Wall Street bought the esports story like it was the next NFL or NBA, then paid peak prices in 2018 to 2021 to get in. By 2025 to 2026, reality hit, and many public esports-linked stocks sat roughly 80% below their highs.
So what did investors miss about how esports actually makes money? This post lays out the post-mortem in plain terms, why teams and leagues struggled to turn fans into durable cash flow, which deal types and business models broke first, and what lessons still get ignored even after the wipeout.
Traditional investors often used a familiar template: buy teams, assume fandom hardens into lifetime loyalty, then wait for media rights and ticketing to swell. That works in city-based sports because the league is stable, the rules rarely change, and no single company can rewrite the sport overnight.
Esports flips that logic. The "sport" is a video game, and the game has an owner. Publishers set the terms, control distribution, and can redesign competition as a product decision. So when investors valued esports teams like sports franchises, they priced in permanence that didn't exist.
The uncomfortable truth is simple: in esports, teams rent their place in the ecosystem, while publishers own the ground it sits on.
In traditional sports, fans inherit loyalty. You root for the home team because you live there, your parents did, and the team is part of the city's story. In esports, fandom usually starts somewhere else, with a game you play, a player you admire, or a creator you watch daily. When those change, loyalty shifts fast.
Ask yourself this in real terms: if your favorite team leaves your favorite game, do you still watch them every week, or do you follow the game you still play? For many esports fans, the answer is the game. That difference breaks the core "franchise" thesis, because the team brand doesn't automatically anchor attention.
Roster churn makes it harder. In the NFL, a star quarterback might define an era, but the roster still has continuity and league rules support long careers. In esports, players retire younger, switch roles, change games, or move regions. Contracts can be short, buyouts create constant movement, and one bad split can trigger a rebuild. As a result, the "team identity" investors expected often lived on borrowed time.
This is why many orgs tried to build a broader media company, not just a competitive roster. They pushed hard into content, creators, and social channels because match wins alone rarely paid the bills. Competitive success can spike attention, but attention doesn't become cash unless the business model converts it.
Merch and ticket revenue also don't behave like traditional sports. Live events exist, yet most fans watch for free online. Even when tickets sell, teams frequently do not control the building, the concessions, or the event economics. A sports franchise can count on steady match-day income because it owns or controls the local experience. An esports org often shows up as a participant, not the operator.
A practical way to think about it is this: many teams looked more like a touring band than a stadium tenant. They can sell some merch, sign sponsors, and grow a fanbase, but their revenue is less predictable than a season-ticket model.
Here's what "team monetization" tends to look like in practice:
When investors underwrote valuations as if every org would become the esports version of the Yankees, they missed how few teams own durable local demand. In esports, the "home field" is often a Twitch channel, not an arena.
The biggest structural risk sits above teams and even above leagues: the publisher can rewrite the ecosystem whenever it wants. If that sounds abstract, treat it like this, you bought a restaurant in a mall, and the mall owner can change the floor plan, move foot traffic, or shut the building. You can be great at running the restaurant and still lose money.
Publishers control the competitive rulebook, broadcast rights, sponsorship categories, in-game monetization hooks, and whether the esport even exists next year. Investors can't vote them out, sue them into running a league, or force a stable revenue split. Even "partnership" language doesn't change the power balance.
This is why franchise-style league pitches carried a trap. A team might pay for a slot, hire staff, sign players, and build local activations, but it still depends on publisher decisions for everything that matters:
Overwatch League is a clean example of how quickly the ground can move. Activision Blizzard built OWL as a franchise model, sold slots to team owners, then later reworked the plan and ultimately ended the league structure. Reports tied to the transition described a $6 million payout per team offered to exit contracts after the 2023 season. Whether an investor loved OWL or hated it, the key point is the same: the publisher could end the model, and teams had limited options besides absorbing losses and moving on.
That's not just a one-off failure. It's a reminder that publishers can run esports as a marketing line item for the game. If the game needs a push, they invest. If priorities shift, they cut. Meanwhile, team investors still pay salaries, housing, travel, coaches, analysts, content staff, and front office overhead.
