In part one of this series, I looked at the Brilliant Basics leaders in sport can use to weather the storm in 2020. Delivering well on these basics will provide a solid platform to ride out the next six to 12 months, but very likely won’t be sufficient to grow at pace when the sports market returns looking, in all likelihood, very different from the one we know well.
As Rebecca Homkes writes: ‘Senior leaders are now rightly concerned about what the crisis and subsequent downturn means for them and their business. While the concern is understood, entrepreneurial leaders must remember that downturns can be a great time to grow. The question is: how do you outlast the immediate crisis, reset, and prepare for high growth?’
It is not easy to think about 2021 and beyond, but the best businesses are bravely pushing themselves to get their heads into that place, with a proactive approach to move forward. In part two, I look at five sequential steps leaders can take to prepare their business for success. This is necessarily a lengthy article in a challenging time – but I hope the stories within it provide some inspiration.
1. Look beyond the bubble for inspiration
This is the most fundamental shock our young industry has seen, and one in which looking outside the sports bubble for inspiration from other relevant professions is fundamental.
Nick Kokonas, chief executive of the Alinea Group, a high-end restaurant business in North America, explained in an excellent interview on The Tim Ferriss Show how he retooled his entire flagship restaurant in days to offer high-end takeaway – and in doing so, discovered a way of offering mass food without undermining the proposition of his three Michelin-starred, Chicago-based establishment. Kokonas’ team also built out their restaurant booking platform to handle takeaway and offered it to other restaurants, generating ancillary revenue.
At an industry level, global leaders of the fashion and retail industry came together to rethink how fashion might work in the new world under the headline #rewiringfashion. They advocated, among other things, for resetting the fashion calendar, including the integration of men’s and women's fashion weeks; re-imagining fashion shows to be better targeted to engage consumers directly and breaking ‘fashions’ addiction to discounting’ within a coherent plan to ‘preserve the beauty, creativity and craft of our industry’.
Just like Kokonas' approach, this isn’t a case of tinkering with business models - it’s a proposal from right across the supply chain to fundamentally rework the way in which the industry preserves what makes it special, but also ensure it adds up financially.
Limelight Sports helped create Nike's London's Fastest Night campaign
2. Understand where you fit in 2022 - and build a plan to that
In all likelihood, it will not be until 2022 that most businesses will be able to move from the three live scenario plans of the Brilliant Basics into a more ‘traditional’ three-year strategy planning type routine.
Sport will be landing back into a very different environment. Kokanos explained the mindset this requires to Tim Ferriss: “We are at the beginning of the beginning of a weird thing that’s happening. Come September, when we are opening, demand is down 70 or 80 per cent and my revenue has plummeted by 75 or 80 per cent…that’s what I spent yesterday modelling out.
“At some point you say, ‘it’s not really worth being open’. So at that point I go, well what would we need to do to make it worth being open? What would we need to do to save 95 per cent of the jobs and still make money as a solid business, while we rebuild it over the next two or three years? What do we do experience wise? What will people want emotionally?’
Alinea Group’s pivot to a takeaway model has bought sufficient time to think properly about how the business will be bold in ‘the new normal’. Kokanos' business managed the day-to-day restructuring very well, which has afforded him time to consider what the future looks like. Despite having a proposition which is today helping him pay the bills, he doesn’t for a minute think this answers the long-term challenge for his high-end business.
For sports industry leaders, the challenge is the same. They need to use the Basics to survive 2020, while at the same time trying to understand where their proposition fits into 2022. Next year, in the best post-pandemic case, is a bridging year to move from one to the other.
Alinea Group's Nick Kokonas repositioned his high-end restaurant chain as a takeaway business in response to the Covid-19 crisis
One sports organisation that has been going through this process is UK-based Limelight Sports, a sports marketing agency specialising in participation experiences. “We have spent the past 18 months repositioning Limelight Sports,” explains chief executive Craig Dews. “Not just our brand identity, but our vision, mission, approach, purpose and beliefs. It is a journey that has helped us to shift our identity and recognise ourselves as a marketing agency that can unlock the power of participation sport for our partners; a journey that got as far as an internal unveiling of the agency’s new brand identity and positioning. And then Covid applied the handbrake.”
