In recent years, sports have turned into a game of math:
- Basketball has evolved into an equation around expected value per shot.
- Baseball became “Moneyball,” reducing players to on-base percentages and slugging ratios.
- Cycling is coming down to a high power-to-weight ratio.
- Even soccer now tracks expected goals.
Venture is the same way (at least for the broader ecosystem).
The VC industry is mature, with a wealth of data on fund performance; however, the sports investment industry has little data, as it is relatively new.
Let’s Dive In 👇
The Venture Arrogance Score
Venture capitalist Josh Kopelman recently shared what he calls the “Venture Arrogance Score,” a formula for evaluating VC firms.
The score answers the question: what percent of “total annual startup value creation” does a fund need to capture to generate its desired return?
This chart does a nice job showcasing it:
Assumptions for this sample fund:
- $7 billion fund with a 3-year investment window
- fund owns 10% of the companies at exit
- aims for 2.5x returns (note that 2.5x is a pretty low multiple for venture; we’re in growth equity/private equity territory.)
The final variable is “Annual Startup Value Creation,” and PitchBook reports that about $2 trillion of total U.S. venture returns have occurred over the past decade, or approximately $200 billion per year.
The math for large VC funds is tough.
Sports Fund Example
Now let’s look at a $5 billion sports fund focused on minority stakes in teams, leagues, and later-stage companies (this is the size of the fund Apollo Global Management plans to launch).
*The Venture Arrogance Score was designed for traditional VCs, but with sports team and league PE groups being their own ecosystem, we can apply the same math.
Assumptions we’ll use:
- 3-year investment window
- 10% ownership at exit
- 3x return target (fund needs to turn $5B into $15B).
The sports industry has averaged roughly $125 billion in transaction value per year (or about $375 billion over three years).
For the $5 billion fund to hit its target…
It would need to capture 40% of all global sports transaction value during its investment period.
In other words, a single $5 billion sports fund would need to participate in nearly every major deal (team sales, league expansions, and top-tier acquisitions) just to break even on its return math.
Fee Accumulation is the Game
Throughout the broader technology ecosystem, big venture firms are running the same playbook that private equity ran 15 years ago.
Fee Accumulation.
Here’s the chart of Blackstone’s fee accumulation over the past decade:
The large venture funds are looking more like banks/PE firms – and interestingly, many of them are dipping into sports to stack more assets under management.
We’re also seeing the same thing with sports-focused funds, but in a different way…
- The VC firms are trying to dip into PE territory
- The mature PE firms are raising larger funds, with some looking to get into team/league ownership.
And it makes sense why….
Arctos’ last fund was reported at $4.1B (which would generate $60-80M/yr in management fees).
All of this movement has left a massive gap in sports for:
- smaller nimble funds
- funds at the earliest stages
- middle-territory groups ($5m-$15m rounds)
It’s essential to understand the distinction between mega-fund fund math and venture’s cottage industry roots. There’s a big gap between 10% IRRs and 40%+ IRRs.
Let’s examine the financial math for early-stage venture firms.
What Matters in Venture Capital
Venture capital boils down to two things:
(1) good ownership in (2) great companies (Ownership + Outliers).
Outliers
Let’s look at sample portfolio construction for a seed firm:
- $35M fund
- Investing $1M each in 30 companies
- Average 10% ownership at entry ($10M post-money valuation)
- Get diluted 50% to 5% ownership at exit.
Here’s one set of outcomes that gets us to a ~6x multiple:
22/30 companies return $0, while 8/30 produce a range of good to great outcomes.
Half the proceeds generated here come from a single company, Company 19. Remove Company 19 and you’re down from a 6.3x fund to a 3.4x fund.
*We’re ignoring a lot here: reserves, recycling, gross returns vs. net returns.
However, the math effectively makes the point: a select few companies drive the lion’s share of the returns.
To illustrate this further, consider what would happen if 29 of 30 companies return $0, but one company becomes worth $5 billion:
Here we have a 7x fund, turning $35M into $250M+. All because of one company.
Clearly, this is an industry built on outliers:
- VCs look for every investment to be a potential fund returner.
- Founders need to understand that a $100M exit might be life-changing for them, but it won’t move the needle for most VCs.
VCs are incentivized to have you swing for the fences. This is why venture capital isn’t the right path for many companies.
Ownership
The second important variable is ownership.
In this example, we assume our 30-company portfolio produces three outliers: a $2B company, a $1B company, and a $500M company.
- In Scenario A, we averaged $10M post entry. We get a 5x fund.
- In Scenario B, we averaged $20M post entry. We get a 2.5x fund.
- In Scenario C, we averaged $40M post entry. We get a 1.25x fund.
Smaller VC funds are playing a different game than multi-stage firms, private equity groups, and minority team/league investors.
Small funds shouldn’t be investing in the “hot” deals at $50M+ valuations…
The ownership math falls apart, and the entire portfolio begins to sag (which is why you don’t see any institutional “Sports VCs” invested in Unrivaled 3×3 women’s basketball’s Series B round).
Sports Venture-Returnable Ideas
In tech, the power law is fueled by near-limitless upside.
A company like Stripe, OpenAI, or Nvidia can scale to $100B+ outcomes.
Sports, by contrast, has been a finite market. The number of teams is capped. League rights cycles are slow and predictable. Even media/tech plays tied to sports are often constrained by licensing and geography.
Here’s the uncomfortable question for many VCs in sports: does the industry create enough billion-dollar opportunities to support venture returns?
I think the answer is yes (but the market size limits how many of those outliers can exist at the same time).
Some notable sports tech exits in the past ~5 years:
- Sportradar IPO (2021): ~$8B.
- Endeavor IPO (2019/2021): ~$10B+.
- DraftKings IPO (2020): ~$20B peak market cap
- Playtika (gaming, but sports-adjacent): $11B IPO.
- Whoop, Strava, Overtime, Sorare, SeatGeek, and Fanatics all have unicorn valuations but are not yet major exits.
If you spread it out, you’re probably looking at one big $1–5B exit every year, a few $250–500M exits, and a handful of <$100M tuck-ins.
That works out to approximately $3–6 billion per year in true sports venture-backable exit value globally (and the U.S. accounts for a significant share of that).
Final Thoughts
Instead of me trying to organize this perfectly…
It’s easier to jot down my thoughts with bullet points:
- There’s a rush of PE firms looking to capture minority stakes in professional teams, but only room for a few of them based on the venture arrogance score.
- Private equity as a business model is mainly about fee accumulation…this is leaving gaps across most industries (including sports).
- A lot of talk about private equity in youth sports, but very few are pulling the trigger as they realize how difficult a market it is to navigate.
- Traditional Silicon Valley investors are starting to do sports deals, which is a nice curveball for the industry.
- Most of the so-called new funds in sports have no capital to deploy.
- It’s essential for founders to understand the math behind funds, as this provides insight into the incentives (which also helps when pitching your company).
- Private Equity is a people industry. But at the end of the day, it’s also just math.
I’m curious to see how the investment landscape unfolds across the sports industry.
You can start to see the transformation taking shape (and can feel the changes on the horizon).