A second, quieter issue is that publisher-backed leagues can lose money for years and still keep operating because the publisher treats it as part of the product. Outside investors can't. A venture fund or a public company needs a path to profit on a timeline. So even if the league survives, teams can drown in the interim because their cost base is real, and their upside depends on publisher-controlled levers.
When you look back at 2018 to 2026, this is a big reason "smart money" still got surprised. They thought they bought into sports. In reality, they bought into a supply chain where the supplier can change the terms without negotiation.
In sports, teams negotiate with leagues. In esports, teams often accept terms from the company that owns the sport.
In sports, the underlying game doesn't go out of style. Basketball doesn't need a patch, and the NFL doesn't release "football 2." That stability is why long-range forecasts make sense. You can project media rights, sponsorship categories, and ticket demand because the product stays familiar for decades.
Esports depends on titles that can rise and fall much faster. Sometimes the fall is slow, as a player base matures. Other times it is sudden because a new competitor appears, a meta gets stale, or a developer makes unpopular changes. Either way, it breaks the neat investment story of "steady growth."
This fragility shows up first in sponsorship renewals. Brands don't just buy a logo on a jersey, they buy reach, cultural relevance, and audience consistency. If a game's viewership softens, a sponsor asks hard questions at renewal time. Even a small drop can force a renegotiation because esports budgets are usually discretionary.
Audience planning also gets harder. A team can build content around a hot title, then watch the audience scatter when the scene cools. You can already see how rare true stability is by looking at the small set of titles that keep delivering year after year. League of Legends is the standard example of endurance. Data cited in recent tracking showed it as the most watched esport globally in 2024, with around 750 million hours watched, and the 2024 World Championship peaking at 6.91 million viewers. That kind of long-lived scale is the exception, not the baseline.
On the other end, Overwatch shows how a scene can lose momentum and force a reset. Even if a game remains playable and beloved by a core audience, the esport as an investment vehicle can still disappoint when viewership, sponsorships, and event economics fail to line up.
Then there are titles that surge in ways that don't fit old sports assumptions. Fortnite has remained culturally present, yet its competitive format and viewership spikes often tie to special events and creator-driven moments. For example, one recent Fortnite Pro-Am event drew a 644,000 peak viewers and 2.3 million hours watched. That is meaningful reach, but it also hints at a different engine: personality and spectacle can matter as much as the league table.
For team investors, the game-cycle problem creates a forecasting trap:
Esports needs more long-lived titles to support sports-like valuations. A few games can do it. Many can't. When investors used 10-year franchise math on a product that can shift in two seasons, the numbers were always going to break.
A lot of esports deals failed for the same boring reason most businesses fail, the math never worked. Teams carried big fixed costs (player salaries, coaches, analysts, housing, travel, content staff, sales staff), while their gross margins stayed thin because revenue was mostly sponsorship and a slice of league programs that could change fast.
That combination creates a trap. When revenue rises, you feel rich and hire ahead. When revenue dips, you can't cut fast enough without gutting performance, and then revenue falls again. If you have ever run a restaurant with a long lease, you already understand it. The room can be full and you still lose money because payroll and rent eat the night.
What made 2018 to 2026 especially painful is that investors often funded growth as if esports would quickly develop sports-style media rights. Instead, many teams got stuck operating like marketing agencies with expensive athletes on payroll, and agency margins do not support sports-sized overhead.
The common pattern: teams spent like mature franchises, but earned like early-stage media brands.
Esports orgs chased star power because it looked like the cleanest path to scale. Sign the big name, win more, get more fans, close bigger sponsors, and take home more prize money. The pitch sounds reasonable, and you can even point to short bursts where it worked. The problem is that results are uncertain, and sponsors do not pay the same premium for every win.
A competitive roster is also a fragile asset. Players can slump, the meta can shift, a new patch can change the game overnight, and one teammate change can break chemistry. Yet salaries are paid on schedule. So when an org overpays during an arms race, cash flow starts to hinge on outcomes it cannot control.
The Dignitas and Huni deal shows the risk in one clean story. In November 2019, Dignitas signed top laner Heo "Huni" Seung-hoon to a two-year extension worth $2.3 million total, about $1.15 million per year. That is a real sports-style number, and it landed in a league where revenue certainty did not match.