He continues: “As with the rest of the world, our priorities shifted as we paused to guide our business, our clients and campaigns through uncertainty. Our immediate reaction was that the repositioning work fell into a ‘non-essential’ bracket as our instinct for self-preservation kicked in. However, the phone kept ringing, new brands have continued to get in touch, our existing partners have remained optimistic, campaigns started to rebuild for a digital audience and, significantly, the nation got active.
“These key ingredients led to an overwhelming sense of confidence; that we won’t just survive this period, but come back stronger than ever.
“The other key factor that helped us restart the relaunch was that the time to plan on behalf of our clients is now. If brands start planning when lockdown is lifted, they’ll be late to the party. By relaunching now, we want to use our confidence to help lift the sector as a whole.
“So, the handbrake has been released and these strange times have helped us to sharpen our plan, challenge ourselves, test scenarios and get ready for an exciting future in which consumers’ increased appetite for active and healthy lifestyles and brands’ evolving desire to add meaning and purpose will come together to reach new heights.”
In reality, if your revised three-year plan looks very similar to your last one, then you haven’t been paying enough attention during your Zoom calls.
While your Brilliant Basics scenarios will need to have been finance-led in order to weather the storm, the long-term plan will need to be compelling enough to fans, stakeholders and employees alike in a world where the expectations of each will have changed forever.
3. Build a balance sheet against your new plan (not the other way around)
One fundamental change to the planning process post Covid will be the need for the sports industry to continue to think beyond P&L and into the balance sheet. While this starts with a month-to-month struggle for cashflow at the Basics stage, longer term balance sheet reengineering is going to be fundamental for all senior leaders, even those with significant tranches of public sector subsidy.
Sports are taking different approaches to planning their growth trajectory, but consistent across all of them is a need for more financial agility to maximise future opportunities. For some that might entail a more flexible and creative financial arrangement with their global governing bodies, but for others the capital markets are continuing their pre Covid trend of being an increasingly attractive route, intertwined with the growth trajectories of sports businesses of all sizes.
Principally but slightly simplistically, this involves a choice between debt and equity investment. Debt financing involves borrowing a fixed sum from a lender, which is then paid back with interest. Equity financing is the sale of a percentage of the business to an investor in exchange for capital.
City Football Group’s (CFG) more recent movements offer an insight into this new normal – simultaneously playing an active role as both investor and investee.
In early 2019, CFG became an anchor investor in Sapphire Sport, a new US$115 million venture capital fund launched by Sapphire Ventures. Later in the year, the group sold a ten per cent share to technology investment firm Silver Lake. The deal valued the organisation at US$4.8 billion, with Silver Lake joining China Media Capital as CFG part-owners. Then in May 2020, CFG’s asset base increased further with their acquisition of Belgian team Lommel SK, relieving them of their reported US$2.1 million debt in the process.
City Football Group are both simultaneously playing an active role as both investor and investee.
This is the agile world of equity and debt management trading that is now part and parcel of modern sport – as it is of all business. Debt remains a sensible route when primary revenue streams are secure. Assuming things go well, they retain full ownership and control of a business growing healthily, however if things go awry that exposes leaders to the risk of funds being ‘called in’ - and worse if that cannot be done.
With the challenges of forecasting the next three years in sport post Covid, the cost of borrowing money for investment or to settle down the books has already increased markedly. In some cases, proposed interest rates on lending even to ‘surefire bets’ have almost doubled.
