Faze Clan’s Rapid Decline from Billion Dollar Valuation to Near-Zero Worth

FaZe Holdings Inc. celebrated its three-month anniversary on the Nasdaq by organizing an exclusive event at a San Diego nightclub. The company hired renowned rapper Travis Scott to endorse its roster of video-game stars and YouTube personalities.

Social media influencers mingled with the players in expensive streetwear. Many looked bored as they filmed the event on their online channels. After midnight, Scott appeared for a 15-minute performance, his voice barely audible over the pounding bass. The $1.7 million party got the name of the company and sponsor in hundreds of Google search results, YouTube videos and Instagram stories. Lee Trink, FaZe’s CEO at the time, hailed the event as a great success.

“We achieved everything we could have hoped for, including making money,” he said in an interview after the party.

But as losses mounted and shares tumbled, the company fired Trink, 55, on Sept. 9 and replaced him on an interim basis with chief financial officer Christoph Pachler. Interviews with seven former employees describe a poorly run organization characterized by poor spending decisions, excessive pay and expansion into unprofitable categories such as esports. The company, which employed 112 people at the end of the year, has been embroiled in controversies surrounding online staff and announced two layoffs this year.

Los Angeles-based FaZe reported a $48.7 million operating loss last year. After initially predicting it would debut on the stock market at a $1 billion valuation, its shares have fallen to 18 cents from more than $20, reflecting skepticism that the social media activism of young, mostly male gamers could ever be a sustainable business – even if they have millions of fans. Last month in New York, followers of one influencer, not a member of the FaZe clan, started a riot in Union Square for handing out game consoles.

In the meantime, management is evaluating its options, including a possible sale of the company, Trink said before his departure.

“FaZe can definitely handle it,” he said in an interview in June. “FaZe is no stranger to controversy. That’s part of why we’re so compelling.”

Trink could not be reached for comment after the dismissal.

The FaZe Clan, as the group of gamers called themselves, was groundbreaking more than a decade ago when its teenage founders gained millions of followers on their YouTube channel watching them play Call of Duty, Activision Blizzard Inc’s first-person shooter. . The creators of FaZe created a pioneering “trick shot” video where they take down opponents after jumping off a building or spinning around.

As their popularity grew, the founders brought in more talent and posted videos of other interests like skateboarding and pranks. The strategy was simple: millions of people watch the players they admire, and advertisers and sponsors follow suit. The company now has a list of 127 internet personalities who post on sites including Instagram and Twitch. But turning all those eyeballs into a profitable business has proven daunting — and continues to elude the company despite its impressive 512 million social media followers.

The so-called creator economy was in its infancy in 2014, when energy drink G Fuel helped acquire FaZe’s first “content house” in Plainview, New York. G Fuel paid the FaZe team $1,500 a month to feature their drink in videos and paid $6,000 in rent for the property where the players actually lived and uploaded clips. G Fuel CEO Clifford Morgan came by every now and then to clean the place and haul empty pizza boxes.

Two years later, FaZe moved to Los Angeles, where YouTubers flocked to seek Hollywood glamour. In addition to playing Call of Duty, members posted videos about freedom (27 million views), tattoos (9 million views) and getting a woman pregnant (6.7 million views).

In 2017, the company elected Greg Selkoe as “PreZident”. Selkoe, founder of online clothing store Karmaloop, called FaZe “a new iteration of youth culture, just like skateboarding and hip hop.” FaZe had “almost no income” when he joined, Selkoe said in an interview. The company confirmed the matter.

Trink joined FaZe as CEO the following year. A former child actor and Brooklyn prosecutor, he had been advising the company since 2016 and also served as an executive at Virgin Records and EMI Capitol Music. Trink loved the stage, but had no experience in gaming, esports or the creative economy.

Over time, they developed a more centralized organization that generated revenue in several ways. FaZe sold sponsorships to brands whose products were featured in videos made by FaZe people. The company also made money from ads that appeared alongside YouTube videos. FaZe then jumped into another, more tumultuous wave: esports.

Epic Games’ first-person shooter Fortnite, released in 2017, brought FaZe into the mainstream. The company’s Call of Duty pros easily parlayed their skills into the cartoony kids’ shooter, which had 78.3 million monthly players by the end of 2018. The New York Times ran a feature on FaZe, followed later by a Sports Illustrated cover.