Here is the part investors often missed, that contract was a fixed commitment, while performance was a variable. If Huni played at an MVP level, the org could justify the spend with sponsor lift, content, and playoff exposure. If results stayed mediocre, the same contract became a weight tied to the ankle.
Dignitas later let him explore trade options, and he moved to Evil Geniuses. Even when trades reduce roster issues, they do not magically undo the cost. Guarantees and buyouts mean someone still eats the bill. In other words, the team bought an expensive asset that could lose value quickly, and there was no deep resale market to protect the downside.
So what did "win-now" spending actually buy many teams?
If you are wondering why this hit traditional investors so hard, look at how the bet was framed. They underwrote stars as growth engines. In practice, stars behaved more like cost multipliers. They raised the burn rate first, then asked the business team to catch up.
One more issue made it worse, the salary boom was not isolated to a few names. In the LCS, average salaries climbed fast, with reported averages around $300,000 in 2019 and $410,000 in 2020. Once that becomes the baseline, "just spend more than the other guy" stops being a strategy and becomes a slow-motion margin collapse.
Franchising pitched stability, and investors love stability. Buy a slot, secure your place in the league, and enjoy the long runway. The hidden problem is that a slot fee behaves like debt, even if it is not technically a loan. You pay a huge entry price, then you also pay the ongoing operating costs, and you still have no guarantee that the league will produce meaningful media rights or profit-sharing.
Teams could not treat the slot as optional. Once you are in, you have to keep fielding a roster, keep staff, keep facilities, keep travel, keep content, and keep sponsor servicing. Pulling back means losing competitive relevance, which can hurt the very sponsorship revenue you need to survive. That is how a "stable" model turns into a treadmill.
Overwatch League is the clearest post-mortem because the numbers were so stark. Early teams reportedly paid around $20 million each for initial slots. Later expansion fees rose, with reported ranges of $30 to $35 million, and in some cases higher figures were discussed. COVID-era delays and payment structures changed the timing, but not the core reality, owners committed to massive fees before the league proved it could generate the upside.
Then the operating model kept burning cash. Costs were real and recurring: player pay, coaching staffs, support staff, housing, travel, and local market efforts. Revenue did not keep pace. Sponsors softened as viewership expectations reset, and some brand categories became harder to sell at premium rates.
By 2023, the pressure spilled into open conflict. Owners pushed back on the economics, and the league headed toward a vote on its future. After the 2023 season, teams voted on a new direction, and the franchised league effectively ended. Activision Blizzard offered a $6 million termination payment to each of about 19 teams (widely reported as roughly $114 million total) to exit. In addition, the publisher waived remaining franchise fees teams still owed.
Read that again with an investor's brain. Owners paid tens of millions to enter, then years later many exited for a fraction of that via a termination payment, after spending even more to operate along the way. That is not venture-style risk with uncapped upside. That is a capital-intensive bet with capped outcomes and heavy carrying costs.
A franchise slot can look like an asset on a slide deck. On a P&L, it can act like an anchor.
The other lesson is about control. In traditional sports, franchise owners collectively shape the league's rules and economics. In publisher-led esports, teams do not have the same power. When the model changes, teams adjust or they leave, and the money already spent is largely sunk.
This is why so many franchise-era spreadsheets broke. They assumed:
Instead, many teams faced the opposite, resale markets stayed thin, media rights growth did not arrive at the scale promised, and sponsors became more price sensitive.
Some esports brands survived the downturn better because they were not only esports teams. They built creator rosters, media arms, consumer products, apps, or event businesses. Those lines can produce steadier revenue because they generate inventory every day, not just on match days. Still, that does not mean the competitive teams became profitable. Often, the team remained a cost center that marketing justified, right up until the market forced cuts.
This is where the "thin gross margin" issue becomes obvious. Competitive esports has a ceiling on how much value you can capture from a match that streams free on the internet. You might get sponsor impressions, social growth, and merch spikes. Yet the org also pays for the entire machine that makes the match possible.
So when ad budgets tightened and easy funding dried up, the healthiest orgs did the same thing any sober operator would do, they protected the lines that could stand on their own and cut the parts that could not.
