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42.55fused unpaidvendors andfrus-
trated employees with late pay-
checks, accordingto interviews
with10 people closeto the com-
pany.
Azubu’s nearcollapse— as peo-
ple described it lastyear — shows
the risks of start-ups relying on
nontraditional sources forventure
capital.
An “investor can be areal part-
ner and help move the company
along, but they have to have good
decisionframeworksto be ableto
do that ... and very often that
comeswithexperienceorbeingina
well-regardedVC firm,” saidJeff
Burkland,whose San Francisco
firm Burkland Associates provides
financial services to start-ups.
The bumpy road hasn’t halted
Windhorst, who’s outlasted failed
companies, personalbankruptcy
and a guilty pleato charges in 2009
thatheembezzledmoneyfromone
ofhisfirms.Withopulence,uncom-
monfinancingmethodsandapolo-
getic charm, he continuesto per-
suade peopleto back him.
In new Azubu CEO Mike Mc-
Garvey, Windhorst said he’s roped
asoftware veteran who knows how
to think big. He said Azubu has
freshcash—in alumpsum this
time— from a European hedge
fund. And in the coming days,
Azubu plansto announce the ac-
quisition ofAustrian rival Hitbox
for tens of millionsof dollars in
cash, giving them as many as 20
millionmonthlyviewerscombined.
Windhorst calls e-sports“the
fastest-growingmediabusinessto-
day” and insists it can’t be ignored.
Bute-sports bus inessleaders
can’t see Azubu competing with
leadingvideo game live-streaming
servicesYouTube andTwitch. In
Windhorst, theyfind anexample of
an unpreparedfinancier treading
too far in their nascent industry —
and leaving an unpleasant mark.
“It’s important for the folks in-
volvedine-sports...tobeauthentic
and deeply passionate,” said Steve
Arhancet,co-ownerofprofessional
squad Team Liquid.“That’s criti-
cal for success, especially with as
much nuanceand idiosyncrasy as
there is in e-sports.”
Windhorst and histhen-senior
advisor Seok Ki Kim, an invest-
ment banking entrepreneur,
launched Azubu in 2012. Kim had
big plans for theventure,telling
executives ata swanky London ho-
tel in 2013 that by buttressing
Azubu withcompanies involved in
video production andtalent man-
agement, hewould create an e-
sportsjuggernaut based in South
Korea. But withina year, funding
ceasedto all those but Azubu,
which moved to Sherman Oaks to
be near Hollywood.
Then-employees say Azubu
survived fora singlereason: Ama-
zon.com Inc.’s acquisition of
Twitch for almost$1 billion came
as Sapinda was recalibrating.
Windhorst saw a chanceto cash in
on a similar scale. Viewership at
Azubu was growing, especially in
Brazil, where Twitch hadn’tculti-
vateda following. Azubu execu-
tives alsoargued thatTwitch’s and
YouTube’s acceptance of other vi-
deo genres provided an openingto
focuson e-sports.
Azubu soughta foothold by
paying hundreds of leagues,teams
and players of varying popularity
to exclusively broadcast on its
service. But fansgriped about a
buggy interface and the lack of a
chat feature, which is a major draw
on Twitch. Video stars found more
attentionandadmoneyonTwitch,
whichgetsasmanyviewersin aday
as Azubu gets ina month.
Azubulostoutto rivalslastyear
when itcould no longer afford the
rights fee for “League of Legends”
matches, which rose to nearly $3
millionfrom $1 million i n the past,
according to people familiar with
the matter.
Last summer, the company
drew scornfrom e-sports fans for
delayinganeventual divestment in
Esportspedia,a beloved online en-
cyclopediachroniclingteams and
matches that Azubu had done lit-
tle to improve.
Internal attitudestowar d the
companytook hitstoo. Employeeswhoworked i n Sherman Oaks felt
collaboration suffered when an of-
fice with cubicles replaced a
smaller, open-floor-plan space.
Website development felt rushed,
yet deadlineswerenever met.
Aformerexecutive and former
developer tied mismanagementto
heavy drinking in the office and
rifts between executives about pri-
orities. Developers in L.A.griped
aboutordersto build unneeded
“eye-candy” to impress Wind-
horst’s firm.
All the while, CEO Ian Sharpe,
who started in 20 13, mostly worked
fromVancouver. Windhorstsaidhe
didn’t know about the arrange-
mentinitiallyandexpresseddisap-
pointment with Sharpe’s refusalto
move. People closeto Sharpe, who
worked at Atari and Electronic
Arts,say Azubu’s discomforting fi-
nancial outlook left him wary
about moving his familyto Califor-
nia. Sharpe, who left the company
lastsummerto startane-sportsvi-
deo advertisingcompanywith an-
other formerAzubu executive, de-
clinedto comment for this story.