Equity finance remains the other primary route, and benefactors are in some instances more prepared to take a longer term view of return. There are currently plenty of funds already raised, and private equity in particular has a reputation for being well attuned to finding value in challenging times. However, not all money is good money, and not all ways of ‘finding value’ will suit sports businesses. There are several different investment hypothesis for private capital, and it is fundamental to understand the needs of your business in detail in order to plot the right path.
Tim Thomas is a partner at Liberty Corporate Finance who works with management teams to help them identify and partner with the right private equity investor. Liberty has recently been very active in the sports sector, including advising the Two Circles management team on their recent investment from Bruin Sports Capital.
“It’s so important that management teams take the time to evaluate their potential investors, as each will have their own style and approach to working with the teams that they back,” advises Thomas. “Bringing a new investor on board is a critical moment for any business and with so much competition amongst funds looking to back strong businesses, management teams should drill down into what each one will really be like to work with.
“As ever, preparation is key and management should not underestimate the importance of having their long-term business plan prepared before any detailed engagement with potential investors. Investors will want to see that the key value drivers have all been properly thought through and that management has a balanced perspective on the upside potential and downside risks.”
He continues: “Once a shortlist of potential partners is identified, due diligence should very much be a two-way process. We always encourage teams we are advising to speak to managers in the firms’ portfolios to hear how the journey has been for them. Have they found their investor supportive? How involved are they? How have they reacted when issues have arisen? Have they been forthcoming with follow on capital and open-minded to new opportunities?
“Management teams should also not be shy in wanting to understand what the equity incentive arrangements will be for them. Unless it’s given due priority, this can often be deferred as an agenda item until late in the process. It’s important for management teams to understand what the commercial terms will be for them with each potential investor. The team and their adviser should make sure that they have a clear picture of this at the key decision-making stages in the transaction process.
“For ambitious management teams who believe in the long-term growth potential of their business, the right private equity investor can be incredibly valuable, providing access to capital, sector experience and genuine support on financing, strategy, leadership, M&A and ultimately exit. We have had the privilege of working with many teams who’ve enjoyed all the benefits of independence whilst also reaping the rewards of having an experienced and supportive investor alongside them all the way.”
Sometimes, of course, creativity can go a long way to enable growth. It is entirely possible that, in future, crowdsourcing and fractional ownership may also increase in popularity.
The right private equity investor can be incredibly valuable, providing access to capital, sector experience and genuine support.
Fourth-tier German soccer club Lokomotiv Leipzig’s success in selling 100,000 tickets for an ‘invisible match’ generated four times the revenue of a typical home game, a move which will not have gone unnoticed. While this has limited shelf life, there is certainly validity in fanbases being called to play a more active ownership role in a club’s future – as once even Chelsea did in challenged times when selling their ground to the fans to avert an unwanted move from Stamford Bridge.
There remain 21,000 ‘Chelsea Pitch Owners’ who hold their own part in the freehold of Stamford Bridge and therefore retain a meaningful voice in the future of the club. In fact, my Dad and I happen to be two of them. While this approach can have downfalls – some of the top Bundesliga clubs, for example, are angling to move away from restrictions on private investment – it’s certainly worthy of consideration as an approach to sure up the balance sheet.
Ultimately, brave businesses are likely to take the view that proactivity is the best form of defence. The key is to identify options that can bring the right blend of capital and credibility to support the future, without losing an undue level of control.
4. Explicitly move the goalposts - and don’t forget to say why
Armed with a quality plan with buy-in for 2022 and beyond, as well as the balance sheet to deliver on it, the hard graft is not over. Brave businesses do not hide their strategy, they publicly and explicitly run with it.
In a post Covid world, being open about the rationale for change is a necessity. In the financial recession to come, we are likely to see far more receptiveness to sporting organisations who are prepared to level with their fans as to the rationale for change.
Where external financiers need to tread carefully in this regard is not to over-leverage their investments for short term gain. This is also true of athletes holding out for significant pay packages. Post Covid, fans will be more forgiving of their teams needing to balance their books for survival but are likely to turn very sharply indeed if survival predominantly entails servicing a very large debt burden.