TSM is a useful example because it shows how fast the shift can be. After the broader market cooled and after the collapse of a major sponsorship deal, the org went through waves of layoffs and reduced its esports footprint. Reports from 2022 through 2024 described staff cuts across content and operations, leadership churn, and exits or pauses in several game divisions. At one point, a former staffer said the team had been reduced to a very small headcount.
Even without perfect segment reporting, the signal is clear. When money got tighter, TSM did not respond by doubling down on expensive rosters across every title. It scaled back, sold its LCS slot, and narrowed focus. That is what happens when the competitive side does not throw off enough margin to support its own overhead.
The more general pattern looked like this:
If you are asking yourself, "Why didn't teams just keep the content profits and run lean rosters?", that was the uncomfortable trade-off. Lean rosters can reduce costs, but they also reduce the competitive moments that keep the brand culturally relevant. Many orgs tried to balance both, and many found out too late that they had built a business where the best marketing channel was also the biggest line item.
In the end, this is why traditional investors lost money even when audiences kept watching esports. Viewership alone does not pay fixed costs. Without thick margins and durable revenue share, the business breaks the same way every time, first slowly, then all at once.
For years, a lot of esports orgs treated sponsorship as the business model, not as one revenue line. That worked while brand budgets grew and new categories, especially crypto, fought for attention. When the cycle turned, the gap showed up fast: too many teams had big fixed costs and too little recurring, contract-backed revenue to carry them.
If most of your income comes from a few logos, you don't have a stable base, you have a confidence trick that resets every renewal.
The clean case study is FTX. In June 2021, TSM signed a reported $210 million, 10-year naming rights deal and rebranded as "TSM FTX." That number did more than fund operations, it pulled up perceived valuations across esports because it made sponsor demand look deep and durable.
Then FTX collapsed into bankruptcy in November 2022. TSM suspended the deal and removed FTX branding. The investor lesson is painfully simple: many models treated a single sponsor like "safe recurring revenue," while ignoring customer concentration risk and sponsor credit risk. If one sponsor can change your headcount plan, your roster plan, and your runway, it is not a base layer, it is a single point of failure.
Mainstream brands buy predictability. They want steady audiences, clean measurement, and low risk next to their logo. Esports often struggled on all three.
Measurement stayed messy because viewership scattered across Twitch, YouTube, co-streams, highlight channels, and social clips. Just as important, controversy risk kept popping up, from publisher or league scandals to player behavior, which made legal teams and CFOs nervous at renewal time. Even when a deal penciled out, the next budget cycle could kill it because esports spend was usually discretionary, not tied to a must-have media plan.
Traditional sports rights often lock in for many years, so teams and leagues can plan around contracted checks. Esports rarely had that kind of insulation.
Many esports media and sponsor deals ran 1 to 3 years, sometimes shorter, and they were easier to pause or renegotiate. On top of that, esports economics can depend on a single game title staying popular. If the game cools off, the audience dips, and the next renewal turns into a price cut. Investors expected rights to act like the NBA. In practice, esports deals acted more like short-term marketing buys that disappear when the story stops sounding safe.
From 2018 to 2021, a lot of esports got priced like a tech category, fast growth first, profits later. That story works when you can scale recurring revenue and expand margins over time. Esports mostly did neither, at least not on the timelines investors underwrote.
Then the macro turned. As interest rates rose from 2022 onward, money stopped being cheap. Investors started asking a simpler question in every diligence call: Where does the cash come from, and how soon does it show up? For orgs built on constant fundraising, the answer often came back too fuzzy, and too late.
Tech valuations assume a few things: revenue compounds, retention stabilizes, and margins widen as you scale. Esports behaved more like entertainment, where hits matter, demand swings, and costs stick around even when views drop.
Start with revenue. For most teams, the core line items were sponsorships, a bit of merchandise, some league rev share, and occasional prize bumps. That mix is fragile because sponsorships are budget-driven, not contractually guaranteed like long media rights. When marketing departments tighten spend, logos come off jerseys fast. If you've ever watched a content channel spike from one viral moment, you already get the problem, attention is real, but it isn't the same as durable cash flow.
