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Friends,

FaZe Clan surprised everyone last October when they announced that they would become the first esports organization to go public at a $1 billion valuation.

They flaunted their 350 million social media followers. They talked about their 85-partner roster, including Kyler Murray, LeBron James Jr., and Snoop Dog, and they even described themselves as “the Dallas Cowboys meets Supreme meets MTV.”

But the last 12-14 months haven’t exactly gone as planned.

FaZe Clan ended up going public via a Special Purpose Acquisition Company (SPAC) in July, but 92% of the shareholders redeemed their shares for cash (instead of FaZe Clan stock), and the stock is down more than 85% from its all-time high in September.

Of course, the broader stock market hasn’t performed well this year either. The S&P 500 is down 18.26% year-to-date, and tech stocks ($QQQ) are down more than 30%.

But still, FaZe Clan is in a significantly different financial position.

The company will generate more than $50 million in revenue this year, but they have never been profitable and have consistently raised outside funding to stay solvent.

This is a problem for two main reasons. First, FaZe Clan doesn’t actually keep most of the revenue they generate. The company has individual contracts with each member of its roster, including revenue-sharing agreements, and this resulted in FaZe Clan keeping just $14 million of the $48.6 million they have generated in revenue this year.

But secondly, with more than 90% of SPAC investors redeeming their shares for cash instead of FaZe Clan stock and the subsequent default of a $71.4 million PIPE (private investment in public equity), the esports company might soon run out of cash.

They were initially expected to raise $300 million through the SPAC process but ended up only raising $100 million — and that has created serious liquidity issues.

For example, here’s a quote from FaZe Clan’s latest quarterly filing:

“We have incurred net losses since our inception, and we expect to continue to incur net losses in the near future. We incurred net losses of $149.5 million and $36.9 million for the nine months ended September 30, 2022 and the year ended December 31, 2021, respectively. As of September 30, 2022 and December 31, 2021, we had an accumulated deficit of $261.9 million and $112.4 million, respectively.

We expect our costs and expenses to increase in future periods as we intend to continue to make significant investments to grow our business. These efforts may be more costly than we expect and may not result in increased revenue or the growth of our business. In addition to the expected costs to grow our business, we also expect to incur significant legal, accounting, and other expenses as a newly public company.

If we fail to increase our revenue to sufficiently offset the increases in our operating expenses, we will not be able to achieve or maintain profitability in the future. These conditions have raised substantial doubt about our ability to continue as a going concern, 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.”

Ultimately, we’ll see what happens. FaZe Clan has a massive audience of 500 million-plus, and they only earn about 20% of their revenue from competitive gaming, so maybe they can raise some additional capital from investors and keep this thing going.

But the reality is they tried to go public at a ~20x revenue multiple — sports teams trade at 6x, and software companies trade at 12x — and with FaZe Clan talent and employees able to start selling stock in mid-January once their lock-up agreements run out, this might actually get much worse better it gets any better.

I hope everyone has a great weekend. We’ll talk on Monday.

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