports investments out of a total of 52 investments in the last 5 years, Tencent Holdings (16 out of 371 - which includes Discord, Riot & Supercell), and the remaining 3 are usual suspects - 500 Startups (12 out of 1632), Techstars (13 out of 1888) and Y Combinator (10 out of 2004). 

When we talk about esports, we are talking about a subsegment of the gaming industry, which was worth $152bn in 2019. And this is where it gets interesting... 

Although as investors we don’t target this industry directly, we do invest in deep tech startups that do target this sector. Few examples that we have seen:

. Player performance - uses computer vision and AI to analyse performance of players and give improvement tips. Startups: Visor, Gosu.ai, Senpai.gg, Bayes Holdings, Mobalytics, Emotai

. Cybersecurity solutions - the games industry is one of the worst offenders for security rankings in mobile apps. Leaks are also frequent even across major players such as Nintendo, Sony, MSFT/AMD, Epic. Startups: Guardsquare, NowSecure

. Hyper personalization of games - In Fortnite, over 70% of revenues are driven by personalization of your character. These startups provide tools for game developers and gamers to personalize their experience. Startups: Affectiva, Didimo

. Content creation - esports pose a different challenge and enable a different immersion from a viewer and engagement standpoint (with matches that can last for several hours). These companies address content creation, distribution and the way we see esports. Startups: Theta.tv, Replai

. Content monetization - While user views/subscribers remain as the main source of income for streamers, the truth is that YouTube, Twitch, Facebook are focusing on the 1% of streamers with a huge number of followers. All the others need to have alternative ways to monetize content. Startups: Maestro, FanAI, Streamloots

Damage modeling on motorsport esports leagues :)

Additionally and as the audience grows and the industry matures, we do expect to see new solutions that enhance the experience of viewers (a use case where we believe that VR can have a huge impact on) and continue to see highly specialized solutions that target this sector and that will then (hopefully) evolve for other sectors - namely hyper-personalization and content creation.

As a gamer, esports enthusiast and part of an investment team, I’m looking forward to it.