Why Sentinels' Crowdfunding Campaign is Deeply Irresponsible

A little more than a month ago, the self-proclaimed “most popular brand in VALORANT”¹ announced that it was looking for new investors: You!

After five years of running on institutional investor money, esports team Sentinels launched a crowdfunding campaign on StartEngine, a platform where everyday people can invest in private companies—similar to how they invest in public companies.

Sentinels is looking to raise $1.23 million, but in its best-case scenario, it’s looking at less than half a year of runway left, even with that money. Its burn rate is crazy high, its revenue is pitiful and its valuation is over-inflated.

For many, though, Sentinels’ definitely-not-a-public offering is a rare inside look at the financials of an esports team. One that’s considered, at face value, to be successful, based on engagement and competitive success.

In reading through the Sentinels’ memorandum, though, I found myself asking: What is an esports team, actually?

The Market

For the past eight or nine years, I’ve been told—by esports team founders, multi-millionaire and billionaire investors, and mostly non-endemic market analysts—that an esports team is just an early-stage sports team. That there will be brand affinity for generations and that longevity will provide decades, maybe even centuries, of revenue to come.

In one on-the-record call I had with Cloud9 CEO Jack Etienne and Team Envy founder Mike Rufail in mid-2017, Etienne told me about his love for the NFL’s San Francisco 49ers, and how he shared this fandom with his father and hoped to share it with his children in the future² . This was just weeks before each of those men on the other side of the phone would commit $20 million in franchise fees to the Overwatch League, arguably the most regrettable and costly decision in their organizations’ histories.

Etienne, Rufail and their esports executive peers sold FOMO to investors—and it turns out, their predictions for growth and the future of this industry were wrong all along.

Esports teams aren’t creating multi-generational sports fandoms. Esports teams are media companies that, for a very long time, rode a wave of investment hype into billions of dollars in fundraising and are now paying the price.³

Media companies don't raise money at high valuation multiples like 10-to-15 times. They don't have many assets and their value depends on the talent on the roster and the content they create. If they fail, there's nothing to sell like technology or data. And their brands aren’t significant without the popular creators and players behind them.

So they raise much more conservatively, at 2-to-3, or sometimes 4-times valuation multiples. Yet, over the past eight years, we’ve seen countless esports teams raise capital like they were tech companies. Sentinels are no different: Their StartEngine offering values the company at $30 million, while it generates just $2.4 million in revenue (that’s a 12.5-times multiple).

Let’s take a look at Forbes’ Most Valuable Esports Team list and how their revenue compares to their estimated valuations:

I’ve given previous analysis on this list before, but some of it bears repeating. First, how does this list make its estimates? From my understanding, many of these teams open up an abridged version of their books to Forbes. You’ll notice a list for 2023 does not exist. Without sounding too conspiratorial, I’d imagine if it did, not a single organization would meet its same valuations. Some might not even repeat or exceed their 2021 revenue, either, as the digital media advertising market dried up significantly due to end-of-2022 fears of an impending recession.⁴

Second note about this list: It doesn’t account for the cost of goods sold. This includes commissions paid to in-house and out-of-house sales people, and, most importantly, to esports teams, the prize money that’s passed on to the players—which is usually the majority of said prizes. We know Sentinels, for example, earned $2.4 million in revenue but lost more than $507,000 of that in costs of goods sold.

So the Forbes list is heavily influenced—and therefore skewed—by the teams themselves, and the data they’re willing to provide. Here’s why that matters.

For the past decade, esports team executives have spun the narrative for esports in some very important rooms. Industry-leading publishers like Riot or Blizzard haven’t raised capital in the modern esports boom that started in 2015 (and likely ended sometime in 2021). Riot is a wholly owned subsidiary of Tencent, and Blizzard is part of a megacorporation that has been public. So team owners have remained the most networked executives in fundraising conversations around esports. And the thought—that this would one day be the next big sport—was categorically wrong.

I have a lot of thoughts on why esports is not multi-generational, and likely never will be, but that’s for another article.

What I’ll say in short (a paragraph!): My leading thought is that esports takes too much time. To understand any of the games, you have to play them a lot. There are constant updates, new characters, reworks and patches. It’s fine for someone who’s in their early-to-mid-20’s, before other areas of their lives begin to develop. But come family planning, additional responsibilities at work and many of the other evolutions of life that occur in one’s late 20s to early 30s, the ability to commit that much time to a game isn’t the same.

Sports aren't the same. I played football, baseball and wrestled growing up. I don’t watch baseball anymore, but I can sit and watch a World Series game once a year and instantly understand because of that exposure nearly two decades ago. The same can’t be said for League of Legends, Overwatch or many other esports titles (special exception here for Counter-Strike).

