The once-flourishing esports sector now grapples with dwindling funding sources, revealing that competitive video gaming has yet to yield the anticipated returns for investors. Sports moguls and gaming leaders aspired to see esports evolve into an entity akin to the National Basketball Association. However, in contrast to the boom five years prior, numerous prominent esports entities in the U.S. are scaling back because of a pervasive economic slump, a venture capital industry now hesitant to back expansion without returns, and a crypto collapse that has eroded a substantial pillar of support.

Downsizing in prominent esports entities

Throughout the summer of 2022, Team SoloMid and 100 Thieves, esteemed as Forbes's most prized esports entities, have shed a significant number of positions in total. In November 2022, Evil Geniuses, a stalwart in the esports realm, dissolved its North American squad that vied in the immensely popular game "Defense of the Ancients 2" and redirected their efforts towards South America. Additionally, game publishers are scaling down their involvement in esports, impacting tournament organizers, teams, and players. In early November, Riot Games revealed their decision to close down their official Wild Rift leagues outside of Asia in the coming year. They intend to focus solely on the globe's biggest mobile gaming market. Additionally, a well-attended Super Smash Bros. contest was canceled due to a lack of licensing from Nintendo.

Financial struggles of esports organizations

Ben Spoont, the founder and CEO of Misfits Gaming Group, pointed out that they've been running their esports teams at a deficit from the very beginning. In July, he opted to sell the organization's slot for fielding a team in the League of Legends European Championship, anticipating that by 2022, they would have amassed sufficient data to evaluate their journey toward profitability.

Investor skepticism and market trends

Once-eager investors, anticipating a flourishing industry, now scrutinize the business landscape with growing skepticism. In 2018, an unprecedented $4.5 billion flooded into the sector, including inaugural contributions from private equity firms, as per Deloitte's report. Nonetheless, this sudden surge of funding has waned, with venture capital investment in esports currently sitting at its lowest point since 2016. This excludes the anomaly of 2020, a year when pandemic-related restrictions raised uncertainties about the feasibility of live esports tournaments, as reported by PitchBook data.

This discontent reverberates in the public markets as well. FaZe Clan, a collective of gaming luminaries and esports professionals who played a pivotal role in pioneering influencer marketing, made its public debut through a SPAC in July, only to witness an approximately 80% drop in its stock value since then.

Esports Industry Faces Funding Crisis: Investors Pull Back Amidst Dwindling Returns

Game publishers’ shift in esports strategy

The original vision for esports organizations entailed revenue streams from ticket sales, merchandise, and profit-sharing with game publishers through substantial sponsorship and broadcast agreements. Fueled by ambitious visions, executives from traditional sports franchises initially invested $20 million in teams for the Overwatch League, which is run by Activision Blizzard, and even larger amounts for Call of Duty league squads.

Yet, the revenue models that thrived in traditional sports have not translated seamlessly to esports. Even in instances where major esports events fill stadiums, ticket prices pale in comparison to those of an average American football or basketball match. Esports enthusiasts also allocate far less expenditure to merchandise and digital assets compared to their counterparts in traditional sports. While a staggering 261 million global viewers engage with esports at least once a month, each fan contributes a mere $5.30 in annual revenue, as reported by industry tracker NewZoo.

Adding to the complexity, viewership for the League of Legends Championship Series, a cornerstone in the esports landscape, is currently at its lowest point in five years, as per data compiled by Esports Charts. This decline in viewership has led to less lucrative or less frequent broadcast and streaming deals for U.S. and European esports leagues.

Moreover, while traditional sports teams have successfully secured concessions from local governments, mitigating initial operational costs through tax benefits and stadium construction subsidies, esports teams have not enjoyed the same advantages. Comcast Spectacor, the proprietor of the Philadelphia Fusion Overwatch League squad, embarked on a $50m cybersports arena project in 2019, only to re-imagine it as a versatile dining and retail complex. 

