The company for online creators has experienced a confluence of factors that have cooled off its business. Without an infusion of funding, FaZe Clan may be looking at Game Over.
When Snoop Dogg stalked the stage at the 2022 Super Bowl halftime show wearing a FaZe Clan-branded gold chain, it marked an important moment for the esports organization turned lifestyle brand that fancies itself the paragon of youth culture: FaZe Clan had arrived.
The jewelry was a signal Snoop had become a FaZe Clan “member,” joining the ranks of professional gamers, online content creators and other celebrities like Lil Yachty, Kyler Murray and Bronny James who make up the ultimate aspirational cool kids’ club. FaZe’s calling card is its ability to partner with these talents to push both competitive esports and casual gaming further into the mainstream. Whether it be at the Super Bowl, on the cover of Sports Illustrated or at buzzy parties at the company’s Los Angeles headquarters, FaZe has worked hard to build the reputation.
But getting Snoop Dogg to join the club didn’t come cheap. For the use of his likeness, and reputation, FaZe agreed to give him $1.9 million in stock and a spot on the company’s board of directors, plus $248,000 worth of stock each to his son and companies controlled by his spouse and his manager. The stocks will fully vest when their initial two-year partnership ends in early 2024. Snoop Dogg’s representatives didn’t respond to requests for comment.
As it is for other esports businesses, finding a way to translate internet clout into a legitimate business has been the fundamental challenge for FaZe, which makes money through esports winnings, revenue splits with its talent and brand partnerships with companies like McDonald’s and DoorDash. Pressure mounted when the company decided to go public in a SPAC merger with B. Riley Principal 150 in July. Since debuting on the NASDAQ, FaZe’s stock has gone on a bumpy ride that nonetheless kept it above its debut price of $10 for months. Shares peaked at $20.08 in August, paying off on its boasts of becoming the first esports organization with a $1 billion valuation well into late September.
Then a September 26 regulatory filing revealed that approximately $71.4 million of a $100 million PIPE investment being used to fund operations had defaulted and would need to be covered by B. Riley. News also broke that 92% of SPAC shareholders had chosen to redeem their shares for cash during the merger rather than convert them to the new FaZe common stock, draining almost $159 million from the company’s trust account.
Shares plummeted. In little over a week, FaZe shares went from $14.75 to under $5, falling further to $1.78 at one point in November after the release of the company’s third-quarter financial results.
Now, the price hovers around $2, giving the company a market cap just over $150 million.
“As we described in our Q3 announcement, FaZe is seeing strong business momentum with brands, talent and the gaming community following our entry to the public markets, and our revenue performance and full-year expectations reflect that,” FaZe CEO Lee Trink told Forbes in a written statement. “Given the broader economy as well as lower-than-expected proceeds from the go-public transaction, we are moving aggressively to manage our capital while looking at ways to enhance our balance sheet to pursue the growth opportunities in front of us.” Trink declined to comment further.
The third-quarter financial report paints a picture of a company quickly running out of money. Because FaZe has never been profitable, it has always used outside investment to fund its operations. The mass sell-off of shares meant FaZe Holdings raised approximately $100 million in capital from the SPAC merger, less than half the $218 million it projected last fall.
As of September 30, FaZe reports having $43.9 million in cash on hand, enough to fund current operations only through November 2023.
“These conditions have raised substantial doubt about our ability to continue as a going concern,” the company says in its quarterly regulatory filing, “which is dependent upon our ability to generate significant revenue and our ability to raise additional funds by way of our debt and equity financing efforts.”
To that end, FaZe has announced partnerships with Xfinity and The Sandbox metaverse and a renewed deal with McDonald’s in recent months, hanging its hat on 11 active sponsorships valued over $500,000 in the first three quarters, up from eight at this point last year.
The primary selling point FaZe Clan will use to lure new investors and advertisers is its sprawling audience of Gen-Z followers. But even those numbers, on closer inspection, look less favorable for the brand. The most common statistic promoted by the company is its “total reach”—the aggregate total of all FaZe members’ follower counts across all social and video platforms—which comes to an incredible 526 million. By comparison, the entire U.S. population is 332 million.
Yet nearly 200 million of FaZe’s followers come from popular celebrity members, like Snoop Dogg, whose accounts FaZe has contractually agreed not to directly monetize. The remaining total is still inflated, by the company’s own admission, because each fan who follows multiple creators across multiple platforms—Instagram, YouTube and Twitch, for example—may be counted several times.
A more accurate estimate of FaZe’s fan base might be its aggregate YouTube subscribers, which as of September 30 totaled just under 136 million, although this metric would also double-count any individual who subscribed to multiple FaZe-affiliated channels.
Whatever the actual number is, FaZe still commands a substantial fan base. Its business struggles are indicative of an ongoing trend in the gaming industry, where top organizations, and more specifically the talent they employ, have captured large audiences online but haven’t yet found a way to generate significant income from the relationships. Instead, they’ve relied on large outside investments. FaZe’s list of early investors included celebrities like Pitbull and Offset and professional athletes like Jamal Murray.
“It’s almost followed a tech model rather than a sports model, of raising funds and working out how to monetize down the line,” says Malph Minns, the managing director of esports consulting firm Strive Sponsorship. “Now the money has poured into the level where investors are now saying, okay, how are we going to see the return? And I think within the esports industry there’s still not a clear answer on that.”
Unlike traditional sports, esports organizations generally don’t participate in the media rights contracts of esports broadcasts, and content creators are entirely dependent on third-party platforms to distribute their content. On YouTube, according to the quarterly report, the average revenue per subscriber within the FaZe network was just 36 cents.
Then there’s the question of how much of the 36 cents FaZe gets to keep. The percentage is negotiated on an individual basis with talent, who operate as independent contractors, but in 2019, the company said the maximum amount of tournament winnings and content revenue taken by the company was 20%.
It’s an important distinction on the balance sheet. Of the $48.6 million in total revenue reported through the first three quarters of 2022, the company itself brought in only $14 million.
On the November earnings call, new CFO Christoph Pachler announced $7 million in annualized savings, but the report asserts FaZe’s intention for costs and expenses to “increase in future periods” as it moves ahead with its growth strategy, including acquisitions. This signals a need for additional funding in the near future. Selling new equity shares seems unlikely at this point, considering their potential value has dropped more than 80% in the past few months.
“If we raise additional debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, force us to maintain specified liquidity or other ratios, or restrict our ability to pay dividends or make acquisitions,” the quarterly report says.
In recent years, being a company with designs on the future and an ambitious growth strategy operating at huge losses, like Netflix, was some paradoxical sort of recipe for success. However, FaZe launched publicly into a stock-market environment where money-losing tech companies were abruptly being brought back down to earth, especially if no path to profitability could be easily explained.
FaZe remains committed to its long-term vision. Announcing its third-quarter earnings, Trink called its talent-first model “the future of entertainment.” The next test of that optimism will come in mid-January, when FaZe talent, employees and owners are released from their six-month “lock up” agreements as a condition of the merger and get the option to sell their shares.
“There’s been a recognition that they’re trying to build something of value, and you need to invest before you can get a return,” Minns says. “But the big question is, how much do you keep putting in before you can expect to get returns?”
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Source: https://www.forbes.com/sites/mattcraig/2022/12/15/faze-clan-faces-substantial-doubt-it-can-survive—five-months-after-going-public/