The National Lacrosse League planned for its return based on fan feedback
Getting it right can drive impetus and goodwill. National Lacrosse League (NLL) commissioner Nick Sakiewicz and his league have been particularly effective in their ability to balance short-term delivery to partners with a longer term, growth planning process.
“We realise the only way to reach our audiences is through digital channels, so we have spent time understanding how to create human connection online,” explains Sakiewicz. “We have managed to create a template for success and engagement that will be hugely helpful as we build into the future.”
The NLL’s fan outreach has gone far beyond engagement towards genuine inclusion in key decision-making. For example, it sent surveys to fans to ascertain when they might be comfortable to return to live sport, using that to drive some of their scenario planning as a league.
This level of insight dovetails very well into the future growth plans for the NLL. “We have been able to spend a good amount of this time talking to organisations about where and when we will expand in the short term,” says Sakiewicz. “We are working hard to lead the recovery.”
5. Stay in permanent BETA in the way you create value
No matter how good the plan, it is going to be wrong in parts. The final trait of a brave business is to be prepared to stay agile amidst difficult conditions. This can be tiring, but is a necessity in a world that can change daily.
Covid certainly changed the pace and intensity with which that agility is required. The ePremier League had been running for two years already, and was growing well, even before the virus hit. However, the Premier League has doubled down on this platform and driven engagement through it while giving broadcasters - primarily Sky in the UK - and sponsors such as EA Sports original content.
The challenge, of course, is to be able to see what the future holds so that new concepts are as ready for amplification as the ePremier League was. Innovation requires real bravery in the toughest of times.
One organisation which is taking this value creation to the extreme is Williams Racing. Commercial and marketing director Tim Hunt, who joined the team in January, is pushing this to the limits. “We don’t actually sell sponsorship any more – instead, we build accelerated growth plans on behalf of our clients,” he says. “We are building partnerships to share risk and be accountable to their bottom line.’’
Rather than obsessing about media measurement and on-car logos, this approach involves a detailed understanding of the profit levers of partners. It also means that potential partnerships can be as much about enabling efficiency for clients as driving revenue growth.
Formula One's Williams Racing have sought to deliver value to their partners by sharing business intelligence
“We understand how to build a Formula One race car from scratch in six months, whereas commercial car production can take six years. So for example, working with Unilever we were able to help them reduce the environmental impact and cost of their washing powder production through using technology derived from Formula One.
“That’s far more compelling to a CEO than logo exposure, and reframes the financials of the conversation entirely. But it’s not just technical or manufacturing aspects we are focusing on. This principle works across all sectors.”
The challenge in delivery of this model is to understand where in a client’s business the opportunities might lie, which is why Hunt is retooling his own team to a focus on business intelligence and growth support – more akin to the Foresight Technology Fund Williams is partnered with than a traditional rights holder sponsorship team.
As he freely admits: “This isn’t revolutionary thinking for the industry in and of itself. However, we have the track record of being agile enough in our own model and those of our clients to deliver hard return. I spend far more time explaining to CEOs and CFOs how a spend of UK£10 million will do more to the profit levers of their business than spending the same on Facebook or other R&D investments than I do putting our case versus a football, rugby or golf sponsorship. That’s the new normal for sport.’’
This touches on the need for sports to rethink their competitive set. The challenge is more to grow the size of the cake than to worry about share, and that can even mean competitors become collaborators.
As Chris Robb, chief executive and founder of Mass Participation World, underlines, the mass participation industry is in many ways going back to the future. “When the industry was in its infancy, we used to market our events by flyering at the finish lines of other ones,” he says. “All the events in a city used to do it, it worked really well. The first ever informal database sharing, I suppose.
“In the last decade, as our sector has professionalised, we’ve all got more competitive with each other. However in these last four months, there’s far more collaboration evident already. We’re starting to see the World Marathon Majors, Ironman, Spartan, all the big guns collaborate rather than purely compete.”
