WTF Just Happened to FaZe Clan?

October 27, 2023 by Chris Erwin

RockWater Roundup

RockWater analysis to make you a better investor and operator. Today we discuss FaZe Clan’s fall from grace and $16M sale to Gamesquare.

by Chris Erwin

WTF just happened to FaZe Clan? 😨

I dove into SEC filings and old articles to find out. My take…

FaZe was part of gaming and digital media hype cycle…

Global gaming activity growing quickly
Massive online fan growth
More fan engagement via competitions, rise of personalities
Assumed many ways to monetize
Esports is future of sports, massive market size

But challenge when rubber hit the road…

FaZe clan boasted 526M global fans. But counted fans of talent partners like Snoop Dogg, and much overlap across talent fan bases, social platforms
Fundamental ecosystem difference VS traditional sports: esports orgs don’t participate in media rights, creators reliant on 3rd party distribution
Big challenge turning digital fans into scaled $$
70% of revenue via talent deals, of which 80% paid out
Lots of flash aka poorly spent $$, like multi-million talent deals
Reliant on $42M of VC investment to prop up company, hoping biz model figured out later

The result is brutal. Here’s 2022 FaZe financial performance per 10k…

$70M revenue
$15M gross margin, or only 21%
$22M increase in SG&A…against $6M in gross profit increase YoY…aka no fixed cost leverage!
$49M operating loss, expanding from $31M loss in 2021
$169M net loss incl debt extinguishment

Every fundamental going in wrong direction. Many 🚩 red flags for investors.

Which led to public market disaster…

$725M SPAC merger in July 2022
At peak valued at $1B, but marked down
Institutional investors got smart to FaZe reality, so…
$71M of $100M PIPE investment defaulted
92% of SPAC shareholders redeemed shares, draining $159M of cash on hand

Retail investors got left holding the bag.

But investors and bankers should have never let this happen. Let’s look at valuation…

$1B peak valuation = 14x gross revenue. Very high for services biz!
I assert that GM is actually their net revenue = 67x multiple!

Which led to firesale announced last Friday…

Sold for $16M
All stock deal (no cash!)
55% sold to Gamesquare, a diversified esports co backed by Dallas Cowboys owner
FaZe clan investors own remaining 45%

How the company plans to get back on track…

Return of original founders in CEO, Prez, COO roles
Focus on core fanbase
Focus on core biz: competition winnings, revenue splits with talent, helping brands get infront of gamer audiences

Good. I’m rooting for a much more sustainable path forward. The industry needs better datapoints.

My takeaways for investors and operators ▶️▶️▶️ fundamentals are now king, not hype.

We’re in a more pragmatic era for the creator economy.

If these insights are relevant to projects you’re working on, ping us here. We do financial and strategy advisory for media, tech, and commerce executives. From M&A and fundraising, to industry research and go-to-market planning.