Influencers are great at selling products, but they aren’t a business on their own.
That’s the hard lesson esports organization FaZe Clan learned in recent months as its revenue dropped 30% in the first half of 2023 compared to the same period in 2022, per company filings. On Friday, it announced plans to sell itself to the gaming, esports, and marketing company GameSquare for a mere fraction of the $725 million FaZe was valued at when it went public a little over a year ago.
While esports as a category has broadly struggled with monetization, FaZe’s difficulties stemmed more from its reliance on just a few influencers for revenue. The company makes money through revenue splits with its talent, brand partnerships, and esports winnings. For FaZe, that revenue is often concentrated on the backs of a few big stars.
In 2022, one creator accounted for roughly 18% of FaZe’s total revenue. In 2021, the same content creator drove roughly 22% of its revenue.
“In the esports segment, a lot of companies have been struggling,” said Michael Metzger, a partner at the investment bank Drake Star. “Relying solely on influencers is obviously not an easy business model.”
Such concentrated revenue marks a “risky place for any business to be,” said Josh Chapman, the cofounder and managing partner of Konvoy Ventures, which invests in the gaming space. If the creator is sick or gets canceled, for instance, “a lot can go wrong real fast.” And the fact that FaZe’s DNA is predicated on edginess “accentuates the risk.”
Influencers can be finicky and even damage a business’s reputation with a single YouTube video or public gaffe.
FaZe has faced this challenge first-hand. The company booted several of its talent in 2021 after they pushed a “Save the Kids” cryptocurrency that quickly dropped in value.
“This was too nascent of a business model to be publicly traded with too much ‘key person risk’ around influencers,” Chapman said of FaZe. “That doesn’t exist in the public markets. It shouldn’t have existed. And this merger is an unfortunate result of a flawed business strategy.”
Other companies with similar influencer dependencies have also struggled. Clubhouse Media Group, an influencer content house upstart that went public via a 2020 reverse merger, adjusted its business model after a group of creators revolted and took to YouTube to criticize its management. And celebrity shout-out platform Cameo has similarly struggled with revenue volatility after tying its business outcomes directly to the whims of influencers and celebrities.
FaZe has faced other headwinds in recent months that have nothing to do with influencers. The overall environment for new public listings, and particularly those that went public via special-purpose-acquisition vehicles, has been shaky. Recession fears have made it harder to win business for newer ad categories like influencer marketing.
But the company’s core problem of relying on a few creators to power revenue superseded any macroeconomic hurdles. Its earlier attempts at diversification have not stuck.
FaZe’s incoming owner says he’s looking to reduce influencer risk
FaZe set out to build different business lines across esports competitions, influencer and FaZe-branded products, ad-funded social content, and brand deals. But the latter two categories have represented the lion’s share of its revenue in recent quarters. Both hinged on the popularity of a few gaming influencers, and both fell off, with brand sponsorship revenue dropping about 50% in the first six months of 2023 compared to the same period last year. FaZe’s overall net loss was $28.4 million for the first half of 2023.
GameSquare CEO Justin Kenna, who formerly served as CFO at FaZe, told Insider that he believes brand sponsorships are a healthy business, but can be hard to scale.
While he’s aware individual creators can derail a company, he plans to build on his existing relationships with FaZe’s founding creators and enlist them as leaders of the subsidiary post-acquisition, a move he hopes will revive the FaZe brand while using GameSquare’s scale to grow the business.
The company aims to focus on creating FaZe intellectual property, licensing deals, consumer products, and tapping into existing brand partners to diversify its business post-acquisition, he said.
“You can’t control everything that talent will say online, and that goes across the board,” Kenna said. “We have a really strong relationship and a really strong plan. It was actually extremely important to me that we had the backing and support of the founders, and that we got on the same page.”
GameSquare has subsidiaries like merchandise brand Mission Supply Co., influencer-marketing platform Sidekiq, and streaming data analytics firm Stream Hatchet, all of which could potentially be applied to the FaZe brand.
He believes tapping into a broader mix of opportunities across GameSquare’s holdings will help push FaZe toward profitability.
“We understand the skepticism, and we’re not approaching this as, ‘Look at this sexy story and look at the sizzle,'” Kenna said. “How do we de-risk this? To me, that is pulling out costs, creating runway, plugging in our infrastructure, and really working closely with the founders on re-engaging audience and the brand.”
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