As the idea of the public watching professional teams play in video game tournaments took off, FaZe began to invest more in its esports lineup, which has since grown to 54 players on 14 teams. However, the esports industry has experienced a large decline since 2018. Investors and sponsors have hindered the idea that competitive gaming could compete with traditional sports. Most of the FaZe teams have been losing, according to a video published earlier this year by company founder Nordan “FaZe Rain” Shat. FaZe would not break down specific esports expenses, but said its revenue has continued to rise and that its esports presence is helping to sell broader sponsorship packages.

Administrative disputes arose. Selkoe and other FaZe executives left in 2020 to found XSET, a Boston-based esports company.

“We didn’t leave on good terms,” Selkoe said, adding that he wasn’t the “biggest fan” of Trink’s management style. Selkoe challenged FaZe’s almost all-male player roster and has made diversity a central part of its new company’s image. FaZe paid Selkoe $3.2 million to settle a lawsuit over his departure, according to a public filing.

Trink also focused on making FaZe a lifestyle brand, while also emerging as a thought leader in the creative economy, comparing FaZe’s trajectory to that of Apple Inc. under Steve Jobs. FaZe’s collaboration with Japanese artist Takashi Murakami in 2020 brought in over $1.2 million in less than four hours from the sale of limited edition jerseys and mouse pads.

In addition to video games, the company signed sponsorship deals with blue-chip companies including General Mills Inc. and McDonald’s Corp. Revenue rose 42% to $52.8 million in 2021 and peaked at $70 million last year.

But while sales increased, so did expenses. FaZe leased a number of luxury properties that served as homes and filming locations for their media stars. Costs, including rent, utilities and security, were up to $60,000 a month. Among the properties was a lakefront mansion in suburban Los Angeles, now worth $12 million, where FaZe members said singer Justin Bieber once lived. Trink took FaZe’s influencers on a tour of Los Angeles steakhouses and wore a diamond encrusted necklace with FaZe’s F logo.

“We weren’t throwing money away,” Trink said. “We were creating a mythology.”

In June 2020, one of the company’s stars, Nick “Nickmercs” Kolcheff, signed a three-year deal worth $500,000 a year, according to a document reviewed by Bloomberg. He also received options for 105,000 shares. The company said it does not discuss individual contracts with talent. Kolcheff’s representative, Gabriel del Rio, said the player has generated $2.5 million in merchandise and 250 million watch hours on Twitch since he first joined FaZe in 2019.

In March of last year, the company announced that rapper Calvin “Snoop Dogg” Broadus Jr. would join its board of directors. As part of the deal that required him to post FaZe content on his social media channels, Broadus and companies tied to his wife, son and manager received $2.6 million in restricted stock that will be paid over time, according to a copy of his contract.

Trink earned $731,000 in salary and bonuses in 2022, down from $1.38 million the previous year, according to public filings. FaZe’s CEO used his own money to rent the Malibu Beach House, where he sometimes held meetings. His rock star persona extended to the office where he worked on a raised platform in the center of a former Hollywood warehouse. The manager brought his pit bull to work, where it bit at least one employee, Trink admitted. FaZe’s total rental expenses rose 71 percent to $1.54 million in 2022, according to the company’s filing.

According to an April 2020 press release, FaZe’s early funding included $40 million from rapper Pitbull, actor Chris O’Donnell, and a host of media and sports personalities. Then Trink made a decision that four former employees said helped tremendously with the company’s current financial woes — he borrowed more money. By the end of 2021, the debt had more than doubled to $70.8 million, including a $55 million convertible note that pays 10% annually and matures at the end of 2023, according to public filings.

Trink began talking internally about taking FaZe public in 2021 through a special sourcing company that would help bring closely held companies to market quickly.

Meanwhile, FaZe survived their biggest controversy to date. The members had previously been involved in public outbursts. One of its Fortnite players was banned for using a racial slur during a live stream. He later apologized. FaZe’s Call of Duty team also had to apologize for a sexist joke about female esports pros. FaZe member Richard “Banks” Bengston was criticized online for promoting an offshore gambling site that is not legal in the United States. Bengston, who told the podcaster that his participation was “100% legal” because he was playing in Mexico, did not respond to requests for comment.

But the aftermath of those episodes paled in comparison to the turmoil that followed FaZe’s involvement with English YouTuber Sam Pepper, who had become famous on reality TV show Big Brother. In 2014, the BBC reported that six women had accused Pepper of harassment. One of them was identified by name. In an email response to questions from Bloomberg, Pepper said none of the allegations were true. “No legal action, no arrests, no lawsuits,” he said.

