French startup Sorare announced a significant new partnership with the US-Canadian Major League Baseball (MLB) today in its first expansion beyond football.
The licence deal will allow Sorare to produce baseball cards for each MLB player — from clubs like the Boston Red Sox and New York Yankees — and it will also launch a new free-to-play NFT game. The exact terms of the deal, including the number of cards issued, contract length or cost, have not been disclosed.
On Sorare users collect and trade football cards as NFTs (non-fungible tokens) and play them in fantasy football games where the best managers win prizes. The platform has already established partnerships with 250 football leagues and clubs the world over, including Spain's La Liga and Germany's Bundesliga, and claims to have 1.7m registered users.
Now, it's hoping to break into a 350m-strong sports-mad market with its first foray into North America.
It’s a huge deal for the three-year-old company, which was last valued at $4.3bn when it raised $680m in Europe’s largest Series B round to date last September.
But what impact does this deal have on its valuation? Was that valuation merited at the time? And how does the wider market context of the Ukraine war, inflation, cryptocurrencies’ slide and the public market sell-off impact the startup?
Valuing a new category
When the Series B was announced, Sorare’s annualised revenues were about €156m according to Boris Golden, a Sorare investor. This implies a 20x revenue multiple — even though, given Sorare’s rapid growth, investors probably agreed to a higher multiple when the terms were negotiated.
That's broadly in line with the valuations top-performing SaaS companies (namely those on the BVP Nasdaq Emerging Cloud Index) were attracting at the time — though since then, top quartile SaaS revenue multiples have dropped to 12x.
In the pandemic’s crazy bull market where hot SaaS companies went for as much as 100x revenue multiples, Sorare’s valuation almost looked conservative.
Investors will have tried to square Sorare’s impressive business performance with considerable macro concerns
True, Sorare is not a SaaS company, but according to Golden Sorare has “Netflix-like retention of 70% over three months” so SaaS is a useful proxy. Sorare doesn’t fit any other readily available category either, as it combines several of the activities that companies push to hook users: it lets people collect (NFT cards), game (fantasy football), win returns (trading crypto or cards) and connect (with a large football-loving community). “We still have to find our box,” CEO Nicolas Julia told Sifted.
In the absence of a precedent or a comparable, investors would have tried to square Sorare’s impressive business performance with considerable macro concerns. No-one's yet sure what the true value of NFTs will be, while the future of crypto is equally up in the air.
Then there’s the pesky issue of regulation: in the UK, the Gambling Commission is deliberating on whether Sorare needs a licence to operate, while financial regulators are trying to wrap their heads around crypto assets more generally.
And over the past few months macro factors like the public market tech sell-off and the invasion of Ukraine have started to puncture private valuations.
Sorare’s impressive business performance
Early-stage investors really get excited when annual growth reaches 400-600%. Sorare’s key growth metric — trading volume — went from $7m in 2020 to $325m in 2021: an astronomical +3,885% year-on-year growth.
However, Sorare operates on Ethereum’s underlying blockchain network and uses ether as its currency. Sorare’s growth in fiat volume was buoyed by Ethereum’s rising value, which increased by 28x between January 1, 2020 and December 31, 2021.
The trading volume metric includes both primary transactions (auctions of freshly minted cards) and secondary transactions (player-to-player trades), but Sorare only generates revenue from primary transactions. It's confirmed to Sifted that it plans to take a cut of secondary transactions in the future, but didn't say how much or when.
2021 was a watershed moment for NFTs. According to Blisce, total NFT sales increased 262 times on 2020, reaching $25bn
While the company doesn’t disclose its profitability, Alexandre Dewez from Eurazeo, an investor in Sorare’s Series B, estimates that Sorare net revenue on each transaction is 50% while it loses 16% on each secondary transaction. That’s because it absorbs the costs of secondary transactions without charging a fee.
Sorare can further improve this margin in the medium term by lowering the rewards it pays out in fantasy football competitions (Dewez estimates them to be 25% of primary transaction value), optimising gas fees (the fee Sorare pays for every transaction on the blockchain) and charging for secondary transactions.
The MLB deal will likely improve Sorare’s business performance and attractiveness further: it will generate additional revenue, make the community more vibrant and thereby improve retention and make Sorare look increasingly attractive to other leagues and sports. A Sorare spokesperson tells Sifted that hopefully, the seasonality of baseball (a summer sport) and football (which takes a summer break) will be complementary.
The new reality of 2022
However, some of you might be wondering whether the valuation logic from last year's monster round still applies amid soaring inflation, rising interest rates, the war in Ukraine and a stock market sell-off. The tech-heavy Nasdaq is on a five-week losing streak, its longest since 2012. Ethereum is down by over 35% since the beginning of the year. And top-performing SaaS companies included on the BVP Nasdaq Emerging Cloud Index are only attracting a 10x forward revenue multiple today, less than half last autumn’s average.
Comparing Sorare’s latest annualised revenue of about €240m (based on April 2022 sales, according to Golden) to its Series B valuation suggests a ~15x revenue multiple, with the company growing into its valuation. That puts Sorare’s revenue multiple well above the 10x that top public SaaS companies are attracting.
Still, 2021 was a watershed moment for NFTs. According to a report shown to Sifted by Sorare investor Blisce, total NFT sales volume increased 262 times compared to 2020, reaching $25bn.
But the debate about the intrinsic value of NFTs and future demand rages on — and investors are paying attention. Even though it’s unlikely that users will lose interest in sports, real or fantasy, a continued fall in Ethereum and consequently players’ card values could dampen enthusiasm for Sorare’s offer.
A Sorare spokesperson says that it's "business as usual" and that it's considering neither slowing down its growth plans nor laying off staff to extend cash runway. They also confirm that the company remains profitable — a highly valued benchmark by investors, as cash has started to actually cost something.
There's another challenge looming, though: as it attracts additional players and capital, Sorare will also attract the attention of regulators.
The risk of regulation
In October 2021, the UK Gambling Commission began looking into whether Sorare required a gambling operating licence. It also issued a warning to consumers about Sorare, which is “uncommon” according to Richard Williams, a specialist gambling, licensing and regulatory lawyer from Keystone Law. The enquiries are still ongoing and the Gambling Commission did not reply to a request for comment.
Being a gambling company is both expensive (thanks to taxes) and laborious, as companies have to comply with multiple additional regulatory requirements.
Sorare itself believes it's highly unlikely to be classed as a gambling company.
A spokesperson tells Sifted: “Sorare is not a gambling service or financial product, nor is it marketed as such.” Instead, Sorare says, its games are free to play and therefore there is no stake to lose. Rather, players own the NFT collectibles used for playing, irrespective of their team’s performance.
It won't be easy for the Gambling Commission to designate Sorare a gambling company — it would have to do so through the courts, and it would be up to the courts to decide how to interpret the UK Gambling Act. It's hard to predict how that would go.
Based on Sorare’s business performance in terms of growth, profitability and opportunities for further growth, the Series B valuation is coherent or even cautious.
Half a year of growth later, as public tech valuations are being slashed, Sorare’s revenue multiple is no longer in line with but significantly higher than top quartile public SaaS businesses. Yet, unlike many fast-growing SaaS businesses, Sorare is profitable.
Regulatory risks still loom large over the business and the big question is whether these are sufficiently priced in.
Katja Staple writes about the business of startups for Sifted.