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May 15, 2023

BITKRAFT Leads Karate Combat’s $18M Round, Sees Potential for “Billion Dollar Plus Outcome”

Karate Combat recently closed on a $18 million fundraise. BITKRAFT Ventures led the round.

The challenger martial arts league is taking a differentiated approach to rules formation, broadcast production and distribution, all with the goal of appealing to next generation sports fans.

However, it is the way Karate Combat (KC) is trying to use crypto to “create and capture value at venture scale” that has BITKRAFT convinced the promotion has the additional value drivers necessary to become a billion-dollar entity.

“It’s not like the two people fighting is going to look better because it’s crypto,” Carlos Pereira (partner, BITKRAFT Ventures) said. “It’s all the stuff around [Web3] that allows the potential value of the league to be larger, or at least created in a different way [than the traditional equity model].”

Karate Combat’s token ($KARATE) began trading last Friday. Its current price implies an $80 million enterprise valuation.

BITKRAFT is a global investment platform for gaming and interactive entertainment with over $800 million worth of assets under management across its Web2 and Web3-focused funds.

While its Web3 fund has some flexibility in terms of the types of investments it can make, Karate Combat is its first investment BITKRAFT has made in sports.

That is not for lack of interest.

The early-stage venture fund has kicked tires on European football clubs controlled by token holders. It has been enthralled with the idea of using a token sale to move an organization’s budget knowing that winning within lower-level leagues is often a function of resources.

“What gave us pause is that we didn’t really see a path to success if [the club] ever got big enough, and were successful in what they were trying to do, in meaningfully working with the leagues,” Pereira said. “The thought of trying to [navigate the European football pyramid] with a DAO-like structure was very scary.”

BITKRAFT also performed due diligence on a league-level investment opportunity. The organization complexity required to put on that league scared the early-stage fund away.

“You needed all these teams. You needed a stadium. The season is four months long. So, they owned their sport, [and could have incorporated crypto], but from an execution standpoint it was complex and capital intensive,” Pereira said.

Karate Combat offers investors the best of both worlds.

“They own their league so [they] can choose to do crypto, and how to do crypto, and the operational complexity of events is much simpler in terms of operating costs and everything around it,” Pereira said.

And KC is all-in on Web3.

Seeded with $30 million since 2018, the founders recently transferred ownership of the league to an ownerless foundation. Foundation directors are expected to participate in radical experiments of collective decision making with token holders on everything from fight matchups to suppliers.

The bet is there will be enough fight sports fans who want the opportunity to control a pro sports property and enjoy the perks that come with ownership (think: owners box at fights), who want to have a say in the business and share in its future.

Fans will be able to buy tokens on a secondary exchange. They will also be gifted in marketing campaigns and can be won by participating in Karate Combat's new free-to-play game.

Logic suggests “if we can give our fans a little financial upside on every fight [they’ll be more engaged], with the potential of that large top-of-funnel engagement leading to a good number of super-fans that want to be long-term owners via the token,” Pereira said.

BITKRAFT is bullish on combat sports and believes there is room in the market for another successful promotion, particularly one built with Gen-Z in mind.

“We designed the whole league from the ground up to appeal to [that demo],” Robert Bryan (founder, Karate Combat) said.

The strategy starts with true cross-platform distribution.

The league wants to be streaming everywhere, for free. The presumption is the more people who see the sport, the more that will care about it, engage with the Web3 platform and perhaps own tokens.

“So, on our own site, Karate.com," Bryan said. "But also, TikTok, YouTube, Twitter, Facebook, you name it."

Karate Combat has a domestic linear television deal with CBS Sports and distribution across Europe, Brazil, Russia and Indonesia too.

While built on karate lore, KC’s ‘north star’ when putting its rule set together was to yield the kind of fast paced, entertaining fights Gen-Z fans would want to consume.

“The rounds are shorter [than the UFC] and the scoring favors aggression,” Bryan said. “So, there are tons of knockouts and TKOs.”

The promotion's visual presentation is also a fit for a digitally native audience.

“All of the events are filmed in front of these immersive 3D environments,” Bryan said. “It ends up looking like an IRL version of Mortal Kombat.”

And the video game-like environment, which is powered by Epic Games’ Unreal Engine, changes for every event. That makes KC’s broadcast look different than any other fight sport and a challenge for other promotions to replicate.

Karate Combat didn’t plan for 3D effects to become a differentiator for the organization.

“We built this thing with our own money, so we were always looking for ways to save,” Bryan said, "and one of the best ways to cut down on costs in live sport when you’re just starting off is to hold events in these smaller footprints.”

The problem with doing that is that you lose much of the excitement. The idea of using virtual environments emerged as a way to spice up the broadcast.

Technological limitations forced Karate Combat to operate live to tape for three seasons. However, the league has been hosting live events since last summer. Its next one is slated for Saturday night in Miami.

Look for more properties to use immersive environments in their broadcast presentation moving forward as the costs of XR tech continue to decline.

“The real high-quality productions in e-gaming [already] use some of this [technology] because just watching someone playing a game is a bit boring,” Bryan said.

The same could be said for any sports property that regularly plays in front of a less than packed house.

The league co-founder predicts “the end state [for sports] is probably some sort of blend of the real world and virtual [environment].”

Those in arena naturally do not see the 3D environment KC renders, except on screens.

But the underground vibe and intimate environment (fans are right on top of the fighting pit) make for a unique live event experience. Karate Combat sells ~1,000 seats to its events.

The bulk of the $11 million KC has generated over the trailing 12 months is tied to sponsorship pacts.

To date, the promotion’s biggest sponsors have been Web3 brands. 

“However, it is looking more and more like the big unlock is doing [location based] sponsored events and going back to a touring model around the world,” Bryan said. “We have a few quasi-sovereigns in the round and two have already indicated that we can do fully sponsored events in their geography.”

A tour-based business model that includes site fees and local sponsorships would enable Karate Combat to host more domestic events and keep its content free without raising costs.

KC broke even in '22 at the EBITDA level. And Bryan said the business was “drastically under monetized” on the sponsorship side considering its ability to insert logos and brands into the 3D environments.

BITKRAFT got in at a valuation below the price offered to the public and believes KC has the potential to become a billion-dollar entity.

“PFL last raised at $550 million. Karate Combat gets more views, and we think they’re more differentiated with the real-life Street Fighter feel that sets it apart from all the other Octagon centric offerings,” Pereira said.

Considering much of KC’s promise is tied to Web3, it’s fair to wonder if the league can be successful without the DAO gaining traction.

Pereira said it can and suggested the approach actually gives the firm a bit of downside protection.

“If the DAO never takes off, Karate Combat could always pursue a more traditional sports league model (think: media rights, ticket sales) and the less than 10x exit (through private equity, for example) that ends up being consolidated by someone else down the line.”