One of the surprising off-shoots of our recent blog posts on eSports has been the large number of venture investors who reached out to get a copy of the full report (drop us a line if you want one too). There is clearly a large wave of VC interest in eSports.

As part of our ongoing research we have been speaking to people in eSports, largely investor groups thinking about buying teams. These groups are hearing the same thing about VC interest, if they do not have VCs already involved.

At one level this makes a lot of sense. Investing in an eSports franchise is clearly a long-term investment. As we have made clear, the business models for teams is very unclear right now, but most participants agree that someday, in the future, successful eSports teams should be great money-makers. On the other hand, that lack of clarity around business models and revenue sources for teams should make venture investors hesitate. Venture investors are good business people, and they usually like to understand the business model in which they are investing. Buying an eSports team is not like investing in a start-up with a promising technology. There, the investors can understand the value of the technology and then work with the company to monetize. In eSports, the teams are just part of a broader ecosystem. So while there is little technology risk, there is considerable business risk.

Some may argue that this is where the venture investors can bring the most value. They understand monetization and can help teams negotiate with the game publishers. Nonetheless, I suspect that the VCs, like everyone else, are still trying to determine the best path for making money in eSports.

Or maybe we are surprised at all this interest because it is hard to see how the numbers work out. Buying a franchise team today means an upfront payment of around $10 million, with a further investment of $10 million to $20 million for working capital, team building, and further franchise payments. Somewhere, down the road investors will want to sell the team. The average life of a VC investment is around 5 years. On that time frame, it is hard to imagine a team getting acquired for more than $40 million, which is many multiples of the highest price paid for a team to date.  That equates to a doubling of an investment ($40m on $20m investment), not bad but not great relative to VC expectations, to say nothing of the considerable risks involved.

We do not intend this post as a criticism of venture investors, instead we are trying to understand what they see and we are missing. The obvious guess is that the venture investors think their eventual exit will be much higher. They are not ignorant of the risks, but likely believe that the value of the team will someday be much higher than that $40 million above.

This is part of the excitement of watching eSports today. The audiences are growing rapidly. The audiences are young and attractive to many advertisers. There is a tremendous level of excitement (and thus engagement) around the whole eSports scene. So it is certainly possible that five years from now, eSports viewership will have surpassed many traditional, viewership of many physical sports. And brand owners will have begun pouring advertising dollars into the competitions. It is easy to dream big in eSports.

We are gradually coming to the view that buying a team makes sense with the right time horizon. That is probably longer than five years, but not ten. By 2027, we will have a much bigger industry, and we will also likely have some clear team dynasties solidly in place. Buying a stake in tomorrow’s Yankees or Lakers or Manchester United is an exciting proposition. Given enough time.