In the absence of traditional sports due to the Coronavirus, the esports industry is experiencing a significant boom. Likewise, the lockdown of consumers has contributed to an overall gravitation toward video gaming. As a result, the esports industry finds itself in even greater demand, both for spectators as well as participants. But according to one investor, things may be due for a “correction” before long.
From the experts
According to Jens Hilgers, founding partner at Bitkraft Esports Ventures, the valuations of certain sectors in esports have grown “out of hand.” Thus, the market is due for an eventual “correction mode.” Said Hilgers, while esports have proven to be a “spectacular growth area,” investor fear of missing out in addition to over-promised projections created inflated valuations in the space.
This is especially true of esports teams, according to Hilgers. Team organizations are one of five investment areas in the esports industry. As an example of this, nearly $200 million was invested in teams during 2018.
Jumping on the early bandwagon
A lot of investors, inexperienced and veterans alike, often think if they’re not a part of something early, then they’re not getting a chance at something big. Said Hilgers, “So, I think there was a certain level of fear of missing out.” In addition, he believes “fairly high” growth expectations by team founders and start-up management teams contributed to the panic.
Consider some of the larger investments that have taken place in recent years. For example, FaZe Clan announced a $40 million Series A funding round mid-April. Many teams’ estimated worth ranges into the hundreds of millions of dollars. Whether they’re actually worth that amount is another question.
But what does “correction mode” mean? When a particular sector or industry as a whole drops in value, this means it has entered “correction” territory. It is called a correction because historically, the drop will often correct and return prices or values to their long-term trend. So while the esports industry may experience strong growth in some areas while dropping in others, it will eventually correct itself with time.
In other words, don’t panic just yet.
Problems as they arise
The problems arising with the industry are only now becoming apparent. Despite the growth and demand experienced for esports industry, two particular sectors are suffering greatly: sponsorships and ad revenue. Investors have always faced challenges in figuring out which games to focus on. Now they’re beginning to see that some sectors, much like teams, are not crisis-proof. The industry relies quite heavily upon sponsorships and ad revenue.
“We’re in a time of financial crisis and in a financial crisis, ad budgets suffer,” Hilgers stated.
Despite these growing pains, initial research by Newzoo indicates that the global esports industry will surpass $1 billion in revenue this year.