Margins stayed thin for structural reasons. Teams carry year-round payroll, plus coaching, analysts, housing, travel, and content production. Yet the product they sell is hard to fence in. Fans watch on free streams, clips spread on social, and platforms capture much of the ad upside. The result is a business that can look culturally big while still feeling financially small.
Winners were also unclear. In software, the "best" product can dominate a category for years. In esports, a team can do everything right and still get clipped by a patch, a meta shift, or a roster collapse. The "winner" can be the publisher, the platform, or the creator, not the org paying the salaries. Even within teams, a creator roster might throw off more reliable revenue than the competitive side, which flips the original franchise thesis on its head.
Public markets eventually forced that reality check across the whole category. The easiest example is the visible wipeout when esports hype met public listing pressure. FaZe Clan's public debut via SPAC valued it around $725 million, and later it ended up sold in a deal reported at about $17 million. That kind of outcome doesn't just punish one cap table, it changes how every investor prices "comparable" esports risk after 2023, and into 2025 to 2026.
When public investors stop paying for the story, private investors stop paying for the optionality.
Private investors like to pretend they price companies on fundamentals. In practice, they also price off comps. When comps fall, term sheets change, even if your org insists it is "different."
By the mid-2020s, several smaller publicly traded esports and esports-adjacent firms became cautionary symbols because their trading profiles looked like microcaps, with thin liquidity and harsh dilution risk. Names that often come up in investor conversations include NIP Group, GameSquare, OverActive Media, Enthusiast Gaming, and ESE Entertainment. Tracking them can be messy because tickers, listings, and coverage can change over time, and some names have traded on smaller venues or faced delisting pressure.
Still, the market signal was hard to miss even without perfect, point-in-time snapshots. When a category's public names trade like option bets instead of compounding businesses, private funding stops pretending the downside is limited.
Here's how that signaling effect hits an esports org in the real world:
Even broad public exposure to gaming and esports cooled. Sector ETFs tied to video games and esports showed meaningful drops from recent highs, which reinforced the new mood: pay less for growth, pay more for profits, and don't assume a rising tide will lift every logo.
One detail matters here. This reset was fast because public pricing updates daily. A private board can debate a valuation for months, but the market reprices in a morning. So when public comps slid and stayed down into 2025 to 2026, private esports valuations did not "gradually adjust." They snapped to a new reality.
Cheap capital covers a lot of sins. It lets a team overhire, overpay for talent, lock into expensive leagues, and still tell investors the same story next round. Higher rates broke that loop because investors could earn decent returns elsewhere, without underwriting esports execution risk.
As the funding spigot tightened from 2022 through 2026, orgs that depended on constant fundraising faced ugly choices. Some cut staff to extend runway. Others exited leagues, sold franchise slots, or narrowed to a few titles. A few sold at prices that would have sounded impossible in 2021, because optionality disappears when you need cash before payroll hits.
The operational pain followed a familiar sequence:
Traditional investors got caught in the middle. Many expected a longer runway, with time for media rights, publisher programs, and sponsor growth to mature. Instead, they faced down-rounds that reset their marks, or worse, illiquid positions where the only bids came with harsh preferences.
If you're an investor, the uncomfortable question is simple: What's your exit when public comps are down and private rounds get tougher? In that environment, even a decent operator can get forced into survival mode, and survival mode rarely produces venture-style returns.
The broader lesson from 2018 to 2026 is that esports did not just suffer from bad picks. It suffered from mispriced risk. When rates rose, the market stopped paying for hope, and a lot of esports balance sheets had nothing else to sell.
Most traditional capital entered esports through the most visible door: teams. That felt natural because teams look like sports franchises, and sports franchises look like durable assets. The issue is that esports teams rarely own the rails that move money, they rent attention on platforms they don't control, inside games they don't own, under rules they can't rewrite.
"Picks and shovels" plays were different. They sat underneath the hype, selling tools and services to everyone in the ecosystem, including teams, tournament operators, creators, and sometimes publishers. When budgets tightened from 2022 through 2026, those vendors could still find customers because demand came from operations, compliance, security, and workflow, not just fandom.
