By Tobias Seck for Sports Business Journal

Five years ago in September 2016, esports and gaming investment group aXiomatic acquired a controlling interest in one of the most prominent esports organizations, Team Liquid, thanks to a fateful conversation between best friends at an NBA All-Star weekend. Unbeknownst to each other, Monumental Sports & Entertainment CEO and Washington Wizards majority owner Ted Leonsis and Mandalay Entertainment Group founder and Golden State Warriors co-owner Peter Guber were confidentially exploring potential investments in esports assets and both came upon Team Liquid. The Sports Business Journal spoke to father-son duo Ted and Zach Leonsis about that conversation, their discovery of esports, and aXiomatic’s philosophy behind enabling esports and gaming assets.

At the Technology Summit of said NBA All-Star event Leonsis and Guber were sitting next to each other during a panel on esports when Ted turned to Peter and said, “you know, I’m really interested in this space. Are you looking at Team Liquid?” Ultimately, that conversation kicked off the aXiomatic journey, which began in November 2015 and since built a portfolio including Team Liquid, Epic Games, Niantic, Dapper Labs, Nifty Games, Mobalytics, and more. The group is led by experienced entrepreneurs Ted Leonsis, Peter Guber, Tampa Bay Lightning owner Jeff Vinik, and Oaktree Capital Management co-founder and Los Angeles F.C. co-owner Bruce Karsh.

The roots of Ted’s understanding of the importance of esports goes back to his time as a student when he first realized the impact computers and gaming will have on society. Just a couple of years after the introduction of the first personal computer, he was introduced to computers in 1976 as a student at Georgetown University when he wrote his thesis about Ernest Hemingway. “I used the computer to prove that Ernest Hemingway wrote a book earlier in his career rather than later in his career and we created one of the first algorithms. Even though I was an American Studies major, the lights went on and I realized the power of computers.”

After graduating in 1977 at the top of his class, Ted was hired by the computer company Wang Laboratories and met many influential people in the computer industry in the late 70s and early 80s. “One of the people that I met was Nolan Bushnell. Bushnell was really the founder of the video game industry. He co-founded Pong. Pong was the very first social media based on a video game and the inspiration for the entire esports industry,” Ted explained. “Pong had a mode where you can play with somebody else. They installed Pong arcades in bars and so you would see young men playing Pong there. People would be watching and cheering and talking about it, and I would do that too.”

Bushnell’s impact on Ted’s career went far beyond the impression Pong made on him as he was also a co-founder of Atari, “which was the first video game company. America Online (AOL), where I grew up, was founded to be the platform to connect Atari game users in 1988.” Ted remained with AOL for 13 years, serving as a senior executive. Around the same time AOL was launched, Ted’s son Zach was born. “I had children. My son Zach became a gamer playing on Sony’s PlayStation and Microsoft’s Xbox. I vicariously saw what was happening but I also could see how the adventure, the fantasy, the games were becoming higher quality and better produced. It was becoming the new Hollywood.” A trend that Ted also observed at AOL in the early 90s as the company made lots of deals with Hollywood studios and with games companies.

“On weekends, Zach would invite his classmates over. They’d do their homework and then like Friday night, they would start playing video games. And I come downstairs Saturday morning to work out and they would still be playing games,” Ted recalled a common scenario from Zach’s time at school. “I would ask them to stop. It’s a beautiful day out, go play some basketball, we’ll play some golf, do something other than playing video games.”

This sentiment was challenged by a South Korean-born friend of Ted’s, Jeong Kim, who served as president at Bell Labs at the time and is also a partner at Monumental Sports & Entertainment. “He told me his family would say if they saw someone playing basketball or hitting golf balls, ‘what are you doing? You’re not going to be a pro NBA player. Go back downstairs, get in front of a computer and dazzle me at League of Legends.’”

Not long after, the esports ecosystem in the U.S. started to gather momentum as leagues like the League of Legends Championship North America were established and professional teams were formed. Within a few years, esports went from a small niche to filling sports stadiums like the Madison Square Garden. Zach shared that “coming from the world of traditional sports, esports really caught our attention because it was really the frontier of live event programing that was digital first and linear second. We also thought it was a totally different audience from what we typically see in traditional sports as esports fans are highly engaged playing their favorite games for four to eight hours a day and using these platforms more as communities of interest rather than just the source of entertainment.”

Once the decision was made to explore opportunities in esports, Zach, who is one of aXiomatic’s investors and a Liquid Enterprises board member, explained that “I started to do my research and quickly realized I had a lot to learn. So, I met with likely 40 different people across publishers, tournament organizers, team owners, players, and blue-chip brands playing in the space. In the process I quickly just fell in love with how organically built the audience was.” During that process, Zach also realized that the sports and esports teams businesses are very different, however, complementary to each other.

