How is a team like LAFC ($750m) valued five times more than a team like Sheffield United ($150m) even though Sheffield has much better players in a better league?

Good question, here's a thread on a high level on how valuations work & why MLS teams are valued so highly.

1/ https://twitter.com/mthead141/status/1300213661768675331

So how do we do a valuation of a business. At a conceptual level, the value is the "present value of estimated future profits". WTF does that mean?

Let's break that down in 2 parts:
1) Profit
2) Estimated future (growth)

Profit is basically revenues minus costs + taxes. Simple right? Let's look at what that means for LAFC and Sheffield.

For both revenues are local team (merch, Tix, concessions, local TV, sponsorship, player sales) and a % of the league revenues (national/global TV, sponsorship)

Key difference is Sheffield is they have the upside possibility of getting European competition revenues. But their revenues are contingent upon staying in EPL and rising to Euro spots.

For LAFC, their revenue is tied with MLS but it will always be in MLS but their other

revenue source is SUM, which has a hand in any soccer event in the US (Gold Cup, USMNT, Mex NT, World Cup).

So the difference is Sheffield's means of revenue growth is being better than other English clubs. LAFC means of revenue growth is growing soccer in America in general.

Important to note, something that is not revenue is expansion fees. These are more cash infusions in exchange of giving up equity - or fundraising. So thing of LAFC's cut of an expansion fee being like Sheffield's board selling a percentage of it's club to an investor.

Costs for the clubs are similar: salaries, buying contracts, operational (buildings & academies, staff), marketing, promotions, taxes.

But not all costs are the same in the eyes of an investor. To show you what I mean, let's look at a company like Uber.

Uber is famous for

losing money but had a huge valuation. Why? Part of that is double clicking on their costs. A large portion of their costs are in marketing (to get more users) and R&D (to make more services).

They can cut both of these things today and still collect revenue and investors

expect that to go down over time as Uber matures. So if you look it that way Uber can be profitable now if they'd like, but are investing into the future and hence those spends are seen as investments and not pure costs.

For Sheffield, in order to get more revenue, they need to

always spend on contracts and player wages, in fact moreso than their competition. If they don't no only do they not gain revenue but they could lose a lot over night. And competition these days have bottomless pockets, so cost growth is super high. In other words, you have to

spend money to get the potential of revenue but you could spend money and still lose a lot of revenue.

LAFC also will have high growth in costs but their revenue unlock is soccer's overall popularity in the US. So the costs aren't about competing on who spends more but actually

sharing the investment cost across all the owners to raise the overall sport. You can see a future where the league is in a top-5 place and costs are tied to revenues (like the NBA). If revenue goes up, then player salaries do too but if they don't cost is controlled.

So net net the profit outlook (future growth) is investing with other owners to raise soccer's profile in the US (LAFC) vs getting into spending races against English clubs to survive (Sheffield).

It's pretty clear on which one is a rosier picture from an investment standpoint.

The other bonus for an investor in the closed franchise model (LAFC) is that at a certain point there will be no more teams available to buy. The artificial scarcity of teams puts a premium on the valuation and you see this in other sports franchises.

In an open system, there's

literally an endless amount of team. There's nothing from Jeff Bezos from buying Bolton in League Two and putting tremendous resources in it and making it into an EPL contender ... because fundamentally the game in that system is a spending race.

Thanks for reading my Ted Talk.