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When Disruptive Startups Drop the Ball

When Disruptive Startups Drop the Ball

I’m a huge golf fan. I watch all the major tournaments. I watch several Professional Golfers’ Association (PGA) events a year. One of my dreams is to watch the Masters in person. I love playing too. In fact, I love playing so much that I recently golfed on a broken ankle.

That’s why I took notice when the LIV Golf Invitational Series launched a few weeks ago. The PGA Tour is the traditional home to most of the top golfers in the world. But LIV — backed by Saudi Arabia’s Public Investment Fund — is trying to change that by offering a condensed schedule, incredibly large amounts of guaranteed money and large prize pools. In the PGA, players typically compete just for prize money.

LIV is trying to disrupt the PGA. If you include Brooks Koepka, LIV has signed up eight of the 50 best players in the world. I’m not going to get into the politics or ethics of whether golfers should join a tour backed by Saudi Arabia. But as startup investors, we should definitely pay attention to this.

Startup investors are in the disruption business. Companies that disrupt the status quo often make the best startup investments. And the bigger the disruption, the more likely you are to see bigger returns — and more risk.

Almost no sector is immune to disruption. The internet destroyed travel agents. Uber decimated the taxi industry. Apple changed the economics of the music industry and created a digital music revolution.

Pro Sports Leagues Rarely Lose

Professional sports, however, have proven to be surprisingly difficult to disrupt.

The National League of Professional Baseball Clubs (NL) was formed in 1876. The American League (AL) was formed in 1901 to compete against it. In 1903, the NL played the AL in the first World Series, and Major League Baseball (MLB) was formed. The only viable competitor the MLB has faced since 1903 were the Negro Leagues. But once MLB integrated, the Negro Leagues folded and that competition went away.

The National Football League (NFL), founded in 1920, has stared down two serious challengers — the American Football League (AFL) and the United States Football League (USFL). (Note: The XFL does not fall in the serious category.) The AFL launched in 1960. The NFL and AFL announced they were merging in 1966 — but continued on as separate entities. The first Super Bowl, which featured the winners of the NFL (Green Bay) and AFL (Kansas City), took place in 1967. The two leagues officially merged in 1970. The first incarnation of the USFL launched in 1983, following a strike-shortened NFL season. The USFL attracted top talent, including Jim Kelly, Steve Young and Herschel Walker. But despite the competitive product on the field, the USFL lost more than $160 million and folded after three seasons.

The National Basketball Association (NBA), which started in 1946, has had only one serious competitor — the American Basketball Association (ABA). The two leagues “merged” in 1976 when the NBA accepted four of the six teams left in the new league. The National Hockey League (NHL), founded in 1917, “merged” with the World Hockey Association (WHA) in 1979 when four WHA owners were granted expansion franchises. The WHA had been in business for just seven seasons.

Why Are Sports Leagues So Hard to Disrupt?

Professional sports leagues hold a special place in our society. They’re not just businesses. They’re institutions. They’re woven into the fabric of our lives in ways most companies simply are not. In many places, sports teams are one of the few institutions capable of uniting the entire community. That makes disrupting a sports league the equivalent of disrupting society. 

Disrupting society is expensive work. Being small and nimble — the usual advantages a startup has — doesn’t help as much in professional sports. The ABA and USFL were both able to pay big money to attract top-flight talent — the type of players fans would pay to see. But they had to spend money to get that talent. And neither league had the cash reserves to last more than a few years.

Leagues that have relied on “lesser” talent, like the XFL, have also folded quickly. They lacked stars to draw immediate interest, which means they needed a few years to grasp the imagination of fans. But they didn’t have enough money to last a few years. So they never took off.  

No investor or sports franchise owner is going to want to lose hundreds of millions of dollars on a product that will take years to establish itself. At least in startup investing, founders typically need only a few million dollars to establish a proof of concept or gain some traction.

That’s what makes LIV interesting as a disruption story. Competing against an established professional sports league requires a money cannon. And LIV’s chief backer, Saudi Arabia’s Public Investment Fund, has both the money and the patience to keep LIV in business.

The PGA is taking LIV’s threat to its supremacy seriously. It’s banning golfers that participate in LIV events from playing in PGA tournaments. And it’s considering changing the PGA schedule and increasing prize pools to fend off LIV’s challenge.

How will this play out? Nobody knows. LIV is facing an uphill battle. The only thing we know for sure is that most attempts to challenge existing professional sports leagues fail. 

And for investors, it’s a good reminder that not every disruptive startup or idea will succeed. What a startup is disrupting is as important as the disruption itself.

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