Once their focus narrowed down on Team Liquid, “it struck us that they weren’t focused on playing a game on one platform, that they really wanted to build a platform company where they would have a brand and an operating methodology to recruit, train, and retain great athletes to play on multiple IP and platforms,” remembered Ted. “So we made a big investment. We own the majority of Team Liquid. But we’re smart and empathetic enough to know that it’s a talent driven business. That the players, the coaches, Steve and Victor are the true artists, the true value creators. So we leave them alone, except we do help them to find competitive advantage, set strategy and vision for the brand and the company.” Ted further clarified that his involvement in NBA/WNBA basketball and NHL ice hockey taught him that a manager dabbling in how to run a team is a certain path to failure. Consequently, aXiomatic entrusts Team Liquid leadership around Steve Arhancet and Victor Goossens with building the Team Liquid platform.

“We’ve provided business services like H.R., Legal, Finance, to the team,” Zach provided as context. “The team has just become so much more sophisticated while still emphasizing the core tenets of treating our players with the absolute best care possible and valuating winning as our key metric for success.” Zach also stated that Team Liquid emphasizes treating their players just like all other athletes in the Monumental Sports & Entertainment universe. “We provide our NBA 2K league team, for example, with access to our medical staff, our training staff, our team psychologists. We treat them just like we would Alex Ovechkin or Bradley Beal. I think that the audience and the fans crave that.”

Diving into the esports audience, Zach told Sports Business Journal that they have a competitive advantage in Washington D.C. as it is one of the youngest cities in the U.S. “It’s why we were one of the first 17 teams in the NBA to evangelize esports and say we’ll definitely launch an NBA 2k league team and we’ve been a leader in the NHL as well, launching our own dedicated sub-brand called Caps Gaming underneath the Washington Capitals team brand.”

On a larger scale, Team Liquid is now at a point where “blue-chip brands are definitely understanding that partnering with Team Liquid grants them access to a global fan base that would be hard to reach otherwise” and it can leverage the brand they established within the regional and global audiences “to add new lines of revenue, new businesses, or potentially make acquisitions to grow this business even faster,” Zach said.

Arriving at that stage in Team Liquid’s business life cycle is a product of aXiomatic’s long-term approach to its investment in the organization. “aXiomatic doesn’t operate like a traditional venture capital fund so we have the opportunity to really take a long-term view. We genuinely love being entrepreneurs and we know that these are early days for the esports world hence we want to make sure things are done the right way at the right pace, as opposed to marching towards an exit based on a mandate that we’ve set from an economic standpoint,” said Zach.

With the same mindset, aXiomatic started to make investments in other parts of the ecosystem. Ted told Sports Business Journal that they are constantly looking to bring the knowledge they gain from those investments to Team Liquid. Ted named their investment into CryptoKitties as an example, which is Dapper Labs owned and runs the NBA Top Shot NFT platform. On one hand Ted was able to add value as chairman of the NBA media committee, on the other hand they are now working with Team Liquid to figure out NBA Top Shot-like applications for esports. Ted concluded that it is those opportunities for cross pollination, they are looking for in their portfolio.

Additionally, Ted revealed that aXiomatic’s complementary focus lies on the people that it brings in. “I wasn’t a ‘Johnny-come-late’ to getting America online. I was first generation. So, all of the people that we bring into the aXiomatic team are real. You won’t find anyone inauthentic to the industry at Team Liquid or aXiomatic.”

The passionate people working at aXiomatic and Team Liquid in combination with the firm believe that “esports is actually going to be more valuable than traditional sports and I firmly believe that the multiples today are already higher,” as Ted put it, are the groups’ secret ingredients to their esports masterplan.

In contrast, traditional sports are very dependent on local markets and buildings pointed Ted out. “I’ll just give you round numbers. Pre pandemic, Monumental, my building, all of my teams, and all of our media assets were doing about $500 million a year in revenue. I wish someone said it has a ten times multiple. That would mean we were worth five billion dollars but that isn’t how we were valued. When the pandemic hit, all of our local revenues went away. So instead of us doing $500 million, our revenues were cut in half to $250 million. Good thing we weren’t out raising money or selling the company because the value was damaged during the pandemic.”

Sharing his father’s sentiment, Zach mentioned that “we certainly have aspirations to make Team Liquid a billion-dollar brand. And we’ve always thought about Team Liquid being in the first or second inning, that means we’ve got a lot of game left to go.” He also added that “I think esports is one of the greatest meritocracies out there as it truly is a level playing field. However, esports like any other vertical has work to do in terms of diversity and inclusion. But I also think esports has tremendous potential to become a great and inclusive platform in the future.”