The esports revolution is already here: what Canadian businesses need to know

The world is experiencing an esports revolution, with Canada at the forefront. With global revenue of $1.1 billion USD in 2021 and year-over-year growth of $1.6 billion USD in 2024. The industry has caught the eye of countless investors and business elite.

As its monumental growth begins to push esports into the mainstream, it’s worth noting that Canada was an early trailblazer. We’re currently home to 900 studios with 28,000 game developers. In 2021, the gaming industry was responsible for over 55,000 full-time jobs in the country. Esports is becoming so important to Canada’s economy that the Ontario government recently announced it’s investing $1 million in a post-secondary scholarship program to help encourage innovation in the field.

As the world begins to see the gaming industry for what it’s becoming – a multibillion-dollar revenue stream and job producer – here’s what local investors already know about this fast-growing market.

Understanding esports

Esports (or electronic sports), refers to organized, multiplayer video game competitions. Events can be online or in-person at specialized stadiums and viewership rates have been increasing around 8% per-year worldwide. The Entertainment Software Association of Canada estimates there are 18 M esports enthusiasts in North America (4.9% of total population), placing us only behind China in terms of popularity.

While gamers are typically the first players that come to mind when people think of the esports revolution, they’re only the tip of the iceberg. What makes this industry so appealing is the technological innovation and job creation potential that comes with it. The esports ecosystem is made up of publishers, tournament organizers, teams, professional and amateur players and lastly, fans and communities. It also has potential for online gambling – a fast developing market that’s already seen some traction in Canada.

Canada’s role in esports’ growth

Canada was an early adopter of the esports model, which is no surprise for a country with a thriving gaming sector. According to the government of Ontario, the gaming industry contributed around $5.5 billion to Canada’s economy in 2021.

As we’ve covered in our podcast, Masters of Disruption, Canada’s booming gaming market hosts a variety of innovative companies, like Amuka esports and ePlay Digital.

Many gaming and esports companies operate out of Vancouver and Toronto, cities known worldwide for their esports reputation. Vancouver is currently the only Canadian city to have developed an official esports strategy, positioning itself as a gaming hub.

Ontario’s recent scholarship announcement proves how important the esports boom is to long-term job growth in the province. The government is investing $1 million over two years in scholarships for post-secondary students in esports and other industry-related programs. This includes anyone in game design, development, marketing, and other programs leading to an esports career.

The country’s enthusiasm for esports has made it a regular stop on the worldwide esports circuit. There are already three large arenas in Canada, and last year OverActive Media announced it’s building a new 7,000-seat, $500 million USD esports arena in Toronto by 2025.

Capital Markets

There are numerous publicly traded gaming companies and gaming ETFs available to investors. Pitchbook published the most recent data available and found that 2020 had the highest number of investments yet – companies raised $2 billion CAD through M&A deals and $46 million CAD through venture capital (VC) deals.

Some recent notable Canadian activity includes Enthusiast Gaming’s $46 M IPO last year, alongside Overactive Medias public listing, and Rivalry’s upcoming bid (which was accompanied by a $22 M round of funding).

Esports and the Metaverse

As esports’ popularity grows, tech experts have been looking at how this phenomenon would fit into the metaverse. For those not in the know, the metaverse is a virtual world made up of a variety of technologies that allow users to engage across platforms, including augmented and virtual reality.

A Wired article described it, in part, as a virtual economy, where users can buy, sell and create goods, like NFTs. Facebook, which calls it “the next evolution of social connection” is so committed to this idea, they’ve changed their name to Meta. Mark Zuckerberg would say it’s the future of the Internet, though in reality, it’s a vague term that, as of now, has endless potential.

So where do esports fit in? According to Alex Fletcher, founder of esports Group, the metaverse would allow games to interconnect, letting gamers communicate and socialize while they play numerous games at the same time. Think of it as a way to create an esports universe, where players could jump from game to game while using tech like augmented or virtual reality.

As of now, gaming doesn’t work like that, mainly because there’s no financial incentive, Fletcher said. Publishers create games as standalone universes that don’t interact with each other, though that could change as many gamers look towards the metaverse.

Microsoft’s recent $68.7 billion purchase of Activision Blizzard, a video game company with an esports focus, was seen by experts as the first shift towards bringing esports into the metaverse.

Still, to fully accomplish this task, games would need to use blockchain technology and NFTs.

What are NFTs and blockchain and why do they matter?

Blockchain is a system of keeping encrypted records that are turned into ledgers and distributed to participants. Blockchains can remain anonymous and are used to record the ownership of NFTs.

NFTs include digital files that are sold virtually, often using cryptocurrency.  One business recently blocked blockchain from all their games available via a videogame distribution service. Valve blocked NFTs and blockchain due to concerns about the “volatility of cryptocurrency” and instances of fraud they’ve seen.

Used in the metaverse, NFTs would allow gamers to build their revenue streams. In-game purchases are already the main source of income for most games, accounting for 74% of revenue in 2020. Many proponents of bringing esports into the metaverse see it as a way to bolster fan engagement and increase revenue opportunities.

What esports startups need to know

While the esports industry is full of opportunity, it’s also a challenging sphere for fledgling companies. Like the cannabis industry, esport markets are taking off so fast it’s hard to get accurate valuations. There’s also a lack of regulatory bodies keeping the industry transparent, which could lead to issues with compliance.

Here are some key tips for new esports companies trying to succeed:

1. Make sure you have a strong leadership team

Esport startups should ensure they choose the right corporate structure (and decide on whether incorporating is in your best interest) early on. While incorporating is a long and sometimes expensive process, it protects your assets in case there are any legal issues and comes with tax benefits.

Your company’s leadership team should have the business experience and financial know-how needed to navigate a fast-growing field like esports.

2. Understand the importance of financial controls

It’s especially difficult to get accurate valuations for esport companies due to the industry’s rapid growth in such a short time span. Because of this, it’s all the more important to create a solid financial reporting process, especially if your company wants to go public at some point.

3. Ensure you’re following all regulations

This is another challenging area for an industry like esports. Because of its fast growth, there are few governing bodies and regulations in the field. It is vital that startups keep up with any new regulations and commit to following all rules effectively.

Why you need an accounting team

As the esports industry grows, so do esports investment opportunities. This category saw a surge of investment during 2020 and continued to expand even through pandemic-related lockdowns.

Companies who are eager to go public during this boom should invest in experienced accounting leadership to ensure their new businesses are structured properly from the get go. Accounting experts can:

  • Help prepare financial reporting for an IPO and aid in the IPO process.
  • Help design accounting systems that work well for esports companies.
  • Create an investors’ deck for companies looking for early-stage investment. Your accounting advisor can also help you find the right funding fit for esports specifically.
  • Establish a corporate structure/corporate governance early on. Your team can ensure this structure will help your company in the long term. This includes dealing with share structure, shareholders’ agreements, the number of shares to be issued, stock option pools and preparing/maintaining capitalization tables for future growth.
  • Tax planning. This is especially tricky for newer entrepreneurs who don’t know how to enhance profit margins effectively.

At Zeifmans, we provide full-service accounting and have decades of experience helping startups in a variety of fast-growing fields. Our knowledgeable team can help create a functioning corporate structure, as well as guide you through audits tax planning/compliance, IPOs and much more.

More than just an arcade game

As esports continues to gain momentum in Canada and abroad, it’s important to understand the investment opportunities and risks involved in such a fast-growing market. Our team has helped a variety of businesses in leading-edge tech succeed. Contact us to get the conversation started.

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