Esports, Gaming, and the Next VC Tidal Wave

Gaming and esports dominate pop culture and represent the immersive entertainment the current generations crave.Since 2000, there has been one market that has been growing every single year – including the 2001 dot-com bubble and the 2008-09 financial recession.The video game industry has swelled to more than $150 billion dollars per year, larger than the music and film industries combined. Once discarded as a niche, investors and major brands can no longer ignore esports and gaming.Today, there are gamers who build custom PCs; esports professionals that earn hundreds of thousands of dollars per year; streamers that amass the attention of millions of fans; and casual gamers who play on consoles, tablets, and smartphones.There are more than 2.5 billion gamers across these platforms and the number keeps growing day by day.We collaborated with Martin Garcia, Chief Financial Officer of BITKRAFT Ventures, the leading venture capital firm in the gaming and esports industry, to get his thoughts on the space.

Traditional Entertainment Has Embraced Esports

Given the COVID-19 lockdown, we have seen traditional media embrace esports with open arms.Since 2017, the NBA has had an esports league called the NBA 2K League. For six weeks during the lockdown, the league’s 23 teams competed for an online title with games streamed live on Twitch and YouTube.La Liga, the Spanish soccer league, held a virtual charity tournament on March 20-22 to raise funds for COVID-19 relief. The tournament, sponsored by Santander and EA Sports, featured professional soccer players going head-to-head in matches of the FIFA 20 video game. In a single weekend, they raised €140,000 and garnered the attention of 1,000,000 fans.The Formula 1 racing series has also shared figures from its Virtual Grand Prix series. The sport shared that its digital series, held over three months, “achieved a record-breaking 30 million views across TV and digital platforms during the lockdown period”.Similarly, NASCAR introduced the eNASCAR Pro Invitational iRacing Series in March 2020. Their first race drew 903,000 fans, a larger TV audience than any other esports event, showing the potential of bringing esports events to more traditional mediums.The gaming industry was already massive heading into 2020. But with the lockdown, there are clear signs that engagement has reached new heights. Verizon shared that U.S. video games “has gone up 75% since the quarantine first went into effect” while overall web traffic grew 20%, video streaming video streaming increased 12%, and social media usage was flat.

New Models Are Still Being Explored

The industry is massive. In gaming, there are game developers, publishers, hardware manufacturers, and more. On the esports side, there are teams, leagues, and tournaments.Despite this scale and diversity, new models are still being explored. “Investors should understand that, today, there is a blurring of lines between video games and social platforms,” said Martin Garcia, CFO of BITKRAFT Ventures.

“Today, there is a blurring of lines between video games and social platforms.”

Epic Games, the developer of Fortnite, see themselves as building a social platform that is focused on interactivity. Yes, Fortnite is a video game with traditional gaming controls and mechanics.However, the game is free-to-play and even runs smoothly on most mobile phones, making it extremely accessible. These decisions are deliberate, as they are looking to attract a wide audience. Fortnite also extends beyond traditional games by using their platform to promote in-person products and services.Multi-platform music producer DJ Marshmello (in February 2019) and Grammy-nominated artist Travis Scott (in April 2020) held virtual concerts on Fortnite, the latter of which brought in over 12 million fans.They have also built partnerships with fashion brands, including selling digital versions of Air Jordan shoes and physical merchandise with Japanese retailer Uniqlo.Back in June 2017, Porsche AG used a video game launch to announce something big: their flagship 700-horsepower, $300,000 911 GT2 RS. Typically, these announcements are done at major car shows, like the Geneva International Motor Show, or private events, as made popular by Tesla Inc.Showcasing the Porsche GT2 RS as the cover car in Forza Motorsport 7 was a great way of exciting both car enthusiasts and video game fans. The Verge reported, “[T]he announcement didn’t come in Geneva, or Detroit, or even New York. No, the new Porsche was unveiled in Los Angeles, on the Electronic Entertainment Expo stage. Yes, Porsche just dropped a car at E3.”Looking ahead, we expect video games to play a more important role in product launches, music, movies, and culture more generally.Another major shift that we are watching is monetization. Traditionally, video game developers created games and worked with publishers to line store shelves with boxes of software. These games, shipped on CDs, DVDs, and Blu-ray discs, were owned by the consumer.However, some of the biggest video games today do not have a purchase price or require a trip to the store. First, we are seeing a transition away from physical media to digital downloads.Second, and more importantly, we are witnessing the rise of freemium in the gaming industry. Instead of charging upfront, game developers are seeing that it’s better for the long-term success of the game (and the company) to build a large audience first and monetize that attention down the road.

“We are witnessing the rise of freemium in the gaming industry.”

Franchises like Fortnite, Apex Legends, League of Legends, Counter-Strike: Global Offensive, Call of Duty: Warzone, and others lower the barriers to entry. They want to get gamers into their platforms. If you do not like the game, you can leave without any risk.Conversely, if you like the game, they have built-in monetization mechanisms like paying for expansion packs, in-game items, skins, and other ways to personalize your experience.The old model generated $60 once and required splitting revenue between the developer, publisher, and retail store. Today, developers can self-publish, leverage digital downloads, and use their data to create the exact type of content that users want.These small monthly or one-off fees can add up to something substantial. In 2019, League of Legends generated $1.5 billion of revenue and contributed to the $20.6 billion made that year by all free-to-play games.The key metric is lifetime value (LTV). By growing their audience and building new content, gaming platforms can hook players in for much longer and keep monetizing them. Moreover, this connection between social and gaming is unavoidable.A recent study found that players who use in-game chat features have an LTV that is 10-20x higher than those who do not use chat. In particular, the Two Hat data showed an LTV of $57 for players who did not use chat, $563 for those who used public chat, and $1,227 for those who used group chat with friends.

Where are the Opportunities for LPs and GPs?

The growth and shifts in the gaming market creates opportunities for limited partners (LPs) and general partners (GPs). In particular, we believe there are two areas that venture capitalists should pay particular attention to.First, we believe Synthetic Reality will become a massive market. “Synthetic reality is the merging of the physical and digital worlds,” stated Martin Garcia. “As video games have become mainstream for the new generation, an increasing share of entertainment options and services will move into the digital realm.”Second, the gaming industry is no longer reliant on perpetually producing new hits. Instead, they can operate in a new model called Games as a Service (GaaS).Studios that are successful in this transition will have a massive, predictable revenue stream and focus on optimizing metrics similar to how a Software as a Service (SaaS) business would. The key metrics in the gaming industry should be familiar to SaaS investors: customer acquisition cost, engagement, retention, conversion rate to paid, and lifetime value.From car manufacturers and brands to sporting leagues and A-list celebrities, gaming and esports have become mainstream and will become an increasingly large part of popular culture. VCs should consider how gaming, esports, and other forms of interactive media will influence their portfolio companies and investment theses.“The last 5 years have proven that esports can be as big, or bigger, than traditional sports,” shared Martin Garica. “The next 5 years will be marked by lowering the barriers even further, with more affordable gaming options and business models taking over.”Esports and gaming are already massive industries, employing thousands of people and generating billions in revenue. And the tidal wave is just getting started.

“The next 5 years will be marked by lowering the barriers even further, with more affordable gaming options and business models taking over.”