The ePremier League has enabled English soccer's top flight to generate engagement and original content
One sports business in the UK which has taken bravery, customer focus and a rethink of its competitive set to the extreme has been London-based creative agency Dark Horses, whose entry into the sports nutrition space offers a creative and courageous example of being in permanent BETA in the way that value is created.
“I wanted something that everyone in the agency could feel really part of, something that would feel like ours and give us all the experience of starting a brand from scratch,” explains Simon Dent, the company’s chief executive. “At the time, I'd just read Raising the Bar by Gary Erickson, the founder of Clif Bar. Gary's story and outlook on life is really inspiring, so from there the ambition to create a sports nutrition product started.
“Given we're an agency full of fitness and sport enthusiasts, it wasn't long before we found a solid gap in the market. We were all guilty of snacking in the afternoon on crisps, popcorn or biscuits, none of which sets you up for exercise after work particularly well. So we decided to make a sports nutrition product designed to fuel your post-work workout, aimed at the casual office athlete.
“It's been fascinating to have a client within the agency walls. It requires totally different processes and commitment from the team, and has opened our eyes to a lot of challenges that clients face every day. Now we have a bar ready to launch, a large proportion of the agency are able to get involved and bring different skill sets to the table.”
Like with any startup, there have been “some eye-watering moments”, continues Dent, not least since the agency’s shift has put it back into a totally different world of permanent BETA.
“We made a commitment to launch Home Run a few weeks after the lockdown commenced in the UK,” he says. “We knew more than ever that a product that would help facilitate exercise would be more relevant than ever. It also validated our earlier decision to donate a percentage from each bar sold to CALM [Campaign Against Living Miserably] as we knew that mental health charities would need supporting.
“We're now creating a good amount of quality content to start building the brand, meaning we're ready for when London goes back to work. We've already learnt so much jumping over product manufacturing and retail distribution hurdles, making connections with other startups and building a nascent community around the brand.
“To be honest it's already been a success as it’s galvanised the agency and given us all a shared interest. It’s put junior members of the agency at the heart of launching a brand and given us all some understanding of what our clients go through on a daily basis. We're hoping to turn a profit in the first 12 months, but ultimately we're in this to build a brand from nothing so our ambitions are more long-term.”
And so, July 2020. Our industry has changed for good, and there’s just no getting away from the fact that the next few months and years won’t be easy. ‘Organisations that thrive will not rebuild their old business,’ writes Homkes. ‘Instead they’ll use a phase-back process to challenge every single decision the old business model was based on and reexamine whether or not the underlying assumption of that decision is still true.’
BT Sport’s Jamie Hindhaugh emphasised that on the SportsPro Podcast, saying: “What I love about all of this is it starts to check those sensibilities and givens that have been in place just because they are. We’re doing something different here and doing it for the right reasons.”
Therein lies the challenge for sport’s senior leaders in the months and years that follow. They need to be agile like never before, and it can feel a little contradictory at times.
Accountability is lonely and balance sheets are unique - and yet success will come from collaboration.
There’s an immediate and real pressure to stick to the Basics - and yet simultaneously remodel the business for 2022 and beyond.
Moving forward will require focus, a smart financial plan and tough choices - and yet any plan needs to retain enough flex to enable permanent BETA.
As Homkes explains: ‘The principles of growth strategy are the same, but the discipline of leading a growth business has adjusted, and it is now a harder game to play. But, for those of you who pride yourselves on being an entrepreneur, it’s your time.’
Being brave is hugely challenging, but it’s also the only viable option. Hopefully this series will provide some meaningful support along the way.
Matt Rogan has spent his career creating and scaling businesses in the sports and entertainment arena. He is a co-founder of Two Circles having previously led the business as chief executive and then executive chairman, a non-executive director of the English Institute of Sport, and joined the SportsPro team as a senior contributor in June. He is currently also writing his second book. www.mattrogansport.com.