E-sports start-ups: A good game for investors

On a plane coming back home from another long business trip, I noticed the passenger sitting next to me had his laptop out with a video game on the screen. But he wasn't playing, he was watching others compete, as if it was an NFL or NBA game.

Welcome to e-sports, one of the hottest trends in spectator sports. Mainstream media took note of it after Amazon's $1 billion acquisition of Twitch, a streaming platform and community for gamers, but last year's deal was just the first snowfall in an avalanche to come.

Competitors play Call of Duty Advanced Warfare during the ESWC (Electronic Sports World Cup) on May 2, 2015 in Paris.
Alain Jocard | AFP | Getty Images
Competitors play Call of Duty Advanced Warfare during the ESWC (Electronic Sports World Cup) on May 2, 2015 in Paris.

Gaming is a massive global category, but it wasn't communal until the Internet brought gamers together, allowing them to use statistics to compete against one another. Now, there's a massive population of people consuming these competitions as fans. This shift in media consumption has created a market ripe for investors as entrepreneurs continue to write the script and the ecosystem continues to be built out.

According to a Newzoo report, the number of e-sports fans has risen from 58 million in 2012 to 89 million in 2014. This number is expected to jump to 145 million by 2017. What's amazing is that of all these e-sports fans, 40 percent don't play any of the top e-sports franchises such as "League of Legends" or "World of Tanks." It's quickly becoming a spectator sport. To put these numbers in perspective, there are 94 million NHL fans and 151 million NFL fans. Within five years, the total audience of e-sports will be comparable to American football, Newzoo reports.

At my company, Metamorphic, we believe e-sports will become even larger than all regular sports combined over the course of the next 10 to 20 years. While traditional sports can continue to grow audiences through new ideas, rule changes and exciting players, e-sports has the ability to constantly add new games of interest to different subsets of players and fans. Sports can't scale nearly as quickly. Launching a new league and building an audience is a near impossible task (remember the XFL?).

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Remember, too, that e-sports is a new phenomenon. That means that its network effect is still in its infancy. Most of us became sports fans based on the favorite teams and players of our parents and grandparents. E-sports is still in that first generation of fans and has yet to find its Babe Ruth who will drive fans for decades to come. Once the first wave of e-sports fans starts to marry and have kids of their own we could see an explosion in e-sports popularity around the world.

Many look at Twitch as the ESPN of e-sports, the place where everyone goes to consume content. There's a host of platforms looking to capture other aspects of the games. AlphaDraft and Vulcun are quickly becoming the fantasy e-sports equivalent (think FanDuel, DraftKings, or Yahoo). Unikrn is capturing the online gambling market outside the U.S. (like Bovada.lv, formerly Bodog). MobCrush is looking to become the Twitch for mobile, capturing live streams of games like Clash of Clans. There is also Battlefy, which helps users and publishers organize tournaments, and Waypoint media, which is a marketplace to connect brands with e-sports players and content creators.

There's an offline component to e-sports as well. In 2013, the Staples Center sold out a "League of Legends" tournament in an hour. Other arenas like Madison Square Garden and the Barclays Center are going to host tournaments in the near future. In China, one of the fastest growing e-sports markets, Major League Gaming is building a dedicated arena for e-sports. In March Vice did a show on the ubiquity and popularity of e-sports in Asia.

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Given the media consumption shift happening and the speed at which new categories are growing and proliferating, there's a ton of opportunity for start-ups to build big business as this sea change continues to manifest itself. And investors can score points by getting in on the game.

David Hirsch is co-founder and managing partner at Metamorphic Ventures, which has invested in AlphaDraft, a company mentioned in the article. Follow him on Twitter @startupman.