Image credit: Nerd Street
Nerd Street Gamers, once a rising star in the esports industry, narrowly escaped collapse in 2023 after a series of financial setbacks and management missteps.
At the beginning of 2022, things weren’t perfect at Nerd Street, but there was promise and purpose ahead. The company had managed to survive the pandemic by running remote events and mining cryptocurrency on computers at its Localhost LAN centers that were shut down—mostly due to state and local restrictions on large gatherings in public spaces.
“When all of our stores were shut down, we just mined crypto on all of the PCs to generate some revenue, since the stores were not allowed to be open during Covid,” Nerd Street CEO and Co-Founder John Fazio told The Esports Advocate in an interview this week. “At that time it was very significant and was good timing because 2020 – 2021 was the highest hash rates for crypto that we ever saw, and they never returned there. We had some days where we did better mining crypto than we would’ve if the store was open.”
At the time, the company was also running local events online, though the revenue generated from that was less than in-person event attendance. Nevertheless, Nerd Street still had the favor of partners such as Riot Games and other stakeholders in esports, and financial commitments from some big names such as crypto exchange company FTX, budget retailer Five Below, and a handful of early, committed investors. But as spring lurched into summer, changes in investor sentiment and some unforeseen calamities were about to put the Nerd Street bus into a proverbial ditch.
But to fully understand the company’s challenges in mid-2022 and beyond, we need to rewind a little bit.
In October 2019, Nerd Street secured $12M in Series A funding, attracting investment from prominent players such as retailer Five Below, Comcast Spectacor, SeventySix Capital, Elevate Capital, and angel investor George Miller. In February 2021, Nerd Street announced an additional funding round of $11.5M led by San Francisco-based venture capital firm Founders Fund and championed by Brian Singerman—with previous investors from the Series A participating.
Five Below was an important part of that deal, as Nerd Street would work with the retailer to build out 10 to 15 3,000-square-foot, in-store Localhost esports facilities for select Five Below stores, launching in 2022. Nerd Street ultimately ended up building out seven of these 10 facilities for Five Below (in Oceanside, Fullerton, Bakersfield, California; Philadelphia; North Brunswick, New Jersey; Austin; and St. Louis).
On Jan. 19, 2021, Nerd Street announced that it had been selected by Riot Games to operate Challengers and Masters events during the inaugural 2021 Valorant Champions Tour (VCT). By the end of 2021, Riot was pretty pleased with the results in 2021, and on Jan. 17, 2022, Nerd Street announced that it had been selected by Riot as the “exclusive partner” for Stage 1 of the 2022 VCT and all of VCT Game Changers events in North America.
On Feb. 16, 2022, Nerd Street announced a multi-year sponsorship deal with cryptocurrency exchange FTX. As part of the agreement, FTX US would serve as presenting sponsor for the Nerd Street Championships during summer, “as well as Nerd Street’s national schedule of weekly community events at their nine owned-and-operated esports venues,” according to the announcement at the time. FTX paid out about $600K in the early part of 2022, with a commitment to pay an additional $600K later in the year. This is important to note because it was a multi-year, multi-million dollar commitment from the crypto exchange.
Fast-forward to early 2023. In February 2023, Nerd Street was the subject of strong public pressure over claims that it had not paid prize money to players and talent who worked at events as far back as August 2022. In March, Nerd Street CEO and Co-Founder John Fazio issued a statement attempting to explain what had happened:
At around the same time that Nerd Street’s issues with not paying people came to light, several sources told The Esports Advocate that Nerd Street had been talking to multiple companies about additional funding or a possible acquisition. In addition, multiple sources with intimate knowledge of Nerd Street’s inner workings told TEA at the time that the company owed mandatory matching 401K contributions to current and former employees.
Addressing the 401K match funds, which have not been made public until now, Fazio acknowledged that a lot of mistakes were made, but the situation has since been rectified. He categorized these as honest mistakes:
“We delayed the 401K company contributions match for almost five months at the worst of it, but we have since caught up with everyone (which includes additional payments to cover appreciation they would have had if the contribution was made on time),” Fazio said. “We accidentally delayed a small portion (less than 5% of our staff) of employee contributions due entirely to a technical error. The delay was about three months (I believe) and we fixed it immediately once we were notified of the error. This includes additional payment to cover appreciation they would have had if the contribution was made on time.”
