February 16, 2018
Mary Ann Azevedo is an Austin-based business writer who has written for Venture Capital Journal, San Francisco Business Times, Crain's and Silicon Valley Business Journal.
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Funding for esports startups has not just grown in recent years—it has exploded.

U.S. venture investment in the fledgling ­field of organized professional competitive video gaming spiked by a whopping 1,125 percent to $146.49 million across 34 deals in 2017, compared with $11.96 million over six deals in 2013, according to Crunchbase data.

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Between 2016 and 2017, investment amounts spiked 186 percent. However, deal flow was nearly the same, signaling larger average deal sizes.

Meanwhile, market researcher Newzoo estimates the global esports market grew by 102 percent to reach $655 million in 2017. Another data source pegs that number to be even higher.

A recent SuperData Research report found out that the global gaming industry generated $108.4 billion in revenue during 2017, while esports itself accumulated $756 million in revenue. Newzoo estimates that by 2020 esports will become a $1.5 billion market with 600 million active viewers around the world.

Dallas-based Complexity Gaming CEO and Founder Jason Lake speculates the amount of funding in esports is even higher than data indicates because “a number of companies don’t report” funding activity.

The past couple of years in particular “have seen a massive influx of investor capital and professional sports teams” investing in the space, he said. Last November, his own company saw a high-profile exit when Dallas Cowboys owner Jerry Jones, along with investor John Goff, acquired a majority stake in his 15-year-old company for an undisclosed amount.

Complexity Gaming CEO and Founder Jason Lake

Lake formed one of the first professional teams in esports and is impressed by the recent surge in interest in a field he’s been intimately involved in for more than a decade.

“The entire ecosystem has exploded in the past few years,” he told Crunchbase News. “It’s one of the most compelling cutting-edge places you can be.”

Big Paydays For Digital Might

This generation has been gamified since birth

Most professional video gamers are between the ages of 18 and 23. Some parents who lectured their children on how video games would never help them be successful are finding themselves eating their words. Skilled participants get paid well to play video games, travel around the world, and compete against others.

Players participating in the International Dota 2 Championship in August 2017 were competing for a prize pool of more than $24 million. It is the largest prize pool in the history of esports. Colleges and universities are even giving out scholarships to varsity video game players.

To Lake, it’s only logical in the new digital era that a digital sport would be gaining popularity.

“When people are passionate about a sport, it usually matures into something more serious,” Lake said. “When people first started playing baseball in New York 150 years ago, people thought it was pretty ridiculous when people started getting paid for it. Now, we’re the baseball players for this culture. This generation has been gamified since birth.”

Like traditional sports, there are now agents, lawyers, marketing firms, and managers built into the esports space.

“For advertisers who want to speak to this generation and generations after, this is a very viable way to market to them,” Lake said.

Buying Into The Trend

Stephen Hays, managing partner of Dallas-based Deep Space Ventures, has invested in seven esports companies in recent years. He believes in the field so much his firm has essentially turned esports into its second thesis. Two-thirds of its investments are in the B2B enterprise software industry, while about one-third are in the esports space.

One of Deep Space’s portfolio companies, Dallas-based OpTic Gaming, made headlines last year when Neil Leibman, the co-owner of MLB franchise Texas Rangers, and co-investor Chris Chaney picked up a majority stake in the startup for an undisclosed amount.

While it’s likely that the majority of the population has not even heard of OpTicGaming, it’s notable that the company currently has 3.34 million followers on Twitter. It’s not that far behind the NFL’s Dallas Cowboys with its 3.71 million followers.

Overall, Hays believes one of the factors behind its success is that players and viewers “are highly engaged.”

“There’s a lot of money to be spent,” he told Crunchbase News. “It’s a huge, global market that’s growing super fast.”

Hays sees opportunity in improving analytics on how valuable viewers and engagement is within the space. One of Deep Space’s portfolio companies, Santa Monica, Calif.-based FanAI, is focused on just that.

“An esports competition gets millions of viewers on a Sunday afternoon but sponsors don’t pay as much for the same number of eyeballs on a Monday night football game or other NFL broadcast,” Hays said.

Another appeal to esports, Hays believes, is that it’s a short-form content platform that is particularly appealing to today’s generation. And thanks to companies like Twitch, a social video platform for gamers, there’s a giant community being built around esports.

“With so many communities being formed and no barriers to entry, there’s a huge media opportunity there. It’s a sport that’s accessible on any device, meaning you can watch and play it on a computer, phone, or any interactive device,” he said. “And viewers can interact with players. That’s far more valuable than just airing some commercial that nobody watches.”

Betting On Digital Sports

Something that could open up a whole other can of worms for esports is if certain states, such as Texas, legalize sports gambling. One company poised to benefit from that happening is Rahul Soods’ Unikrn, a Seattle-based startup that aims to provide a safe and legal place to gather, game, and bet on esports. The company has developed the tools and algorithms needed to analyze all the matches and create what Sood describes as “the most comprehensive sports book for esports on earth.”

Esports pioneer Sood founded Unikrn in 2014 and has raised a total of $10 million in venture capital since inception. It also raised $31.4 million in an ICO (Initial Coin Offering) in October 2017 from investors including Dallas Mavericks owner Mark Cuban and Blockchain Capital.

Sood is most known for founding VoodooPC, the world’s first PC gaming manufacturer, which was ultimately sold to Hewlett-Packard Corp for an undisclosed amount in 2006. He also started Microsoft Ventures, where he worked until 2014.

“I’m a long-time gamer, and have been watching this space for a while,” said Sood.

Unikrn CEO Rahul Sood

He’s not surprised that venture interest is up.

“Even though some people are still trying to figure out how to make money in the space, they are paying attention because viewership is up and the fan base continues to grow. It’s safe to say that esports is the fastest-growing sport in the world right now and it’s only going to continue to grow,” Sood told Crunchbase News. “More people watch Twitch today than some TV channels.”

Sood agrees that esports is a more intimate sport with high player engagement.

“Professional players have relationships with fans at a very high level,” he said. “It’s definitely different that way in that fans are engaged with players in a way that you don’t see in any other sports.”

The audience is young and tech savvy, making it appealing to advertisers.

“As big brands want to approach millennials and communicate with them, there’s probably no better way to do it than esports,” Sood said. “We’re dealing with a very current, very relevant customer base.”

With such a huge jump in funding in a few years’ time and major professional sports owners acquiring esports companies left and right, it’s probably safe to say that this is an industry that will only continue to grow.

iStockPhoto / aurielaki