By Alan Wink, Waylon Chin, Brian Bernstein, Joey Brander. Edited by Sebastian Gomez Puerto
Private Equity investors have made personal investments in sports franchises in major leagues around the globe. These unique investments provide bragging rights, entertainment, and, in some cases, a sizable return. Most private equity veterans view these teams as underperforming assets and believe that they can enhance the organization’s value given their business acumen and strong ties to the community. Rarely is a fund the lead investor in any deal involving a professional sports team. Instead, they invest in other parts of the capital structure, including mezzanine debt or preferred stock. Investing in sports franchises does have a considerable level of risk. For an investment to be successful, all of the stars need to line up – it must be the right team, the right market and the right terms and conditions.
Major League Teams are Big Business
Today, sports teams and the leagues are big businesses. The National Football League brought in $13B in revenue in 2015/2016 and was followed by Major League Baseball with $9.5B, the English Premier League with $5.3B, and the National Basketball Association with $4.8B. In 2016, the most valuable sports franchise was the Dallas Cowboys, valued at $4B. The next two teams on the list were two soccer clubs, Real Madrid and FC Barcelona, valued at $3.65B and $3.55B, respectively.
Sports Technology Venture Capital is Booming
Even if you do not have a billion dollars to invest in a team, there are other ways to invest in the business of sports. Investments in the sports tech ecosystem by venture capital is booming. Since 2012, investments in sports related startups have been growing nearly 30% year over year. In 2015 alone, investors put over $1B into sports related startups and this pace of investment is accelerating.
Technology in sports is dramatically changing how athletes train for competition, how fans view sporting events and the way that fans engage with their favorite teams and players.
Disruption and Innovation through Tech
Sports is far more than a niche leisure activity. The annual global spend across all sports consumption is $145 billion. Globally, there is an incredible appetite for all things sports and for sports related content. For the major networks, dollars allocated exclusively to sports programming have tripled. From a social media perspective 60% of Twitter’s traffic is sports related. Vast technological improvements in how sports are viewed in the home coupled with high prices for live sports entertainment have even resulted in many teams and leagues experiencing attendance issues. Thus, teams and leagues need to continually innovate and embrace new technologies to create a more engaging live experience for their fans.
The Evolving Sports Tech Ecosystem
Sports is a global industry and quickly becoming one of the most intriguing markets for venture investing. From wearable devices, to gaming, fan engagement technology, smart arenas, and fantasy sports leagues; sports tech is changing the ways that people compete, consume and engage with sports. Investor dollars are being put into innovations in stadium technology, customer (fan) relationship management, digital content, and analytics on athlete performance. Here is a common breakdown of the sports technology ecosystem:
- Analytics – both for athletes and fan engagement
- eSports – professional competitive gaming leagues/teams, events, and content platforms
- Wearables – used by athletes (both competitive and recreational) to improve performance
- Virtual/Augmented Reality – changing how live sports are viewed at home and in the arena
- Drone Technology – competitive leagues and action photography
- Media – Mobile content, athlete-founded media companies, streaming
- eCommerce/ticketing –models for maximizing the B2C market
- Fantasy sports – platforms for fantasy sports leagues
What Makes Sports Technology Such an Attractive Area to Investors?
The sports industry in the United States alone is projected to reach $75B by 2019. Sports fans are some of the most passionate consumers in any industry, and spend long hours and significant dollars following their favorite teams and athletes. As a result, technology that allows fans to more easily engage with the teams and athletes they love comes with an automatic user base and high retention rates. In the sports industry, the customer is easily identified, extremely loyal, and willing to spend money to support their passions.
The Rise of eSports
One of the most significant revolutions in the sports industry is the rapid growth of eSports, or professional gaming, which is expected to reach two-and-a-half billion dollars in revenue in the next two years.
Viewership, consumption, and event attendance have continued to rise at unprecedented rates. Over two weekends, the 2017 IEM World Championship in Poland drew 173,000 fans to the stadium and surrounding festival. It accrued 46 million unique viewers watching online. In 2016, the League of Legends World Championship saw 43 million unique viewers, more than 12 million more than Game 7 of the NBA Finals that same year. A 2017 study found that males between 18-25 in the United States prefer viewing eSports over traditional sports, and eSports came in second overall in preferred media behind only movies.
eSports streaming site Twitch has seen tremendous viewership as fans continue to seek an ever growing amount of gaming content. In January 2018, 962,000 was the average viewership on Twitch, meaning that nearly a million people were viewing content on the service at any given time putting them on par with major broadcast outlets such as CNN, MSNBC, and ESPN. In total, Twitch reports over 15 million daily active viewers that spend 106 minutes daily watching live gaming.
eSports athletes have started to gain international recognition and following comparable to professional athletes across other sports, with many listing millions of social media followers and bringing in six-figures in endorsement deals annually.
Similar to traditional sports, technologies to analyze eSports performance, engage fans in the arena, and train these athletes more effectively have been created.
Pro Athletes as Entrepreneur and VC
Sports focused venture capital has attracted many celebrity investors, including professional athletes themselves. These athletes understand how technology can be applied to their craft, and can provide startups with true strategic value, such as brand power/recognition and access to millions of potential customers via social media.
Pro Athletes Take Over the Sports Media Business
Leveraging their personal footprint and star power, pro athletes have moved beyond being limited partners in VC funds and companies, and are now directing investments themselves. The trend started with athletes like Kobe Bryant becoming the GP in VC platforms, and evolved into direct founders of content platforms. Notable examples include, Derek Jeter’s The Players Tribune, LeBron James (SpringHill Entertainment/Uninterrupted), Kevin Durant (Thirty Five Media), and Tom Brady (Religion of Sports). They have found a winning formula in monetizing their extensive fan bases with original content.
As the business of sports continues to grow, the sports technology space is becoming an increasingly intriguing market for investment. New innovations are changing everything from how athletes train to how sport content is consumed, viewed, and analyzed. The bottom line is as follows, if you make capital allocation decisions as an angel or venture investor, you need to consider an exposure to the sports tech sector. It is one of the world’s fastest growing industries, with material disruption happening today, and a real possibility of asymmetric upside reward.