The first thing that may have hobbled the company actually happened in 2020; according to sources, Nerd Street secured a $2M Paycheck Protection Program (PPP) loan as part of the federal government’s relief program for small businesses—created because many small companies in America were forced to lay off employees and shut down during the pandemic. But one of its big investors was not a fan. Seeing the backlash of some esports and gaming firms taking these PPP loans that they didn’t necessarily need, that investor, according to sources, told Nerd Street to return the loan—which it ultimately did in October 2020.
According to our sources, if Nerd Street had kept the loan, it would have had the resources needed to help it through the FTX collapse and the related impact to its VCT efforts.
Summer 2022 was when things really went awry for Nerd Street. At around that time, Five Below, one of its biggest early supporters, decided that it did not want to continue building out any more esports facilities in its stores—Nerd Street had built out seven locations, with plans to build out five more.
“Five Below had financed us to build seven venues [with the intent to eventually build 500 stores]… their CEO joined our annual meeting in 2019 and said ‘we won’t let you fail,’ and they pushed us to grow, grow, grow at all costs,” a source familiar with the situation told TEA. “They had us ‘pre-buy’ 5 stores before launching, so we had full stores in storage to expand into their venues as ready.”
In early 2023, Five Below appeared to be done with the Nerd Street experiment, telling the company that the “partnership was over” and that it had “shut down” all of the stores, despite some being profitable, according to Fazio, because “they said they had a more profitable use for the space.” At the beginning of this year, all five of the locations Nerd Street built were shut down, but Five Below did not fill those spaces with anything new.
While Nerd Street managed to get $600K from its sponsorship deal with FTX in early 2022, Fazio claims that many of its plans for that year were built on top of expecting to get additional funding. Instead, on Nov. 11, 2022, FTX announced that it had filed for bankruptcy protection, leaving a number of financial commitments to esports organizations and stakeholders unfulfilled.
“The day they announced their bankruptcy was the day we found out,” Fazio told us. “I had been DM’ing Sam [Bankman-Fried] up until that point. The deal was for $1.2M and we got paid $600K. After bankruptcy, we lost out on that second $600K which we had used as our budget for Nerd Street Champs, which put us in a major hole.”
Nerd Street was not the only esports organization to take a hit from FTX bankruptcy; the crypto exchange signed the biggest deal in esports history with TSM in 2021— a 10-year, $210M naming rights deal. FTX also signed a seven-year sponsorship deal with Riot Games in the summer of 2021 for the rights to display the crypto exchange’s branding during League of Legends Championship (LCS) matches in North America. In April 2022, Brazilian esports organization FURIA signed a one-year, $3.2M sponsorship deal with FTX.
Other deals and promises of funding came and went over the last several years.
In Q3 2021, Nerd Street was working on a substantial deal with Tiger Global to invest $50M to “rapidly expand” and build 25 more venues in the United States. But after the individual partner leading the deal had a disagreement with the firm, they quit, and TG decided against going through with the deal without that partner overseeing it.
At around the same time, an existing investor offered to fund the company for $10M according to Fazio, but the person who had championed the deal passed away suddenly. Following that unforeseen tragedy, the investor decided not to move forward without the person overseeing the investment.
In 2023, as the company worked through its financial troubles, Nerd Street worked with another unnamed investor to get some additional funding, according to Fazio, even going so far as providing a $6M term sheet, but they suddenly walked away from the deal without any real reasoning.
Given the perfect storm of lost funding, no additional sources of funding being secured, and some poor decisions on the part of management (that Fazio acknowledges), how did Nerd Street manage to stay in operation from 2023 until now? According to Fazio, the company completely changed its business model, worked out a deal with Riot to help pay back players and talent that were owed money from 2022, made a lot of personal sacrifices, and received strong support from some existing investors.
In its heyday that company had 120 employees, but today that workforce has been scaled down to about 20 workers—a mix of full-time employees and contractors.
