Cao Xi, venture partner of Sequoia Capital China, shared his insights on investing in the esports industry by means of his firm’s portfolio, including short-film company Kuaishou, live streaming company DouYu, and esports solutions provider VSPN, during the recent Tencent Esports Global Summit.
Founded in 2005, Beijing-headquartered Sequoia Capital China is one of China’s most prominent venture capital firms. The firm has invested in more than 50 Chinese public companies, most notably Alibaba, Jing Dong, Sina, Meituan, and Didi. Since 2013, the VC has been investing in multiple Chinese esports companies, including esports solutions provider VSPN, esports events company Imba TV, and online gaming network Fighting Esports Group.
Before the 36-year-old Xi became the youngest partner at Sequoia Capital China, he was part of the Tencent Independent Evaluation Group (IEG) department, which was his first job after graduating from university.
To kick off his speech at the conference, Xi discussed his perception of the current esports market size. “We should remain pragmatic and determine the esports market’s size isolated; therefore, it should not include gaming revenues,” he said. “According to a Chinese statement about the market, ‘the esports industry generates more than ¥200 billion ($30.8 billion) in revenues,’ which is not an objective perspective.”
Offering his assessment, Xi revealed that he believes an objective estimation of the global esports market size to be about $1 billion.
Next, Xi shared some of the reasons behind why his firm invested in Kuaishou, DouYu, and VSPN.
“What impressed us the most was Kuaishou’s community philosophy and technology background,” Xi said. “Kuaishou is a short video social platform, with esports and gaming being part of the platform’s comprehensive contents. The reason for the investment at that time was that we believe that the short video format is a vital form of content.”
Prior to the company’s IPO, Sequoia Capital China invested several times, including participating in Kuaishou’s B, B+, D, E, and F funding rounds, according to Chinese data technology service company Tianyancha.
Xi pointed out that the reason for investing in DouYu was Amazon’s $9.7 billion acquisition of live streaming platform Twitch in 2014. “At that time, the internet speed in China was constantly increasing. Live streaming users required a stream quality of at least 720P resolution to watch esports broadcasts clearly, so we realized it’s an opportunity to invest in DouYu in 2014.
“Objectively speaking, the rise of League of Legends , Honor of Kings , and PUBG  were also three catalyzing factors for us to keep eyes on gaming live streaming platforms,” Xi added.
Sequoia Capital China was involved in DouYu’s Series A, B, and C funding rounds.
Regarding Sequoia Capital China’s investments in Chinese esports solutions provider VSPN, Xi emphasized two major reasons, the long-term value of esports competitions and VSPN’s CEO Dino Ying.
“In the world of esports tournament organizers, the economies of scale are important. An organizer has to have access to quality equipment and qualified human resources to produce flagship tournaments for game publishers. Consequently, only top companies can profit from economies of scale,” Xi explained. “Hosting flagship tournaments also goes hand-in-hand with employing a quality production team. If an organizer is not able to get commissioned to operate flagship tournaments, the costs of maintaining a [production] team are too high.
“We initially invested in VSPN during an angel investment round because we believed that Dino has enough courage and foresight to see and grasp the main contradictions in the industry. He also has a solid management team, which is an important reason for our investment,” Xi said.
Sequoia Capital China made investments as part of VSPN’s Angel and Pre-A investment rounds, according to Tianyancha.
Concluding his speech, Xi shared his opinion on the trajectory of esports going forward.
“Every big wave of innovation in human history is based on advances in technology,” he said. “For esports, VR and brain-computer interface technology are segments we will continue to pay attention to because those technologies enable new experiences.
“I guess when the boundaries between the virtual world and the real world become indistinct, the line between esports and sport will become less indistinguishable,” Xi concluded. “Many movies have discussed this scenario, such as ‘Ready Player One’ or ‘The Matrix.’ We will have to face a final choice one day, no matter ‘a blue pill or a red pill.’”
Finally, Xi mentioned one of his favorite books to describe his outlook on the future of esports: “Maybe the ‘Dream Machine’ will come true, just like Isaac Asimov wrote in his book, ‘The End of Eternity.’”
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