As part of our new coverage of eSports, I want to touch on a top-level concern for people considering an investment in eSports. The growth of eSports has attracted considerable investment attention.  The large web properties are buying platforms and streaming rights. Many sports teams and entertainment companies are investing in eSports leagues and teams. The leading game companies are also setting up ‘leagues’ of their own and seeking investors for teams in those leagues. While conducting research for this report, I spoke to many people who had been approached to buy a team or were advising others on a potential team purchase. The underlying theme of this report is to determine the viability of such an investment in an eSports team.

At the highest level, I would advise caution on investing millions of dollars in a team a this stage.  The simple summary is that there is no clear path to revenue for teams, making ROI a largely theoretical calculation. The big revenue source for eSports is likely going to be the sale of broadcast rights for important games. So far, these opportunities are largely solely owned by the game companies. While there are exceptions, with a few leagues monetizing their broadcast streams of high-profile matches, those appear to be under threat from the game companies’ ambitions.

It is important to understand that there are really two tops of teams – newly formed franchises and already established ‘endemic’ teams. The endemics are teams that emerged organically from years of game play, with amateur teams gradually evolving into professional organizations. In these cases, there was very little upfront capital required, other than working capital needed to establish the team organization and pay player salaries. And while participation in the many of the leading championship matches now require the purchase of a seat at the table, those are small compared to the latest wave of franchise fees being considered. These endemic organizations have survived years of full-on capitalism and have the cost structure and revenue streams to show for it.

By contrast, the new franchise teams being offered show the game companies testing the limits of what the market will bear. As we detail in our full report, this is driving endemic teams away from some titles. (E-mail us or leave a comment if you would like to be added to distribution for our reports.) The endemics are being replaced, in theory, by deep-pocketed investors with longer time horizons. The franchisors (i.e. gaming companies) seem to be targeting wealthy individuals, the kinds of people who already own sports teams.  This promises a new infusion of capital into eSports, as well as professional physical sports organizations’ management expertise. On the other hand, there is the very real risk of new investors entering the market with a very poor understanding of how eSports work. To put this in gaming terms, everyone wants to Pwn the nOoBs.

Our advice, for anyone looking to invest in an eSports team is to first get to know the market. (Our full report is not a bad place to start.) When negotiating with franchisees make sure to understand all the revenue streams. (Hint: there are not many being offered right now.) Recognize that the industry has grown considerably in recent years, and will likely continue to do so, but the revenue that accompanies those audiences has not kept pace in a uniform manner. Also, be aware that many of the proposed franchise structures come with exit penalties and other onerous terms. To put this in investing terms. Do your due diligence. Past performance is not be a guarantee of future performance. And watch your fees.

That being said, if you have a few million dollars to spare, I think eSports will eventually be a very lucrative place for team owners. Today is the time to get in at close to the ground floor with considerable growth still ahead.

As with all investments caveat emptor.