When we first began digging into this story at the beginning of 2023, Fazio described a misunderstanding with Riot about its Valorant tournaments in 2022 (about money). At the time Riot told TEA in an email that Nerd Street had been “paid in full.” Today Fazio chalks all of that up to the incredible pressure he felt at the time. Ultimately, they hashed things out in 2023, and Riot provided Nerd Street with a loan that allowed them to pay players and talent the money they were owed. Fazio says that the loan from Riot has been paid in full.
“I wouldn’t put any blame on Riot for our decline,” Fazio told TEA. “I had a lot of frustrations at the time and the partnership certainly didn’t go the way I hoped, but I don’t think there was any malice and I continue to hold Riot in high regard, especially so many of the amazing people that work there. We simply overextended ourselves by subsidizing VCT with what turned out to be unreliable funding sources.
“After it was clear that we were doing our best to pay everyone back by making small payments each month, Riot agreed to repay all players and talent at once and let us repay them in monthly installments instead. We finished repayment to Riot in full last month and we are grateful for their support.”
Fazio told us that the situation around not paying players and talent was one of the lowest points of his career:
“I spent every day playing triage where I wouldn’t pay someone for a tournament so that I could pay an employee that would keep the lights on. I hope that in hindsight, people will agree that was the right choice, especially the ones we made whole, but when it was happening people hated us for it. I tried my best to explain that if we shut down we’d never be able to pay anyone, but people just wanted our heads. I was committed to getting everyone repaid, so staying open and figuring it out was the only option in my head.”
Fazio acknowledged that he made many mistakes as the company navigated an environment where VC funds had cooled on the promise of the esports industry as a viable investment.
Pinpointing the exact moment when things really began going off the rails, Fazio said that TG pulling its offer “was the start of the problems, because that was when the pace of our fundraising slowed significantly drying up our runway.“ The FTX bankruptcy, coupled with Five Below abandoning its deal, was a real gut punch in November because this was right around the time when payments on Valorant tournaments were coming due.
“That put us in a huge hole which meant we didn’t have the funding to honor our subsidization of VCT on time, so payments started going out late,” he said. “That caused Riot to pull their contract from us. That was at the same time Five Below canceled their partnership and stopped funding us. So within three months most of our cash flow had dried up between losing FTX and the VCT contract, then combined with no investment funding and an already short runway, we were on fumes almost immediately. That’s when we began layoffs and restructuring.”
Looking back on the situation today, Fazio regrets building out projects based on funding commitments instead of the cash the company had on hand.
“The single biggest mistake I made was basing our budget off of expected funding sources from our investors while retaining a relatively short runway instead of managing runway off of existing cash only. We kept our runway under six months for almost the entire company life because we were expanding and raising capital so swiftly and frequently dipped into less than a month of runway. If there was anything I’d change if I could do it over again, I would’ve retained a longer runway and lower burn by only working with what we had in the bank, even in the face of the large commitments we had.”
With FTX out of the picture and all of the investor funding dried up, Fazio said that the company had an “immediate hole of ~$1M for VCT” and Nerd Street Champions, owed mostly to prize winners, talent, and vendors. But that the $1M hole “quickly ballooned” to over $3M because, he claims, the company took too long to “stop the bleeding” and cut back on ongoing expenses.
“It took us the next two years to repay that $3M from business operations,” he said, adding that he personally funded over $600K into the business by “liquidating assets, borrowing from my other companies, and taking on bank debt just to hold us afloat—I risked everything I had just to keep us alive.”
Over the last year, TEA has spoken to several former employees who said that Fazio’s leadership skills and his executive team mismanaged many aspects of the company. The litany of complaints beyond the 401K debacle included C-Suite executives who were out of their depth, management siloing itself and ignoring advice and counsel from other departments, replacing seasoned staff following layoffs with junior staff who were out of the depth and making serious mistakes, and generally making poor and uninformed decisions that set the company back further following the evaporation of funding access.
“I’m sure I failed to listen to people who would say ‘they saw this coming,’ Fazio told us. “Hindsight is always 20/20 though, so I would take those accounts with a grain of salt. Even the biggest critics had been caught up in the excitement and momentum of our growth. Of course, I would do it differently and I would do better if I could do it again with the knowledge I have now.
