New Leagues Bank On Investment Capital

BY ADAM GROSSMAN

Major professional sports valuations seem to increase on a yearly basis as indicated in the latest Forbes NBA Team Valuations article released last week. One of the “concerns” about sports organizations, however, is that these increases are decreasing. More specifically, while teams are increasing in value overall the average annual increase seems to be declining over time.

Why is that the case? Many argue that many sports properties operate in mature markets where the assets have already priced in the value. That is in large part because the value of new media rights deals (both at a league and team level) have been “priced in” to the valuation. A good example is our most recent post on the Los Angeles Clippers valuation at the time Steve Ballmer bought the team. Using a discounted cash flow and relative valuation analysis (two techniques common in asset valuation) we found that the team was worth between $2.02 billion and $2.36 billion in 2014. Ballmer paid $2 billion for the team.

Buying assets for a potential 18% return on investment (making $360 million on a $2 billion investment for Ballmer’s Clippers investment) is not an attractive proposition for a venture capitalist (VC). In fact, even a 180% return on investment is not that attractive for VCs because it does not fully compensate for the risky nature of their investments.

Venture Capital funds typically invest in companies with high-risk / high-reward profiles. The goal is to generate outsized returns by identifying companies that can grow and become valuable quickly. This often requires investing in younger companies that have a higher risk of going bankrupt than more mature organizations. As demonstrated with the Clippers, investing in sports leagues or teams does not seem to fit the profile of a VC investment.

Yet, VCs and early-stage investors seemingly lining up to fund new sports leagues. The Alliance of American Football (AAF) kicked off its inaugural season last weekend with millions of dollars in VC backing. The Professional Lacrosse League (PLL) announced yesterday it just closed its Series A funding round led by Alibaba Group Holding Ltd. billionaire Joe Tsai.

Greg Bibb, chief executive of Capital Sports Ventures, summarized why VCs may now see sports properties as more attractive investments when he said, “There’s a huge marketplace out there for underserved properties and sports, and investors are now seeing that and actively working to grow those areas.” Are football or lacrosse really “underserved” in the ways that Bibb describes?

The initial answer appears to be yes. The AAF is specifically positioning itself as a developmental league for the NFL. In particular, that goal serves to create connections with fans that lack professional football when the NFL enters its offseason. The AAF debuted with a 2.1 overnight rating on Saturday night tying its first broadcasts with the overnight rating of Oklahoma City Thunder vs. Houston Rockets game and just behind the Duke vs. Virginia 2.3 rating. This is one of the first proof-points validating the “underserved” large-market VC thesis for the AAF.

Meanwhile, the PLL already “has a multiyear broadcast agreement with NBC Sports Group, which will show games across its platforms. NBC will show three, while another 19 will be broadcast on NBCSN. Games will also be shown on the network’s website, mobile app and NBC Gold, a subscription streaming service.” NBC likely would not have agreed to this expansive of a deal for a league that had not yet played a game if it did not think there was an untapped audience for professional lacrosse.

Underserved certainly does not mean that there will not be direct and indirect competition. AAF and PLL face competition between the “new” XFL and Major League Lacrosse (MLL) leagues, respectively (let alone the major professional sports leagues). While the AAF may have experienced early ratings success, the original XFL could not sustain a high-enough in-venue or television audience while the MLL has struggled to attract fans or secure the same level of media rights distribution as the PLL appears to have.

The struggles of the XFL and MLL actually make an investment in the AAF and PLL more attractive. More specifically, VCs like to enter markets where companies can learn from “failures” in their space. One of the most famous examples of this is how both Google and Facebook learned from companies that entered their markets before them that no longer exist to become the dominant search and social media companies respectively.

This does not mean that the AAF or PLL will be successes since even most VC-backed companies fail. It does show, however, that looking at inherent asset valuation can identify opportunities that on the surface do not appear to exist. More specifically, the AAF and PLL demonstrate that there are potential ways for new sports properties to grow in value significantly in a “mature” industry.

This is also the type of approach that should be used with partnership asset valuation and is a central element of B6A’s Corporate Asset Valuation Model (CAV). More specifically, sports sponsorship buyers are potentially missing out on opportunities because they may not be examining a seller’s sponsorship assets for how they can deliver value for that specific company given a specific activation. Completing a deeper analysis of both new and existing partnership inventory to understand its full potential value will enable buyers and sellers of sports sponsorship to obtain VC-like potential returns.