In recent weeks, esports has made many headlines in mainstream media. Due to the ongoing global pandemic (COVID-19), most sports events such as the Olympic Games, NBA, NFL, Formula 1, MLB, and many more have been suspended, postponed, or canceled. In an effort to fill the void of competition and fan engagement, many sports organizations and athletes turned to streaming competitive and casual games, which pushed awareness in mainstream media to a new level as competitions such as a virtual NASCAR series are being televised on linear TV.
Nevertheless, the esports industry is part of the same global economy that is facing the consequences of COVID-19 policies. In late-March, Kristalina Georgieva, the managing director of the International Monetary Fund (IMF), stated that the global economy had entered a recession that could be as bad or worse than the 2007-2009 downturn.
In an article analyzing esports stocks The Esports Observer published earlier this month, I found that it isn’t representative to look at the esports ecosystem as a whole to judge whether or not it is immune to the negative economic impact of COVID-19.
Several industry categories, such as esports organizations, venues, and competition organizers, are highly dependent on ticketing, merchandise, concessions, media rights, and sponsorship revenues. Those types of revenues are currently either uncertain or outright non-existent as spectator events are prohibited in most countries (Germany banned all mass events until Aug. 31, which is affecting gamescom and ESL One Cologne). In addition, many companies had to revisit their annual budgets to save money where possible, which in several cases could end up in the cut of marketing expenses, including sponsorships and partnerships.
Since the current situation affects the esports industry’s players rather differentiated, we’ll take a look at a group of esports companies that is very susceptible to the negative impact of the economic crisis. This article is discussing the current funding issues the esports ecosystem’s startups are facing.
The esports ecosystem is a rather young industry; consequently, it is host to a large percentage of startups. Esports startups come in every shape and size, including esports teams, event organizers, data providers, media outlets, hardware manufacturers, software developers, and more.
While a startup can be many things, it always is a project-based company through which an entrepreneur or a group of entrepreneurs is looking to develop and validate a sustainable business model. In general, there are two main approaches to financing a startup: bootstrapping and raising equity/debt.
Because most startups aren’t profitable right away, both approaches to financing are susceptible to economic recessions. Bootstrapping is relying on the business creating sufficient revenues to offset costs. Startup equity and debt are often provided by investors in volumes to last the business a couple of months due to the risky nature of the investment. When the company fulfills expectations and shows the potential to turn profitable or exit in the foreseeable future, it is usually able to raise its next investment round.
Universally, there are several major common points of failure for startups, including business model flaws (saturated market, too much competition, barriers to entry, bad business idea, difficult to implement, outdated technology, etc.), issues with management (wrong motivation, poor research and planning, poor leadership, financial issues such as inadequate capital and lack of cash flow), legal problems, and economic problems (changes in spending, changes in consumer and industry trends, recessions). The economic consequences of the current global pandemic increased the probability of some of those potential points of failure significantly.
Lack of Investments
In the last two global recessions (2000-2001 and 2007-2009), the availability of venture capital funding decreased significantly. While it might not be a big issue for major airlines to find $50B USD in new credit, startups needing $100K to stay liquid could be in trouble. In Germany, 73% of startups claim to be existentially threatened by the ongoing crisis, according to a study conducted by the German Startups Association.
Since the onset of the crisis, Chinese venture capital deals have declined by 50% – 57% in the first two months of the year, relative to the rest of the world. If a comparable downturn happens globally, even for just two months, startups will be missing out on approximately $28B in investments in 2020, when using the numbers researched by the Startup Genome, which were published in its report “The Impact of COVID-19 on Global Startup Ecosystems.” Taking the previous two recessions as historical analogies, the total drops in global venture capital investments were between 21.6% and 29.3% over twelve months, which, projected on the current economy, would represent a decline of up to $86.4B in global venture capital investments.
Rising from the Ashes
Even if it is inevitable that startups in the esports ecosystem will fail in the coming weeks and months, there are great opportunities. A number of startups will benefit from boosted revenues from their products and services due to the increased demand for esports, gaming, and game live-streaming. Moreover, an economic crisis is always an opportunity for young companies to prove the sustainability of their business models as history has shown that crisis begets opportunities for select startups.
Over half of Fortune 500 companies were created during a recession or bear market, and over 50 tech unicorns, collectively valued at $145.2B, were founded during the 2007-2009 recession years. One of those unicorns being Airbnb, which was created because the entrepreneurs behind it were struggling to pay their rent at the time.
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