The effect of the VC wave on esports

Exploring the history of VC investment in the NALCS

AUG 21, 2017

As 2015 came to a close, League of Legends completed its most successful season in its history and the League Championship Series solidified itself as the biggest league in esports. Meanwhile, the League of Legends World Championship went globe trotting through Asia in front of sellout crowds. Viewership was up; engagement was up; League of Legends and esports were beginning to appear as a growing force that even traditional media could no longer ignore. It was only a matter of time before investors and non-endemic sponsors came knocking and it seemed as if everyone in esports was yelling, “Show me the money!”

The Beginning

On October 7th, 2015, Immortals entered the LCS as the first venture capital owned team after they bought Team8’s slot for the 2016 NA LCS season. A month later, NRG Esports also bought their way into the LCS and Ember purchased Cloud 9 Tempest’s Challenger spot. Although all three teams represented VC forays into League of Legends, the paths they took were starkly different.

The Venture Capital effect on the scene was immediately apparent. Immortals lured the dynamic duo of Huni and Reignover away from Fnatic, who had just completed the the most successful International performance from a Western team in the modern era. This was the changing of the old guard to the new; if an esports colossus like Fnatic was easily trumped by Immortals, what chance did the smaller, less established teams have?

NRG were not to be outdone, however, as they brought over Korean mid laner, GBM. The player had just experienced a renaissance season on Jin Air Greenwings, and he entered the NA LCS with much fanfare surrounding him. They also invested heavily in support staff by picking up several analysts and coaches and providing the team with several managers. Coming into their first split, NRG were hyped up as a potential contender for the NA title.

Ember was treading a path that many already deemed dangerous. Choosing to go through Challenger demonstrated a fundamental difference in ideology from the other VC teams, and they continued to demonstrate this by being the first team to publicly release their player’s salaries. They also centered their team around North American talent and made it clear that they believed that for NA to succeed internationally, it would require a philosophical change within the North American scene. This culminated with their now famous quote, “NA will kiss the Summoner’s Cup in two years.”

Blood in the Water: The Troubles

Ember was the first team to fall into trouble. After ending the regular season in second place, they appeared poised to make it into the Promotion tournament, but their hopes came crashing down after they fell to Team Dragon Knights in the semifinals. Their crushing defeat led many to question if they could maintain such an enormous investment in the Challenger scene. At first, the Ember staff were confident that they could continue for several splits in Challenger. Yet they were given the first taste of the cutthroat nature of Venture Capital as the team was disbanded after their investors pulled out.

NRG were the second team to suffer setbacks. After a decent first split, the team went through several roster changes to bring in former Najin AD Carry, Ohq, to the roster in what could have been the transfer of the Summer split. Despite the improvement in AD Carry, the team downgraded in other roles and a terrible Summer split ended with the team being relegated from the LCS. Afterward, NRG decided to disband their League of Legends roster to focus on other esports.

Immortals were the only team to have any modicum of success during the season, and the only one to survive the entire year with their League of Legends team intact. Their regular season performances were on a level never before seen in the NA LCS, but when it counted most, the team went missing. Many fingers were pointed at the end of the season when they somehow missed out on a maiden Worlds berth, but the result was irrelevant to the coming wave of VC. In their own way, each of these three teams shaped the future of Venture Capital in esports and the conversations that followed.

The Effect

As of the Spring split of 2017, only two teams remain without VC investment. Those two are the oldest and largest brands within North American League of Legends, Team SoloMid and Counter Logic Gaming. Even teams like Cloud9 and Team Liquid, which were considered established teams within North America, have opened themselves up to VC investment.

The effect of these investors has been widespread across the support network surrounding esports. Ember’s decision to publicly release their player’s salaries began a conversation on appropriate compensation. It surprised many that players who were in the Challenger scene were being paid more than even those who were in the LCS and as a result salaries have gone up tremendously. Things like health care for players were also put on the map, and North America became another popular destination for top-tier Korean pro players to come and play.

