Jul 19, 2023

Photo Illustration by Lorenzo Gordon Scrum Ventures, a Japanese venture capital firm, is homing in on sports technology as one of the gateways to explosive growth. It has the backing of some of Japan ’s largest conglomerates to help it find it. “We see that there’s a massive opportunity,” Scrum Ventures managing director Michael Proman said on a video call from his home in Minneapolis. “Where I get excited is that sports, particularly over the course of the pandemic, had its definition expanded. Before the pandemic would you have called sleep technology, home fitness or mental health a sports tech company? Maybe not.” Scrum Ventures is a Tokyo and San Francisco-based fund started by Japanese entrepreneur Tak Miyata a decade ago, after he formed and sold off tech companies in biometrics and medical imaging. Scrum has been venture capital generalists, investing in about 100 mainly tech-based companies, such as weight loss service Noom and Natural Fiber Welding, a developer of petrochemicals-free textiles. The Scrum Sports & Entertainment fund, a $120 million VC fund formed in late 2022 and managed by Proman, is the first move in a decision to focus on some key business verticals to better locate growth. Scrum’s investors are mainly Japan’s massive conglomerates, including Mitsubishi UFJ Bank, a $100 billion (market cap) financial powerhouse. “Our bank will gain access to the latest technologies of American startups at the forefront of sports business … [and] the attractive power of sports to bring people together,” CEO Junichi Hanzawa said in a December press release, a translation of which was provided to Sportico. While it’s named a sports and entertainment fund, Proman clarifies it’s not seeking sports just for sports’ sake. “I refer to us a tech fund that invests in sports and entertainment, and I know that’s a very subtle difference,” Proman said. “But to me, it’s about leading with technology, and finding ways that technology transcends the vertical.” The fund’s handful of disclosed investments reflect that approach. Scrum bought into Misapplied Sciences, a company that has developed pixels able to transmit different colors to multiple directions. That means a collection of pixels can use the same screen footprint to project a unique image to every viewer before it. Delta Airlines uses it in Chicago to provide information to travelers depending on what direction they are walking toward the board. The business will be breaking into sports and entertainment soon, according to Proman. The fund has also taken a stake in Boom Entertainment, which provides content for daily fantasy sports, sports betting and online casino, as well as joining Jim Pallotta in backing ticket marketing platform Project Admission . In every investment, Proman wants the Scrum Sports & Entertainment Fund to meet some criteria. One is that the business has the potential to provide venture capital-like returns, meaning upwards of 30 times invested capital. The recent push by a number of funds into sports makes finding such businesses more difficult, since valuations were bid up coming into this year. That also means Scrum usually wants to find businesses that have the potential to expand beyond servicing sports, into larger business-to-business markets or appealing to the massive global consumer segment. “The pain point is sports is kind of a rounding error, in terms of the total addressable market (TAM), when compared to other high-growth industries,” said Proman. “What’s really challenging is that the valuations of some of the earliest stage companies are not reflective of that TAM. To counter that, we’ve found we need to home in on technologies and companies that can speak to teams, leagues, properties—your core customer base in sports and entertainment—but at the exact same time have diversity from a customer base and revenue.” To put it simply, “sports plus something else,” Proman explained. He has a point: While sports has tremendous mindshare, its direct revenues and valuations are small compared to other industries. For instance, sports’ richest franchise, the Dallas Cowboys, would just be a mid-cap stock at its $7.64 billion valuation . In most industries, businesses of that size have trouble getting Wall Street analyst coverage and in finding attention from the financial press. Still, those challenges aside, Proman is bullish about sports and entertainment startups. “The category has continued to expand and evolve, is what gives me a lot of confidence that this is a vertical that has those venture-style returns, we just have to find those,” he said. “When I look at sports, it’s less about what has occurred and it’s more about what we’re going to be defining as sports, even five or 10 years from now, that might now be on the peripheral.” While it’s hard to say what those businesses will be, Scrum Sports does have an idea about the types of firms it thinks will produce it. “The greatest kind of data point that you can often times use is customer attraction and retention,” Proman said. “If you can acquire customers and acquire revenue, and you cannot retain that revenue, there’s not much scale behind that business.” A second criteria the executive looks for is ability of the founder and management team to be able to pivot the business when the market shifts. “Working for Coca-Cola and the NBA early in my career afforded me some very established relationships. That to me is the number one attribute for founders—I want to understand their network,” Proman said. “I’m a big believer that the people who have the most connectivity are the ones who are going to find a way to win.” Still, VC money for sports tech businesses continues to grow, with billions of dollars from new funds waiting to be deployed. Proman believes Scrum Ventures’ unique background as a fund backed by some of the world’s largest conglomerates is a differentiator. “Japan is the third largest economy in the world. Every startup, even if they don’t have the bandwidth to be there today, is going to want to be there at some point as they mature,” Proman said. “Having that as a core competency and differentiator is what is also helping us establish a deeper presence within the sports and entertainment community.” Read More About: