Underweight: eSports Equity from Backers

Key Stats:

Summary

The Backers team has been selected as an “Underweighted Deal” by KingsCrowd. If you have questions regarding our deal diligence and selection methodology, please reach out to hello@kingscrowd.com. 

Problem

The eSports market is exploding in popularity and viewership. This bodes well for companies in this space, but there are some issues the key players must face. As in many sports markets, fan engagement is limited. Funding is also reliant in large part on sponsorships, in-game purchases, and what media rights have been negotiated. Even though the industry is in a state of growth, relying on traditional means of funding could stifle opportunities in an era of amazing technological progress.

Solution

One company that hopes to address these shortcomings is Backers. Through its platform, Backers will allow eSports fans/viewers to contribute funds to a prize pool. These prize pools can be utilized for already-established events (though Backers also wants to organize its own tournaments). In exchange for these cash proceeds, the fans who contributed funding will receive what management describes as a ‘form of equity’ in the competitor they are backing. This lasts only during the event that they are backing them for.

Though equity is how management spins this arrangement, a more apt comparison would be sports betting. Money is put up and if you’re right, you receive a payout. If you’re wrong, you might receive no payout. It is worth mentioning, though, that the cash taken in is considered to be an entry fee for the event. These proceeds are also allocated toward the competitor or competitors you are backing, hence the company’s name.

Even though fans may contribute cash to the competitions, there’s another component to the transactions. All cash received is converted into cryptocurrency and then controlled by smart contracts. These smart contracts will serve as an online escrow account for the funds. They will only pay out when the final results of the competition are recognized. This helps to ensure that the funds in question are where they need to be. It also helps to remove issues of custody that Backers might otherwise have to contend with.

Initially, Backers began with this concept for the poker industry. They were successful in creating a proof of concept involving smart contracts on Ethereum. With the funds the company hopes to receive from this current raise, it intends to build out a minimum viable product. Once completed, it wants to launch with an eSports partner. All of this, management says, should take about a year. As part of this movement toward a functioning platform, the company intends to migrate to Bitcoin Cash. One issue about this transition is that Ethereum is known as an excellent platform for smart contracts. Bitcoin Cash is a smaller opportunity than Ethereum offers, so this transition does not make much sense.

Because of how early Backers is, the company has yet to generate any revenue. This applies to both 2018 and 2019. In 2018, the company’s net loss was $10,795. This narrowed slightly to a loss of $6,662 in 2019. Operating cash flows were identical in both years. This shouldn’t be all that surprising for a business as early stage as Backers is. In order to generate revenue when it does launch, Backers intends to charge a fee of 2.5% on top of amounts contributed through its platform.

An Excellent Market Opportunity

Though eSports may seem like a niche space, it’s actually larger than many people might expect. According to Goldman Sachs, the industry was estimated to include an average monthly audience size for 2019 of 194 million. That number this year is forecasted to grow to 225 million, and by 2022 it should climb to 276 million. To put this in perspective, the NFL in 2017 saw a figure of 270 million viewers per month on average. The MLB’s figure was 114 million, the NBA’s was 231 million, and the NHL stood at a paltry 65 million. eSports viewership is well in line with more mainstream sports broadcasts.

eSports is a broad space, with several large games each making up a piece of it. The biggest game on the market today, in terms of viewership, is League of Legends. Back in 2017, the world championship for League of Legends brought in 58 million viewers. By last year, this figure had grown to more than 100 million. To put this in perspective, the Super Bowl, over the same period of time, shrank from 124 million viewers to 102 million. Not only are these numbers large, they are highly-desirable for advertisers. A full 79% of eSports viewers are under the age of 35.

One of the largest eSports viewing venues (the largest besides YouTube) is Twitch. In 2019, 660 billion minutes of content was watched on the platform. This was up from 355 billion two years earlier. So far in 2020, the platform has logged 476 billion minutes of content watched. This is up 51.6% compared to the same period last year. It is thanks, at least in part, to the draw created by its 5.5 million monthly streamers (up 50% year-over-year) and its 41,812 partners.

Gaming revenue should not be conflated with eSports revenue. Total gaming revenue across the globe last year was $120.1 billion with Fortnite leading the way at $1.8 billion. The eSports market, by comparison, is much smaller but it’s growing quickly. Revenue in the space last year was just $1.18 billion. By 2022, it’s forecasted to grow to $2.96 billion. This implies annual upside of 35.8% over the forecast period. Another key factor that relates to Backers is the amount of cash allocated toward prize pools. In 2019, $256 million was paid out in prizes. This should grow to $413 million by 2022, implying upside of 17.3%. Theoretically speaking, this works out to potential annual revenue for the company of $10.3 million by 2022.

The Goldman Sachs report also reveals another interesting tidbit about how revenue will change over time. In 2017, 38% of eSports revenue came from sponsorships. A further 22% came from advertising, and 14% came from media rights. The bank believes that this will change drastically between now and 2022. By the end of the forecast period, it’s estimated that 40% of the industry’s revenues will come from media rights. Sponsorships will shrink as a share of the space to about 35%, and advertising will decline to 14%.

Terms of the Deal

To get to the next stage of development, the management team at Backers is raising funds through an issuance of common shares. Units are being priced at only $2 apiece, and the minimum commitment per participant has been set at just $2. The firm hopes to raise up to $1.07 million, but it can close its round with as little as $10,000. As of this writing, Backers has received commitments totaling just $5,234. This small amount of capital committed might have something to do with the firm’s proposed valuation. At this time, management wants its incoming investors to value the business at $8.56 million on a pre-money basis. That’s very high when you consider that its minimum viable product is not yet completed.

An Eye on Management

There are two key figures in charge of the Backers team. The main individual in question is Brian Tinney, the firm’s founder and CEO. At present, he’s also still working as a Senior Network Engineer at Teradata where he focuses on network architecture. Prior to his time there, he served in the same position at both Sempra Energy and MaxLinear Inc. The other key person is Matt Smart, the company’s Vice President. At this time, he is also serving as the owner of Smart Software Solutions, a company he has been at since 2004. There, he creates ‘dynamic’ websites and mobile apps.

Rating

After careful consideration, our team has rated Backers an Underweight prospect. The company’s rating is actually in spite of a lot of things it has going for it. The industry the firm operates in is going through a period of rapid change. An idea like this that could take off in a really exciting way. There are, however, some really significant problems for investors to consider.

For starters, the company’s stage of development is very early. Possibly too early to realistically be seeking capital like this. If the deal were being done at a reasonable valuation, that might be a different issue. However, the valuation is sky-high for where the company is at the moment. Another issue relates to the business’ plan to utilize Bitcoin Cash (BCH). Using cryptocurrency is probably a wise idea, but the transition to BCH is concerning. BCH does not have the value strength or adoption rate that Bitcoin or Ethereum bring. The move from Ethereum to BCH raises red flags about Backers’ team and the viability of the project. Lastly, the founders of the company are both fully employed in other ventures, which casts doubts on their drive to make Backers a success. Taking all this into consideration (the very early stage, the lack of a viable product, the very high valuation, the move to BCH, and the multitasking team), Backers is an Underweight Deal that investors should consider carefully.