More than just an injection of capital, the advent of VC has expanded many teams’ business and sports capabilities. The experience and input of investors has been vital in esports teams learning how to leverage their reach and marketing opportunities. The ability to work with professionals from different fields—such as sports psychology, public relations, or brand management—has also had a quiet influence on how esports teams now operate. A majority of these changes can be considered a natural part of the evolution of a sports and entertainment industry, but it is undeniable that VC has accelerated this growth spurt. This period of mentorship will define what esports becomes in the next few years.

Despite the industry’s tender age, many believe that the arrival of VC has already signalled the legitimization of esports. Investors have ranged from traditional sports teams, owners, and players to media moguls and tech insiders. The most vocal and enthusiastic investors have come from the NBA, including names such as Rick Fox, Shaquille O’Neal and Magic Johnson. Considering the NBA is viewed as the most progressive traditional sports league that isn’t all that surprising. One only needs to look at the NBA’s social media strategy and focus on Twitter to see similarities to esports. For now, it looks like the NBA has taken esports under its wing, like a prodigious talent during summer camp, and we should continue to see the impact of the NBA on esports as the two become further intertwined.

Where to Now? The Future

The failures of some VC teams has placed another topic in the hot seat. While the LCS has always been run with a promotion and relegation system, this system has brought about a natural risk to one’s spot. A single bad split for a team could result in them dropping out of the LCS and into Challenger, which is a death wish for a team and their investors.

This culminated in a letter from nine of the NA LCS team owners, with Rick Fox being a notable exception, penning a letter to Riot Games on topics ranging from the possibility of franchising to monetization issues. The owners argued that among other things, this meant that they were unable to take risks on new players, and that job security was low as players were expected to perform from day one. And with so much investment coming into the LCS, they also raised the issue of the lack of monetization options within the LCS. Riot maintains very strict rules surrounding sponsorships and currently lags behind other popular esports in widespread monetization in the client.

Riot responded to these questions in 2016 by stating that they would look into the possibility of franchising by the end of 2018 and would tweak the monetization of icons and World Championship skins to offer more money to the teams. They guaranteed a minimum of $100,000 to each team. They also promised to explore other in-game monetization options, but ultimately did not specify exactly how they would achieve that. The Chinese LPL became the first League of Legends esports league to announce franchising, beginning in 2018, with Riot following suit with their own announcement a few weeks later, announcing sweeping changes to the NA LCS in 2018.

Riot published an article detailing the next era of the NA LCS where relegations would be removed, the Challenger series replaced with an Academy League, and a player’s union established to support the professional players. Surprisingly, Riot announced that no teams would be grandfathered in and that, instead, teams would have to apply to enter the newly franchised league. The approved teams would be announced some time in November. Of course, this did leave out Riot’s other major league, the EU LCS, which maintained that it would not be implementing franchising, at least for the near future. This inflamed some in the European scene, as while they weren’t as interested in a franchised league, they believed Europe was being forgotten within the sweeping changes to the NA scene.

With ever-increasing investments into esports, it is only natural for investors to want the highest security for their investments. Franchising would therefore ensure that teams become long term fixtures within the LCS. Unsurprisingly, League of Legends isn’t the only place where this power struggle is occurring. CS: GO has also struggled with several associations splintering off in trying to dominate the scene. This culminated in the PEA vs. Players/WESA debacle where ultimately, the VC-backed teams were rebuffed in their attempts to control the NA Counter-Strike scene.

The next big change for esports will come in Activision-Blizzard’s Overwatch League which will sell spots that are dedicated to specific geographical locations. This is a stark contrast to the Los Angeles-based LCS which takes finals and other events to different locations. The level of investment needed to buy specific seeds have reached well into the tens of millions, and this is for a league with no history of success in a very young esport.

It’s clear that Venture Capital investment has transformed the landscape of esports well beyond dollar valuations and balance sheets. This new stage in esports’ adolescence will center around the maturation of business and sports practices and the development of better monetization schemes. Without a doubt, Return On Investment will be a key driver that will guide many decisions, but plans are now being laid out with long term implications on the LCS structure and the progress of the league.

For now, it looks like esports is benefitting from its summer affair with its mentor, and the entire scene has well and truly hit the peak of puberty. By the looks of things, the awkward teen is turning into a stud.

Photo Credit: Riot Games