What esports is, and will be, until a market rebound is an activity that was very popular among a subsection of Millennial and early Gen Z gamers. It is now dying.

The Sentinels Specifics

The Sentinels’ offering memorandum is one of the most interesting documents I’ve seen in esports in some time. It’s more honest than the FaZe public offering documents, in part because, ironically, the SEC requirements around risk language for Regulation Crowdfunding (Reg CF) are more strict than disclosures for public companies. Sentinels are brutally honest about their business, its pitfalls and traps and how ridiculous their expenses are.

I want to start, though, with one of the early paragraphs in the competitors section. Sentinels lists four competitors by name: FaZe Clan, 100 Thieves, Cloud9 and TSM. In another document, they list just FaZe and 100 Thieves. I don’t think that’s coincidental.

FaZe and 100 Thieves are the envy of every single esports organization. There’s an aura in the esports industry that FaZe and 100 Thieves are cool. FaZe used to, and 100 Thieves still does, put its influencers front and center—attempting to maximize the exposure that talents like Valkyrae, Courage and even 100 Thieves’ founder Nadeshot provide to the brand. They’ve both made a run at creating lifestyle brands around competitive gaming.

FaZe, at one point, did that very successfully. 100 Thieves has done that to a much lesser extent, and like many of their competitors, as I understand it, are struggling fiscally, too, in retail in particular⁵ . FaZe is now in the gutter, reportedly for sale and having a mutiny among its founding influencer talent, who are calling for the head of the CEO who has pushed them out of the business.

Sentinels are trying to replicate the FaZe and 100 Thieves formula. The org brought Shroud, one of Twitch’s most-watched streamers, to its VALORANT team as a temporary sub for a month in summer 2022, and signed Tarik—another one of Twitch’s big dogs—to an influencer contract.

Sentinels focused heavily on VALORANT, the one esport that executives are still optimistic about. It has built real brand credibility there.

The one potential positive about VALORANT, from my perspective as a veteran reporter in this industry, is that it has attracted a younger Gen Z audience that grew up in the age of the reinvigorated, direct-to-consumer subscription relationship. The older esports titles are rife with an audience that came of age on the social media internet, where premium content was given away for free. This younger generation is used to Twitch and Patreon subscriptions.

What I’m not sold on is that it will convert to monetizable brand opportunities for an esports team brand.

The advertising market is changing. Advertisers are finally getting wise, and many are changing from an eyeballs model (CPM) to a conversion model (CPA). Early data shows that esports teams suck at converting their eyeballs into product sales for their sponsors. I’m not sure if that will change with a generational shift, either.

The Gen Z audience that is into VALORANT love creators. They have parasocial bonds with those creators. But they are, generally, quite anti-corporation, and even though Sentinels is a small business startup, they look like a corporation from the inside looking out. Do these fans like Sentinels, the brand? Or do they like TenZ, Zekken and the players who represent them? I’d guess the latter.

We can’t talk about the Sentinels memorandum, though, without discussing the expenses.

Sentinels is compensating their four C-level employees nearly $1 million per year, combined.

The breakdown is that its CEO, Rob Moore, is paid $360,000; its COO, Eric Ma, is paid $215,000; its CMO Riley Jameson $215,000; and its CRO, Leena Xu, $200,000, plus 2.5% commission on sponsorship revenue.

There’s no kind way to put this. Every single person on that list is overpaid.

If Sentinels were a profitable company or a bigger corporation, those numbers wouldn’t be bad. But for a company hemorrhaging $8 million per year, for its officers to make $1 million a year combined, is ludicrous. I know three of those four executives well, in a professional sense, and I have no doubts about their capabilities—nor is this commentary about their competence—but the pay doesn’t meet the stage of the company they run.

Sentinels estimates, between staff, influencers and player salaries, that it burns $695,000 per month.

While reports of its potential demise are exaggerated, if the company gets its best outcome—another $1.15 million from existing investors (likely), plus raises $1.23 million from crowdfunding (unlikely) and continues to generate net revenue at its current clip of $1.93 million per year—it will have less than six months of runway. It needs to cut costs exponentially. Today.

Here’s a breakdown of three scenarios, making some safe and fair assumptions based off the publicly-disclosed data:

Commentary:

Some of these numbers aren’t variable. Sentinels reported it had $185,221 in cash at the end of 2022. This best case accounts for a few things:

1. Sentinels collects on all of its outstanding accounts receivable, which could include prize money, sponsor payouts and revenue share. It’s very possible this is not true, but I’ll explain in the worst case.