This doesn't mean team equity is always a bad bet. It means you have to price it like what it is: a media and marketing business with expensive talent, volatile demand, and real execution risk. In other words, you don't underwrite it like the Yankees. You underwrite it like a studio that has to ship hits, keep costs tight, and build distribution that doesn't disappear when one game cools off.
A modern esports team sells attention before it sells wins. Even when the roster performs, the cash usually comes from sponsors paying for reach, plus creator inventory, plus commerce. Competitive results matter, but mostly because they move the content engine. The team is less "club" and more "channel."
So a sensible valuation starts with media fundamentals. First, audience quality beats raw follower counts. You want repeat viewers, watch time, and a community that shows up when the team loses. Next, you look at creator economics, because creators often produce the most consistent inventory and the most direct conversion to revenue. Then comes distribution, meaning where the team can reliably publish and get discovered without paying rent forever to algorithms.
Repeatable formats are the quiet edge here. A team that can turn a tournament weekend into ten strong pieces of content has a real machine. A team that posts a highlight and prays does not. Many investors in 2018 to 2021 priced "brand" as if it were permanent; by 2026, the market treats brand as something you have to earn again every week.
Costs are where the story usually breaks. Teams can grow revenue and still lose money if payroll and production creep faster than sales. Disciplined costs don't mean "no stars." They mean you know what each dollar is supposed to return. If a roster move is really a marketing spend, call it that, then measure it like marketing. Otherwise, you will confuse morale with ROI and call the difference "strategy."
What to look for in diligence becomes clearer when you stop pretending this is a normal sports franchise. Here's a practical checklist you can use before you underwrite a team:
A team can be investable, but the underwriting has to match the product. If you price a team like a media company, you'll ask the right questions early, and you'll avoid paying "franchise" multiples for what is often a marketing business with a payroll problem.
A good esports org doesn't just win matches. It turns moments into a repeatable publishing schedule, then turns that schedule into cash.
Infrastructure businesses win when they sell to the whole market. That's the core advantage. A team monetizes one fan base, plus whatever it can borrow from a creator roster. A service provider can sell to hundreds or thousands of customers across many titles and regions, even when a single scene slows down.
Start with production services. Live broadcasts, remote production, highlight packaging, localization, and graphics are unglamorous, but they are required whenever competitions run. The buyer might be a tournament organizer, a brand running a one-off event, a platform, a college league, or a publisher. That diversity matters because it reduces the "one league, one title" trap that crushed so many team models.
Then there's tournament operations itself, including platforms and systems that handle brackets, matchmaking, integrity checks, scheduling, and player communications. Businesses in this layer can become default tooling. When that happens, they can keep selling even as teams come and go. The real-time context here is telling: infrastructure has drawn heavy investment attention across 2018 to 2026, including major consolidation like the merger of ESL and FaceIT, which combined tournament operations and competitive platforms into a larger backbone for the industry.
Security and fairness create another steady demand pocket. Anti-cheat sits in a category that buyers don't love to talk about publicly, yet they keep paying for it. Cheating, account boosting, and match manipulation don't disappear in down cycles. If anything, pressure can increase when prize pools and contracts shrink. This means integrity tools, monitoring services, and fraud detection can hold budget priority longer than "nice-to-have" brand spend.
Coaching and performance products have also matured. Coaching tools and analytics can sell to amateurs, semi-pros, academies, college programs, and pros. That widens the total customer base and reduces reliance on a single tier of esports spending. A team might cut its analyst staff, but players still want to improve, and organizers still want fair competition. In other words, the end-user demand can sit outside the team P&L.
Payments and monetization services can be surprisingly durable too. Payments, wallets, and payout systems matter when you run tournaments, distribute prize money, pay creators, sell digital goods, or handle cross-border commerce. The point is not that every payments idea works. The point is that the vendor is selling plumbing, and plumbing tends to get fixed even when marketing budgets freeze.
The creator economy is another strong "many customers" angle. B2B SaaS for creators can include sponsorship marketplaces, brand-safe campaign workflows, rights management, clipping tools, scheduling, and performance reporting. A single vendor can serve thousands of small creators, plus a few large networks. Compare that to a team, which might need one perfect sponsor to make the year work.