Dependency on external investments

This heavy dependence on external investments has become the hallmark of the industry. Esports organizations accumulate a considerable portion of their income, around 60%, from sponsors and advertisers such as BMW and Red Bull, as per data from NewZoo. However, the global economic downturn has cast its shadow over the advertising market in the U.S., shrinking it by 7% in the second quarter compared to the previous year, and esports has not remained unscathed. A vivid illustration of this effect unfolded when the Overwatch League lost its entire roster of sponsors in anticipation of the 2022 season. This was in part attributed to the controversy surrounding sexism at the publisher, Activision Blizzard.

Esports Industry Faces Funding Crisis: Investors Pull Back Amidst Dwindling Returns

Rise of gaming influencers and impact on esports

Certain sponsors have redirected their attention towards the burgeoning popularity of gaming influencers, specifically focusing on Twitch streamers and YouTube content creators such as Tyler "Ninja" Blevins. These influencers are better positioned to harness viewers' attention compared to esports teams solely dedicated to competition and winning tournament prizes. Twitch and YouTube Gaming experienced a surge in live gaming viewership during the pandemic, while esports leagues grappled with lockdowns. As an example, Misfits' choice to sell its League of Legends European Championship slot was a component of their strategy to enhance collaborations with leading creators such as Minecraft YouTuber Toby "Tubbo" Smith and "QTCinderella."

On top of that, influencers offer a more cost-effective alternative to esports teams, where player salaries can reach seven figures. This year marked a decline in salaries within the League of Legends Championship Series, a noteworthy development in light of the industry's previous trajectory.

Cryptocurrency’s role in esports sponsorships

Notably, cryptocurrency companies have inked some of the most substantial sponsorship deals in esports lately. Betting firms and crypto entities accounted for 15% of sponsorships in 2022, according to NewZoo. However, the cryptocurrency market's turmoil and the failure of crypto exchange FTX, which filed for bankruptcy due to a liquidity crisis, have led to a drying up of funding from this sector. As an illustration, last year FTX disbursed $210 million to Team SoloMid for a rebranding as TSM FTX. However, in November of 2022, with the collapse of the crypto empire, the partnership was put on hold, and the team reverted back to its original name, TSM.

Gillian Sheldon, a spokesperson for TSM, emphasized that the termination of the FTX deal played no part in the team's choice to reduce in size and lay off personnel. Sheldon highlighted that numerous esports teams run at a deficit each year, and the convergence of high-interest rates along with a slowing market has made it difficult to secure extra capital. She added that TSM, as an organization overseeing esports teams, content creators, and the successful Blitz app, remains worthwhile.

Esports Industry Faces Funding Crisis: Investors Pull Back Amidst Dwindling Returns

In mid-November of 2022, an admired platform connecting esports enthusiasts,, ceased operations after failing to find a buyer. The allure of esports has dwindled for venture capitalists who previously succumbed to the hype and lofty valuations enjoyed by esports startups a few years ago. An increasing number of investors are now acknowledging that game publishers are the primary beneficiaries in the esports ecosystem, a perspective articulated by former Twitch employee and creator Ben Goldhaber in a Medium article.

Calls for game publishers’ greater involvement

While several esports organizations are shifting their focus towards influencers and away from traditional sports teams, some executives believe that game publishers bear a greater responsibility for the current challenges faced by these teams. Arnold Hur, CEO of esports organization Gen. G, argues that publishers should adopt a more hands-on approach in establishing digital revenue avenues for the esports ecosystem they've nurtured. He acknowledges that depending solely on media and sponsorship agreements in the present market environment might fall short of meeting the industry's needs.

To sum up

In a nutshell, the esports world is navigating a bit of a rough patch. Investors, once gung-ho, are now a bit hesitant due to lower returns. Big names like Team SoloMid and 100 Thieves are streamlining, and game publishers are taking a step back, affecting the whole scene. The initial excitement from investors has cooled off a bit, and traditional money-making methods aren't fitting in smoothly. Relying heavily on external funding is a bit of a hurdle. Add in the influence of gamers and the unpredictability of cryptocurrency, and things get even more interesting. Folks are starting to suggest that game publishers play a bigger role in generating revenue. To keep this industry thriving, it's all about being adaptable and rethinking how things are done for long-term growth and success.

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