Formula 1 racing is an expensive business, but it has very considerable rewards as well, not least because of the huge sums of money that are given to the teams by the Formula One group in respect of their involvement in the sport. In addition teams can bring in money from sponsors and merchandising and can at the same time use their cars to promote the products associated with the team owners. This is the business model of Red Bull Racing, which is a promotional tool of the Austrian drinks company which should cost less and less with more success as sponsors buy space on the cars, and thus eventually Red Bull will get free advertising. This is not a new model as it was used by Benetton in the 1990s. Long-established teams have worked the model in reverse with the success in racing being used to sell other products. Ferrari, for example, started building cars to pay for the racing, but these days F1 gives Ferrari fantastic publicity without the main company needing to put in much money. McLaren and Williams are following similar strategies, using F1 technology to create new businesses.
In recent years we have seen the arrival in Formula 1 of venture capital. The budgets involved in the sport and the value of the returns are such that adventurous investors have seen an opportunity to make money and have thus provided racers with the cash they need to start or to buy teams. In return for the cash, the venture capitalists take equity in the team, or even own it outright. At the same time as being an interesting investment, F1 provides the investors with entertainment and the opportunity to use the sport for other business purposes, such as B2B deals.
If we look around at the current grid, one can see that Lotus F1 Team is the prime example of this phenomenon. The team was bought cheaply from Renault, which wanted to dump the asset quickly after the disastrous and embarrassing Singapore Scandal in 2009. This meant the Gerard Lopez and his associates were able to not only get the team at almost no cost, but they also got Renault to agree to guarantee some of their debt for a period of time. Once the question of ownership was sorted out, GenII Capital had only to find the running budgets needed to keep the ship afloat, and a little extra for capital investment. This they have managed to do, with one or two white knuckle moments when cash-flow proved to be a problem. Such is the way of the world in venture capital. In the end, however, the investors have either dipped into their own funds, or borrowed money from banks that are willing to pay for such ventures. At the moment Lopez is saying that the team is not for sale, but there was a point around the Indian Grand Prix when there was a potential buyer of 49 percent of the shares on the hook and Lopez was keen to see whether that would be a good exit strategy for GenII. It obviously was not good enough for him and his fellow investors and the fact that he is now saying he is not selling suggests to me that there is a probably a buyer out there and that he is simply pushing up the price…
In the meantime he and his pals have to keep the money rolling in, but with the team’s results improving things are looking up. The team finished fifth in the 2011 and moved up to fourth in 2012 and although this brought only a few million extra in TV money, it attracted the attention of sponsors and that will bring in much more revenue by the time the 2013 season begins.
In addition to all this, Lopez and his partners have a licence to use the Lotus name in F1 for a number of years and if Group Lotus runs into more trouble they may one day get their wish to acquire a road car company, which is an ambition that has they have had for a few years. Group Lotus’s owner Proton still believes that the brand can be revived, despite a disastrous year in 2012 with revenues dwindling and huge liabilities that must be dealt with. The latest plan is to switch the focus to Asia and there is optimistic talk of selling between 3,000 and 4,000 cars in the 2014-2015 financial year. This is more than double what the company was selling in 2011. If that does not work, Proton may seek to dump the business and Lopez will be there with open arms – if the price is right and debts are made to disappear.
Thus, if he can keep all the balls in the air and the team can keep on increasing its value GenII will probably end up in a position where they can cash out at a considerable profit at some point in the short- to mid-term, or they can stay in and use the team to promote their own car company if that idea becomes a reality. Time will tell.
The other example of venture capital in F1 is with the Marussia F1 team, which began with money from Lloyds Development Capital, the private equity arm of the Lloyds TSB Bank. The bank held a majority of the shares in the business but left running of the operation to John Booth and Graeme Lowdon of Manor Motorsport. They used the “commercial firepower” of Sir Richard Branson’s Virgin group to excite interest in the new business and this resulted in Marussia becoming a sponsor. LDC then sold a majority share of the team to Marussia at the end of 2010. The deal meant that LDC did not lose any money (and probably made a profit) but still retains 25 percent of the business, which can be sold at a later date when the team has built up more value.
Many of the other smaller teams have similar ambitions, but their money does not come from investment firms, except in the case of Scuderia Toro Rosso, which is partially funded by the Aabar Group, which owns some shares in the team and uses the team to promote companies that it has in its investment portfolio.
Other teams use private money from their own investors, as is the case with Force India and Caterham.
As I have said on many occasions the business models of F1 would be significantly enhanced if the teams would get together to agree a budget cap so that each operation would generate more profit and thus have more value. This would mean that there would be more buyers… However, the racers in the industry are blind to this. They simply want to spend whatever they have in order to win…