“I think in esports more generally we have a tendency to reject corporate structures and it’s easy for even the smallest bureaucracy to make the people doing the work feel unheard, so I’m sure it would feel as if there was a disconnect to anyone who was involved. However, I don’t think that was the cause of our failure. I am not someone to externalize failure, so in my head, the cause was simply my decisions to take the risks I believed we should take, that didn’t pan out as I hoped. That’s my mistake and no one else’s.”
On replacing senior staff with less experienced employees following layoffs:
“Anytime you’re taking a company from 130 employees to 20 employees, it’s going to be the case that replacement talent sometimes lacks experience, so of course that did happen. There are also some incredibly positive outcomes that came from the junior staff that stepped up to plate when they were needed most. However, I don’t think that our layoffs or replacement talent contributed to our decline. Our recent turnaround, progress, and acceleration from the team that is still here still grinding should be testament to that.”
At the start of Nerd Street’s journey the “plan from day one” was to raise $150M in total to build 50 venues across the United States. Fazio claims that all of those early investors were on board with that idea from the beginning. Ultimately, the company raised around $35M and ended up building around 13 venues, but when Five Below ultimately backed out, that plan went out the window. Of course, this plan always had a problematic burn rate, according to Fazio:
“The liquidity problem was that we bought too much hardware and didn’t have the cash we needed for long-term operations. But the real problem was always our burn. We kept increasing our burn (operational expenses) with our growth and that was the fundamental issue. Had we kept our burn lower from the get-go, we would have been profitable from our revenue growth. And then, even with the liquidity issues, the investors that walked away, the FTX issues, etc, we could have avoided digging such a big hole. So I just want to be clear that was our mistake, and we learned that hard lesson and have returned to a bootstrap mentality with a lean team that will stay that way.”
Finally, Fazio acknowledges that “without any doubt, we would have shut down within months of the issues in 2022 had we not made drastic changes.”
Nerd Street would not have survived as long as it has if it weren’t for local angel investors like George Miller and Charles Beaver and Founders Fund, who continued to provide the company with bridge funding over the years, even in its darkest hours.
“From 2021 to 2024 we survived off bridge funding from Founders Fund, some local angel investors, myself [loaning the company money], and debt. Just enough to keep the lights on,” Fazio added.
Nerd Street has changed its focus, the scope of its ambitions, and made the company a lot leaner. Today the company has 20 people and three venues, versus 120+ employees and 11 locations. In April 2023, Nerd Street and Glassboro, New Jersey-based Rowan University officially launched Localhost Rowan University, a gaming and esports venue located on the college campus.
Nerd Street plans to open more venues at universities throughout the United States in the future, but will do so slowly and methodically:
“Simply put, we shrunk our costs as small as we could, while retaining the same vision, goals, and trajectory. However, the biggest change for the positive for us has been finding product-market fit with our university gaming venue offering. Instead of taking on all the risks ourselves to build new venues as we have in the past, we now do it in partnership with Universities where we cover the build costs while the school pays to use the facility for their esports, gaming, and technology efforts on campus. We launched Rowan University in April 2023, which has been a major pilot success for us. We’re excited to announce more schools in the pipeline soon.”
Nerd Street has also been working with tournament organizer BLAST on North American Rainbow Six Siege Esports:
“We’ve been running Ubisoft Rainbow Six Siege NAL for the entire year, working for BLAST,” Fazio said. “We ran Season 1 with no hiccups, and everyone paid on time. We are hoping to expand our partnership with BLAST, but I think it’s important to note that it is our first major publisher work since VCT and demonstrates our viability.”
Finally, Fazio says that, now that the company has turned around and caught up on all of its bills, it has managed to attract some funding interest, though negotiations on that are in process and far from finalized. That aside, he believes the company will be profitable by the end of this year.
“We are now laser-focused on partnering with universities to bring our venue experiences to their campus,” Fazio said. “That is a far leaner and more sustainable model that will support our near-term profitability.”
While Nerd Street seems to be about to turn the page on two years of trials and tribulations, many have quietly wondered why its long-time supporters have stuck around for so long. Brian Singerman from Founders Fund, one of the company’s longest investment partners, summed his support up rather succinctly:
“99.99% of founders would have given up. John didn’t.”
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