In 2021, Pepper began working as an independent contractor at FaZe, consulting on YouTube channel strategy with some of the founders, according to the company. At one point, Pepper was on the phone with Apple trying to broker brand deals, according to two former employees. Pepper declined to comment on his role, citing an agreement not to discuss it.

Pepper helped FaZe members promote a cryptocurrency token called Save the Kids, ostensibly for charity. However, the value of the coin collapsed. The YouTube scammer later revealed that the influencers had sold their holdings for thousands of dollars in profit before the collapse. FaZe ended its relationship with one influencer and suspended three others, saying in a statement at the time that it had no connection to the promotion. Pepper, who is no longer involved with FaZe, said that a member of FaZe paid her to help make his videos and that she was “dragged into all the drama and later thrown under the bus.” He added: “Many people came out and proved that his statements about my involvement were not true.”

After the incident, FaZen found it more difficult to attract sponsors, said one person familiar with the company’s sales, who asked not to be identified to discuss internal matters. FaZe confirmed that it had a harder time, but despite the controversy, it was able to sign deals with companies such as Porsche AG and Nike Inc.

“We did a pretty thorough investigation,” Trink said. “It was a lesson that you can’t completely limit talent.”

In October 2021, FaZe said it will go public through the merger of B. Riley Principal 150 Merger Corp., a SPAC. Investors and fans scoured public filings after the merger was announced, looking for more information about the company. In an investor presentation that month, FaZe predicted that its revenue would grow to $651 million by 2025. Another application revealed that one content producer’s share of the company’s turnover in 2021 was 22 percent.

“It wasn’t a company that really should be sharing events publicly at this point,” said Selkoe, FaZe’s former president, suggesting the company was not mature enough to withstand public market scrutiny.

The timing of the merger was not good, as many investors had already soured on SPAC deals. After some of the original investors walked away from the offer, B. Riley stepped in to support the deal, according to the regulatory filing. “Many SPAC transactions around the time FaZe went public saw significant redemptions from investors who were concerned about stock market performance,” the company said in a statement.

FaZe became a publicly traded company on July 19, 2022, paying off its debt and netting $57.8 million, less than originally expected. B. Riley Financial Inc. remains the company’s largest shareholder with a 14 percent stake worth about $2 million. B. Riley Chief Investment Officer Dan Shribman served as FaZe’s chairman until he stepped down in late August. FaZe said it wasn’t because of a disagreement. Shribman did not respond to a request for comment.

On July 20 of last year, Trink took to the podium at Nasdaq in New York to celebrate the debut of FaZe.

“Can we get everybody here? It’s really not about me,” he said, gesturing to the members of FaZe on stage.

Trink thanked the “renegade teenagers” who founded FaZe and the leaders in Los Angeles and around the world who “stood on the shoulders of these giants.” As he rang the opening bell, red confetti poured down. FaZe “F” lit up Times Square.

Meanwhile, viewers on YouTube bemoaned FaZe’s transformation from its roots into a scrappy children’s brand.

“Brother to be honest. I don’t give an ‘f’ if Faze is a public company,” one fan said. “I miss having six friends in the average NY house doing funny pranks, skits, vlogs and challenges every day.”

After initially supporting the deal in an online interview last year, Bengston, the company’s founder, this year railed against “corporate types” who were “stealing” the brand. “You have no idea what FaZe is,” he wrote in April on X, formerly known as Twitter.

Few of FaZe’s original members regularly publish their games online—a practice that former employees say undermines the company’s original model. Snoop Dogg resigned from FaZe’s board in March after the company said it was not the result of a disagreement between them. G Fuel has been replaced by another energy drink sponsor.

The advertising market as a whole started to shrink last year, which raised the spiral of the sponsor-based e-sports and influencer industry. In the first half of 2023, FaZe made a loss of $28 million. Sales fell 30 percent to $24.2 million.

Before his firing, Trink said FaZe was “strengthening its roster of online stars” and reducing its expenses. In February, the company cut 20% of its staff, and two months later 40%. While FaZe hasn’t shared news of any new major sponsors since deals with Porsche and Nike were announced in January, brands like McDonald’s and General Mills remain.

“This business ebbs and flows,” Trink said, referring to the broader downturn in advertising. “We’re not there yet as an industry, but we’re getting there.”