FaZe Clan’s plummeting valuation shows how risky it can be to bet your company’s future on influencers

• Esports company FaZe Clan struck a deal to sell itself at a fraction of its 2022 valuation.
• FaZe’s struggles can be traced to its reliance on a few influencers to drive overall revenue.
• Other companies with similar dependencies have also faltered.

Influencers are excellent at selling products, but they are not a business in and of themselves.

According to company filings, FaZe Clan’s revenue dropped 30% in the first half of 2023 compared to the same period in 2022, a difficult lesson for the esports organization. On Friday, it announced plans to sell itself to GameSquare, a gaming, esports, and marketing company, for a fraction of the $725 million FaZe was valued at when it went public a little over a year ago.

While esports as a whole has struggled with monetization, FaZe’s problems stemmed more from its reliance on a small number of influencers for revenue. Revenue splits with its talent, brand partnerships, and esports winnings are how the company makes money. That revenue is frequently concentrated on the backs of a few big stars for FaZe.

One creator accounted for roughly 18% of FaZe’s total revenue in 2022. In 2021, the same content creator was responsible for roughly 22% of the company’s revenue.

“A lot of companies have been struggling in the esports segment,” said Michael Metzger, a partner at the investment bank Drake Star. “Relying solely on influencers is obviously not an easy business model.”

Such concentrated revenue is a “risky place for any business to be,” according to Josh Chapman, cofounder and managing partner of Konvoy Ventures, a gaming investment firm. If the creator becomes ill or is unable to work, for example, “a lot can go wrong real fast.” Furthermore, the fact that FaZe’s DNA is based on edginess “accentuates the risk.”

Influencers can be picky, and a single YouTube video or public gaffe can ruin a company’s reputation.

FaZe has firsthand experience with this challenge. In 2021, the company fired several of its employees after they promoted a “Save the Kids” cryptocurrency that quickly lost value.

“This was too nascent of a business model to be publicly traded with too much ‘key person risk’ around influencers,” Chapman said of the company. “That does not exist in open markets.” It shouldn’t have existed in the first place. And this merger is the unintended consequence of a flawed business strategy.”

Other businesses with similar influencer reliance have also struggled. After a group of creators revolted and took to YouTube to criticize its management, Clubhouse Media Group, an influencer content house upstart that went public via a 2020 reverse merger, adjusted its business model. Cameo, a celebrity shout-out platform, has also struggled with revenue volatility after directly tying its business outcomes to the whims of influencers and celebrities.

In recent months, FaZe has faced other challenges that have nothing to do with influencers. The overall environment for new public listings has been shaky, particularly for those that went public through special-purpose acquisition vehicles. Fears of a recession have made it more difficult to win business for newer ad categories such as influencer marketing.

However, the company’s core issue of relying on a few creators to power revenue outweighed any macroeconomic challenges. Its previous attempts at diversification failed.

FaZe’s new owner says he wants to reduce influencer risk.

FaZe set out to create various business lines, including esports competitions, influencer and FaZe-branded products, ad-funded social content, and brand deals. However, in recent quarters, the latter two categories have accounted for the lion’s share of its revenue. Both relied on the popularity of a few gaming influencers, and both have declined, with brand sponsorship revenue falling by about 50% in the first six months of 2023 compared to the same period last year. FaZe’s overall net loss for the first half of 2023 was $28.4 million.

According to GameSquare CEO Justin Kenna, who previously served as CFO at FaZe, brand sponsorships are a healthy business but can be difficult to scale.

While he recognizes that individual creators can derail a company, he intends to leverage his existing relationships with FaZe’s founding creators to enlist them as leaders of the subsidiary following the acquisition, a move he hopes will revitalize the FaZe brand while leveraging GameSquare’s scale to grow the business.

To diversify its business after the acquisition, the company plans to focus on developing FaZe intellectual property, licensing deals, consumer products, and leveraging existing brand partners.

“You can’t control everything that talent will say online, and that goes across the board,” she said. “We have a very strong relationship as well as a very strong plan.” It was actually very important to me that we had the founders’ backing and support, and that we all got on the same page.”

Merchandise brand Mission Supply Co., influencer-marketing platform Sidekiq, and streaming data analytics firm Stream Hatchet are all subsidiaries of GameSquare that could potentially be applied to the FaZe brand.

He believes that tapping into a broader range of opportunities across GameSquare’s portfolio will help FaZe reach profitability.

“We understand the skepticism, and we’re not approaching this as, ‘Look at this sexy story and look at the sizzle,'” she said. “How do we reduce the risk?” To me, that means cutting costs, building runway, investing in infrastructure, and working closely with the founders to re-engage the audience and the brand.”