Most start-upsreceive invest-
ment cash through infrequent
largedeposits.Theymaystartwith
$1 million,get tens of millionsof
dollarsfrom ventur e capitalists 18
months later and take an even big-
ger chunkfrom deeper-pocketed
fundsa coupleof years later.
Azubu saw nothinglike this. It
got tiny, monthly installments of
debt thatcould be paid backwith
companystock.Sharpedemanded
sixmonths’worthofadvancefund-
ing so hecould make long-term
budgets but received recu rring
$1-milliontra nsfers days after billscame due for slightly more, multi-
ple sources said.
Formerworkerssaidvendors
such as technology providers
found Azubu’s situation bizarre.
The company often filed payments
late and rarelypaid the full bal-
ance, but never went into default.
Employees say theyreceived
delayed paychecks on occasion,
and fora time werepaid once a
month in violationof s tate law re-
quiring at leasttwo paydays each
month.Morale disintegrated as
plansfizzledto award workers a
promised10% company stake.
Sharpe struggledto get Sapin-
da’s attention, saida formerhigh-
rankingemployee speaking on the
condition of anonymity. The CEO
once spent hours outside the in-
vestor ’s London office, hopingto
see a familiar face pass by.
Venture capitalists and mutual
fundsSharpe pitched forcashre-
jected involvement because of
Sapinda’s monopolyover Azubu,
people said. Activision Blizzard,
Yahoo andTencent talkedto the
company about an acquisition but
didn’t bite. Revenue, about$1 mil-
lion a year from licensing deals and
atiny bit more from advertising,
barelycovered two months ofpay-
roll, accor dingto people familiar
withthe matter.
Anyremaining internalenthu-
siasmevaporated lastFebruary.
Twomonthsearlier, the company
announced closing a nearly $60-
million bond sale through
Sapinda, providing more than
enough fora majorexpansion of ad
salesand video production.
But funding never materialized
as intended, and the misrepresen-tation sent employees fleeing.
Respondingto inquiries in 2015,
Sharpe notedahuge debtissuance
was atypical fora tech start-up. He
called it“very effective” nonethe-
less and described the investors as
Windhorst’s friends.
Windhorst now admits only
Sapinda purchased the bond. And
he said he didn’twant to placeall
$60 million in the handsof a n un-
trusted start-up team, pinning
Azubu’s struggles on its leaders’
poor “execution.”
An earlier investor , Sallfort Pri-
vatbankof Switzerland, pulled out
last year and successfully de-
manded its$7.5 million back. A
bankrepresentative didn’tcom-
ment.
SinceMcGarvey quietly arrived
lastMay, he’s cut monthlyex-
pensesinhalftoabout$1. 2 million.
HedownsizedAzubuto 50 employ-
eesfrom 7 5,endedcontractswith
dozens of less-popularstreamers
and called for using Hitbox’s
technology.
Soon, Azubu plansto relocate
within Los Angeles and unveil a
moneymaking plan that includes
advertising as one of several com-
ponents. Through additional ac-
quisitions and vertical integration,
McGarvey expects Azubu to be-
come a formidable alternative to
Twitch and YouTube for gamers.
“There was some dysfunctional
things that happened in the past,”
he said.“But there wasn’t clarity in
what the businesswas. There’s no
longera disconnect.There’s full
alignmentfrom Sapindato me and
my team.”
Burkland,the start-up finance
expert unaffiliated with Azubu,
saidthestrangefinancingarrange-
ment has plausibleexplanations.
Sapindacould have been short on
cash,too distracted by itstwo doz-
en bigger investments or simply
forcing people to scramble in
hopes of bringing out the best in
them. Whatever the cause,
Sapinda issuesconsumed unrea-
sonable attention of the previous
regime.
Windhorst equivocated when
askedwhether heregrets holding
back bigchecks.
“Maybe itwould have beenbet-
ter, maybe itwouldn’t have been,”
he said.“We have a portfolio of a
fewbillion dollars of deployed capi-
tal, and thiswas a start-up. We’re
not a ventur e capitalist. Thiswas a
not normal investment.”[email protected]
Times staff writerJames Rufus
Koren contributedto this report.Funding structure put start-up at risk
[Azubu,from C1]
AZUBUHASfreshcash — in a lump sum this time — from a European hedge fund. Itplans to soon
announce the purchase of rival Hitbox. Above, in New York duringAdvertisingWeek in 2015.Mike PontGetty Ima ges for AWXII