2. This also assumes that Sentinels revenue grows this year by 15%, though the documents did not give a payout schedule of how its revenues come in and out. It’s possible that rather than a steady stream of $160,275 dollars (a 15% increase, divided over 12 months) is more like bigger lump sums at certain points throughout the year.

3. Sentinels said in the filing that it has $1.15 million in capital commitments from an existing venture capital group. It says that since it finalized its crowdfunding financial review in June 2023, it’s received $700,000 of those dollars. This model assumes they get the other $450,000 committed.

4. Most notably—and the least likely in this model—is the $1.23 million raised from StartEngine. As of August 23, Sentinels have raised just over $136,000 in seven-ish weeks since launch. The chance they raise the full $1.23 million in crowdfunding seems unlikely.

Commentary:

1. This model also assumes that accounts receivables were collected in between the end of 2022 and now.

2. In this model, it presumes that the $450,000 still owed by the venture capitalist group bankrolling Sentinels will not be paid. Here’s my thoughts. In my time as a founder, talking to people who’ve crowdfunded, crowdfunding is used in two ways:

   1. A crowdfund is a way to drum up positive interest and demonstrate demand for a brand among an audience, driving investors to commit more funds to the business. I’d take a guess this is what Sentinels thought it was doing. That its VALORANT audience would be gullible and easily reach close to $1 million committed in short order. That’s not played out.

   2. The other way is the inverse: Venture capitalists come on and it creates confidence for the public around a Reg CF campaign. This is clearly not the case with Sentinels. Nothing about this rollout signals confidence.

3. Lastly, I estimate the StartEngine Reg CF campaign will end around $250,000. It’s currently at just over $136,000 and they have a couple months left. Usually the biggest boosts you see for crowdfunding campaigns are at the beginning and the end.

Commentary:

1. Cash remains the same, but accounts receivables aren’t paid to Sentinels. At the end of 2022, a lot of consumer brands cut back heavy spending and did not fulfill their sponsor obligations. I’m also aware that many of the tournament organizers in the industry, including VALORANT’s Riot Games, are extremely slow to pay out prize money. The possibility that none, or at least a good chunk, of this accounts receivable never being paid is possible.

2. Revenue here is flat.

3. This projects the StartEngine campaign ends at $175,000, about $40,000 more than where it’s at today. I have some confidence Sentinels will exceed this. But it’s possible it won’t.

There’s only one way to slice this: None of these scenarios are sexy, and if I were Sentinels CEO Moore, I’d fire almost everyone tomorrow. Build a minimum team that runs off of Riot’s VALORANT stipend—which is reportedly between $600,000 and $1.5 million per year—and tried to hold it out until the market corrects.

The Sentinels StartEngine page and the memorandum take me back to a different era of esports. One where social media engagement numbers and bullshit market data numbers from Newzoo fooled investors. I don’t think that’s working this time.

Sentinels have only raised $136,000 in the month since they announced their campaign. They’ve only got additional outside capital from existing investors and say they’re not able to find funding elsewhere. They’re putting the emphasis to carry the business and its future onto what I believe they thought would be a gullible audience. Thankfully, it seems the esports audience, for now, is smarter than that.

Footnotes:

1. Sentinels CEO Rob Moore said this in an interview with Digiday discussing the crowdfunding campaign. It’s hard to determine if he’s right or wrong, but a bit arrogant, I must say.

2. I want to mention how this interview came to be, as it was really weird. In early 2017, I reported how poorly the Overwatch League’s road show of pitches were going—notably because they were asking investors for $20 million each in franchise fees! After the piece published, a Blizzard spokesperson reached out to my editor and offered Etienne and Rufail, both who I knew personally by this time, to speak with me. Neither were bought into the Overwatch League yet. They wouldn’t buy in for another seven or eight weeks. It was a weird interview.

3. In talking over this article and my thesis, my friend and colleague Mikhail Klimentov told me that he did an interview with then-G2 Esports CEO Carlos "ocelote" Rodríguez Santiago in the summer of 2020 while reporting for The Washington Post. He recalls Rodríguez openly admitting esports teams were media companies, though that part did not make the article.

4. Economists don’t all agree, but many no longer think we’re headed to a recession anymore. That said, the end of 2022 was a very difficult time to lock in sponsorship dollars or investment, as fear ran rampant among C-level halls of venture capital firms and brands. It’s very possible Sentinels’ bottom line was impacted by this—unable to find other brand deals and sources of revenue.

5. More on this another time, but I’ve heard that 100 Thieves is not having a good time in diversifying into the retail space. The esports team owns two retail brands: keyboard and peripherial manufacturer Higround and energy drink Juvee. Juvee, in particular, is a bit of a money sink, sources tell me.

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