Point Solution Consolidation Appears to Be on Horizon

Point Solution Consolidation Appears to Be on Horizon

Much of the conversation involving private equity in sport has focused on LP investments in professional teams and leagues (or the prospect of private capital in college sports). Pitchbook reported, as of March ’24, that P.E. or affiliated firms controlled stakes in 63 ‘major’ North American properties.

However, a multitude of integrated point solutions, created to solve specific industry challenges (think: sports-centric CRM or data warehouse) and support sports properties by driving operational efficiencies, growing incremental revenues, and/or better engaging fans have emerged within the last half decade.

If one believes in sports’ macro trajectory and recognizes that the ongoing influx of smart money into the space will only push rights owners to become more sophisticated in the years ahead, then it is easy to understand why multiple operators and PE-backed groups –including Hextec– are actively pursuing, or kicking tires on, the idea of creating an all-in-one sports enterprise software solution (think: Adobe in the marketing space) or integrated technical toolkit.

“There is a unique opportunity to create a centralized solution for sports organizations’ B2B needs, leveraging data and analytics, to drive additional revenue across categories such as sponsorship, fan engagement, and ticketing,” Nathan Janick (VP, Shamrock Capital) said. “The sports market continues to grow rapidly with a huge inflow of institutional capital; however, the infrastructure of these organizations needs to catch up. That dynamic naturally creates an opportunity for software and tech enabled services to help these franchises and rightsholders as it has across other sectors over the past 10-15 years.”

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Historically speaking, most sports properties have been ‘under’ sophisticated from a data perspective and have relied on traditional relationship-based sales approaches to drive revenues.

That started to change as valuations began rising in the late 2000s and a new class of owners emerged. Now, P.E. and institutional capital is investing in these properties at multi-billion-dollar valuations. Naturally, they are expecting these organizations to be run efficiently and for them to maximize revenues and develop new income lines.

Headwinds on the media front have also made it more difficult for them to bank on rights fees continuing to grow exponentially. The threat of a setback in the next negotiation cycle has created an urgency to identify incremental and/or alternative income streams.

Most sports organizations recognize that they can command greater share of wallet from their existing fan base. And all want to capture the next-gen fan.

To do that effectively though, they must know who those individuals are and what they want. So, sports properties have increasingly been seeking out enterprise software solutions that help them to do a better job of owning and managing first-party data, and of leveraging the insights they’re able to derive to drive better business outcomes.

The problem though is that few of the large B2B solutions in the marketplace can be tailored to the needs of a team or league (think: Salesforce).

Or at least that was a problem.

Opportunistic entrepreneurs have built custom tools to fill the gap. Now, there are ‘a ton’ of relatively small (think: $4-5mm of ARR on low end, $30mm on high-end) sports-focused point solutions available to rights owners. 

Presumably, most of the founders behind these companies had planned to add products once the business began cash flowing and as the industry evolved. Sports has a naturally constrained TAM, and teams/leagues tend to be sticky clients.

But few of the sport-centric point solutions created are widely profitable today. Most are still trying to reach break-even and figure out the next move.

The seemingly logical transition into concerts and other live events isn’t as easy as one might suspect; particularly, outside of the ticketing vertical. 

“The two primary challenges these companies face are the ability to gain meaningful market penetration across sports organizations, and also the need to establish a price point that drives profitability,” Hextec founder and CEO Heather Brooks Karatz said.

The rights owner ecosystem and business models are also just different. 

“Given sports is unique and somewhat constrained, [companies operating in the space] almost have to go broader rather than narrower from a capability perspective to continue to scale,” Janick said.

So, an increasing number of sports investors and executives are beginning to wonder if it makes sense to roll some of these tech providers up.

“Currently these sports tech companies are either the hammer or the nail within the tech stack,” Brooks Karatz said. “We believe that assembling and building a toolkit through consolidation and development is the key differentiating opportunity. A team or league can buy the entire set of tools or select tools a la carte that fit together as they come from the same toolkit. This allows for a picks and shovels approach to investing in the sector that goes deep on capabilities, while still being nimble enough to adapt to the diverse set of needs of sports organizations across the industry.”

It remains to be seen if rampant consolidation will occur. The overarching investment thesis regarding institutional capital and the subsequent need for B2B software infrastructure in sport is first starting to play out. 

While logical enough, rollups typically occur when a series of businesses in a fragmented industry can be stitched together, and the sum of the collective assets is greater than the individual pieces. That may not be possible here.

Many of the purpose-built point solution providers serving sports properties raised capital at lofty revenue multiples back when interest rates were low. They’re investors are expecting them to drive meaningful growth (not sell at a discount). 

In the short-term, assume most companies will work to retain their market share in an increasingly competitive space, set costs, and try to accelerate their trajectory with the hope someone comes and is willing to pay a premium valuation with the belief it can roll up the remainder of the market.

Eventually, they’ll either have the growth to support the next big raise, they’ll fundraise again with more modest expectations, or they’ll determine profitability and consolidation is the best path forward.  How long that takes remains to be determined.

Potential acquirers are watching closely.

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