From IPOs to Busts: What went wrong for Public Esports Companies

The esports-organisation-as-a-public-company experiment is not going very well.

FaZe Clan (NASDAQ: FAZE), whose share price dropped below $1 per share for the first time in January this year, may be at risk of being delisted, per the NASDAQ’s listing rules. The American org debuted at $13.07 per share on its first day of trading; at the time of writing, its price is $0.42. A 96.79% decline.

Similarly, the share price of Astralis — an iconic brand built primarily in CS:GO; has been on a steady decline since early 2021 (it was once at 8.88 DKK; it is now at 1.29 DKK). Furthermore, X1 Entertainment Group (CNSX: XONE), which last year acquired esports org Rix GG, talent agency Tyrus Talent, and two Rocket League esports websites in Octane and Shift RLE, has already shuttered or let go of most of these assets.

Enthusiast Gaming (TSE: EGLX), parent company of Luminosity Gaming, Seattle Surge and Vancouver Titans, has seldom seen its share price rise above $1 CAD since October. This is despite being the #1 gaming property in America in January for unique visitors, according to Comscore. With its extensive portfolio of news and guide websites, Enthusiast’s business model is largely ad based, and the global ad market is in a rough spot.

But it also reflects a dwindling belief in esports properties across the board.

“I think you hit the nail on the head,” said Tobias Seck, business journalist at Sports Business Journal, when asked if this was the case. “Bad actors such as FaZe have negatively impacted other companies. FaZe went public to get funding. They acquired funding, and to them, if they make good business, it doesn’t matter what happens on the stock market.”

Shifting markets, shifting priorities

One former FaZe senior executive told that some at the company may have hoped, and even expected, that FaZe would be a meme stock à la GameStop. Yet, that ship seems to have sailed.

There is a common trend with public esports stocks: a gradual decline over a year or more. There are few exceptions. Macro factors should not be ignored. Esports stocks are seen by investors as risky assets, according to Nikhil Thadani, Vice President, Capital Markets Advisory at Sophic Capital. Thadani has worked with public esports companies.

“If you’re an investor looking at a bunch of investments, they all fall differently on the risk-reward spectrum,” Thadani said. “Generally there’s more risk associated with newer companies in a newer space, where there aren’t clearly defined leaders yet. A lot of these companies, because they’re newer and they’re younger, they have to prove not just their business model, but also that they can execute towards it.”

This means that through hard times — 2022 and 2023 have been very hard, thanks in large part to Russia’s invasion of Ukraine — such assets are more likely to be dropped in favour of safer ones. As with all risky assets, upswings and downswings alike are more aggressive than perhaps they ought to be. From around 2017 onwards, we saw the upswing: mainstream hype for esports abounded. For the last year or so, we have seen a downswing.

It cannot be ignored, however, that many have lost belief in esports.

The journey of some public companies supports the theory that esports was driven by hype for too long. Guild Esports (LSE: GILD) used its association with David Beckham to raise $26 million in 2020, but has struggled enormously as a public company since then. It released its annual report for 2022 in late January and showed a pre-tax loss of £8.75m, and had just £1.6m of cash left. After debuting on the London Stock Exchange at 8p per share in 2020, its price dipped below 1p for the first time in February. After almost three years of high expenditure it is now scrambling to find cash.

It is telling that the biggest esports companies in the world aren’t esports companies at all. At least, that’s not always their main product. FaZe is as much a content house and creator agency as it is an esports organisation. 100 Thieves is a streetwear brand (and a game developer… and a seller of energy drinks). TSM claims to be profitable, which if true is largely thanks to Blitz, a League of Legends platform which it owns. Team Liquid is a whitelabel production services provider.

Competition alone is nowhere near enough for esports teams to thrive financially.

From IPOs to Bust


What can be done?

It’s important for the industry to temper its expectations. Now that venture capital funding has dried up, teams will be forced to act more frugally. This is a good thing.

“Five years could be the time window it takes for the industry to go through a full reset,” Seck said. “I do believe it takes a full reset in the esports industry. It needs to get rid of all the bad players. It’s unfortunate for investors — many will lose all they put into the industry. What orgs can do is create internal stability. Set realistic goals; don’t go into every title; don’t always try get the next super team. … Teams have been expanding their reach into new esports scenes without making sure where [they’re] already invested is done properly.”

There is cause for optimism. Companies that make it through tumultuous periods are often hardened by the experience, well positioned to capitalise on the good times because of the foundation they built.

“When really successful companies like Amazon and PayPal are founded, it’s usually in tough times,” Seck said. “It forces companies to build sustainable business cases. They start growing from a really solid foundation.”

This was echoed by Thadani.

“What happens with not just esports companies but [also] younger companies in these sort of markets is they react violently on the downside and also on the upside. We’ve seen that downside over the last, you know, 15 or 18 months, if not 24 months, and the ones that are executing when the market is more receptive should come back with equal vigour on the upside.”

The million-dollar question, however, is how do esports organizations ready themselves for a rebound when running teams almost always results in a loss?

There is good progress in publisher revenue-sharing of in-game skin sales, led by Riot Games with Valorant. Psyonix (Rocket League) and Ubisoft (Rainbow Six Siege) are also pulling their weight. However, players, who are already salaried and arguably paid too much, often take the majority of skin-sale revenue, not to mention prize money. Teams have less free rein now; for the economics of esports to improve, teams need more of the pie. Rev-sharing is a necessary step in that direction. Before more things like this happen, it doesn’t make much sense for a teams organisation to be publicly listed.

A less expensive esports industry is an incredible product. Besides getting through a difficult macroeconomic moment, esports organisations must now humble themselves, get back to basics, and forget the hubris of yesteryear.

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