Finally, don't ignore the real world. Event logistics and services, such as venue coordination, equipment rental, travel, staffing, and on-site network support, can build repeat business across corporate events, college tournaments, and publisher activations. These vendors may not scale like software, but they can still scale across customers, not fans.
A simple way to remember the difference is this: teams sell a story to an audience, while vendors sell a function to an operator. Operators may complain, negotiate, and cut scope, but they still need the function to run the event, ship the product, or pay the talent.
This is why picks-and-shovels models often attract more serious underwriting. They can show multi-customer revenue, clearer unit economics, and a path to survival that does not require winning the internet every weekend. Even in 2026, the best version of the esports investment story is still not "we bought the jersey." It's "we sold the tools to everyone who needs to run the machine."
By 2026, the easy money story is gone. Underwriting has started to look like underwriting again. Investors want proof, not vibes, and the proof has to survive bad scenarios. That's true whether you're looking at a team, a tournament operator, a tooling business, or a services firm.
A clean framework starts with gross margin, because it tells you if the business has any oxygen. If a company can't show healthy gross margin, growth often makes losses worse. In the real-time data context, tournament organizers in 2026 often talk about high target gross margins (with costs like prize pools and licensing able to crush profitability if mismanaged). You don't have to accept any single benchmark as gospel, but you do have to understand the cost stack and who controls each input.
Next, look at sponsor concentration. If one sponsor makes the year work, then the sponsor is the business. That is not automatically disqualifying, but it changes the risk profile. You underwrite the sponsor's budget cycle, category risk, and credit risk, not just the esports org's execution. Ask for a simple breakdown: top five customers by revenue, contract term, renewal rate, and any performance clauses that could cut payments. A quiet warning sign shows up when management avoids this conversation or hides behind "strategic partner" language.
Then comes publisher dependency, the risk that a single publisher decision can rewrite your economics. For teams, this shows up as league format changes, revenue share shifts, or eligibility rules that limit monetization. For organizers and tool vendors, it shows up as licensing fees, API access, broadcast permissions, and policy changes around co-streaming. If a publisher doubles fees or changes rules, what happens to your margins and your customer demand? This is not a theoretical exercise, it is the base case for anyone who watched major leagues get restructured in the last cycle.
After that, demand a credible path to break-even. "We can be profitable if we stop spending" doesn't count unless you can see it in the model, with named cuts and realistic revenue assumptions. The better approach is to show break-even under three versions of reality: expected, down 20 percent, and down 40 percent. If the company can't survive the down case without raising more money, then you are not underwriting a business, you are underwriting future funding conditions.
At this point, one question belongs in the middle of the discussion because it forces honesty: what happens if this game is 30 percent smaller in two years? That single stress test cuts through most pitch decks. It also pushes management to explain whether they can switch titles, sell to other customer segments, or reduce costs without breaking the product.
Finally, stress-test against a game decline in a way that matches the company type:
Good underwriting in 2026 also pays attention to incentives. If management gets rewarded for revenue, they will buy revenue with discounts. If they get rewarded for margin and retention, they'll build a healthier book. In the esports boom, many teams and leagues optimized for headlines because headlines raised rounds. That trade looks ugly now, and it's why smarter capital wants numbers that stay standing when the hype leaves the room.
In esports, the downside case is not "growth slows." The downside case is "the rules change," so the model has to survive a world where someone else controls the rulebook.
Traditional investors lost money in esports because they priced teams like sports franchises, while publishers kept control of the game, the rules, and the revenue levers. At the same time, game cycles stayed unstable, payroll and production costs stayed high, sponsorship revenue proved fragile, and peak 2018 to 2021 valuations ran into tighter capital from 2022 onward. If you want to avoid repeating the wipeout, start diligence with control and cash flow, who can change the terms, what revenue is contracted, how concentrated sponsors are, and how fast the business reaches break-even if the main title drops 30%.
Next step, treat team equity as a media business with expensive talent, not as a scarcity asset, then demand stress tests, renewal data, and a real cost-down plan that does not depend on winning. If the goal is exposure without the franchise-slot risk, focus on picks-and-shovels bets that sell tools and services across many titles and customers. Ask one question early, what still works if the publisher changes the format next season, then invest only where the answer is clear in the numbers.
